ENA Fee Switch Parameters

General
1

Following the general approval of the sENA “fee switch” proposal earlier this month, the Ethena Risk Committee deliberated to crystallize the parameters which the Ethena protocol needed to meet to activate it.

After multiple rounds of discussions and a blind voting process, the committee members have decided on the following success metrics, at which point Ethena would be considered in a sufficiently strong position to begin directing a portion of protocol revenue to sENA in some fashion:

Success Metrics:

  1. USDe circulating supply: >$6bn
  2. Cumulative protocol revenue: >$250m lifetime (current $166m)
  3. CEX adoption: USDe integrated on 4 of top 5 centralized exchanges by derivative volumes

As the original Wintermute proposal outlined: it may be the case that direct revenue distributions are suboptimal to implement in practice for a variety of reasons related to the maturity of the protocol and other considerations. These success metrics are the first step at crystallizing a satisfactory level of protocol maturity for Ethena.

Once all of the success metrics are hit, the fee switch for sENA can be considered. At that stage, Ethena will have solidified its position as a market leader and can start the fee switch activation process.

At the current 7 day growth rate in USDe supply of 15%, and weekly revenue of ~16m, the USDe supply metric would be hit in three weeks, while the revenue metric would be hit in 5 weeks.

If all three success metrics are hit, the Risk Committee will then assess the following two risk metrics on an ongoing, regular basis, when determining whether or not to distribute a portion of protocol revenue to sENA in some fashion:

Risk Metrics:

  1. sUSDe APY spread vs benchmark rate: between 5.0-7.5% over benchmark rate.

Risk committee members will determine the spread and benchmark rate on a regular basis and sUSDe APY will need to clear that hurdle in order to enable a distribution of protocol revenue to sENA.

  1. Reserve Fund Sizing

The Reserve Fund will be assessed on a monthly basis by all members to determine if it is adequately sized. If yes, the sENA fee switch can be activated.

The exact split of protocol revenue to be sent to sENA is still to be determined, and more details on the split will follow. Furthermore, the Risk Committee will perform legal and operational diligence with respect to various methods of implementation, to be evaluated and confirmed by the Ethena Foundation, beginning now. Updates on this process and any decisions related to implementation structure will be provided on an ongoing basis.

Risk Committee members will provide monthly updates on sENA fee switch progress in the governance forum as well as publicly sharing their risk metric analysis on a monthly basis. app.ethena.fi will soon introduce a metrics dashboard where users can track the progress towards sENA fee switch activation.

6 Likes
2

LlamaRisk supports the outcome of the Risk Committee vote on the ENA fee switch proposal. To ensure full transparency, we would like to share the rationale behind our votes and the arguments supporting them. Our votes on the proposed metrics were as follows:

1. USDe Circulating Supply

Vote: >$2B

Rationale: A $2B supply target reflects significant adoption while allowing for sustainable growth that mitigates risks associated with overexpansion, such as liquidity stress or inadequate reserve management. Ensuring that this threshold is maintained ensures realistic, achievable progress without sacrificing the protocol’s stability.

During the more constrained market conditions of the first three quarters of 2024, the supply threshold of $2 billion was consistently maintained. This indicates that this supply level represents the protocol’s baseline continuous utility. Under current market conditions, this lower threshold supports the possibility of implementing a fee switch earlier, while monitoring growth-related risks beyond this threshold. Nonetheless, we acknowledge and support the committee’s vote for a supply threshold of $6B.

2. Cumulative Protocol Revenue

Vote: >$250M

Rationale: Setting the $250M revenue metric ensures that the protocol achieves robust revenue streams before initiating revenue-sharing mechanisms. This level balances operational maturity and early return opportunities for sENA holders.

3. CEX Adoption

Vote: Integration on 5 Exchanges

Rationale: A broader integration mandate across 5 centralized exchanges improves liquidity access and hedges against venue-specific risks (e.g., regulatory actions or technical outages). Emphasizing top-tier exchanges with significant trading volumes ensures visibility and usability of USDe while diversifying exposure. In addition, we recommend balanced CEX liquidity diversification for optimized liquidity distribution and mitigation of single-exchange dependency.

4. Reserve Fund Capitalization

In alignment with the initial considerations, we highlight the critical importance of Reserve Fund sizing. Ensuring that the Reserve Fund is sufficiently capitalized remains a top priority, as its capitalization is a fundamental prerequisite for the seamless activation and operation of the fee switch. Our efforts will focus on regularly assessing the adequacy of reserves and prioritizing the fund’s resilience over revenue sharing.

To support this, we have introduced a reserve fund drawdown analysis designed to recommend an optimal capital level for the Reserve Fund. We intend to reference this analysis continuously to determine sensible revenue distribution. Our methodology may be further refined in collaboration with other risk committee members, in which case we will publicize any changes.

LlamaRisk will continue active engagement with Ethena Labs and all concerned entities to ensure a risk-measured fee switch process.

2 Likes
3

BA Labs supports the above ENA Fee Switch Parameters. Our voted values for the metrics and reasoning are listed below:

USDe Circulating Supply: 6 billion USDe

Circulating supply is a good measure of protocol adoption and general user growth. This metric has nearly reached 5 billion units now and is on pace to achieve 6 billion within the next month if current growth rates persist. 6 billion circulating supply would make USDe the largest decentralized/cryptonative stablecoin on the market, edging out Sky’s USDS/DAI stablecoin which currently sits at ~5.4 billion circulating supply.

Cumulative Protocol Revenue: $250 million

Cumulative revenue is a measure of Ethena’s financial success. Considering that future sENA fee switch distributions will draw on protocol revenue, it makes sense to use this as a key threshold for determining if the protocol is mature enough to support distribution to token holders. We find that $250 million cumulative revenue threshold strikes a fair balance between activating fee switch earlier to benefit sENA stakers while ensuring the protocol has reached an adequate level of revenue generation.

CEX Adoption: Integration on at least 3 of top 5 derivatives exchanges.

Ethena Labs team has consistently communicated they view CEX as one of the most important growth drivers for USDe over the long term. Given the strong history of CEXes and particularly centralized perpetual contracts as the most successful product in crypto, we agree with this assessment and think Ethena should wait to achieve a healthy level of integrations in this space before activating sENA fee switch.

However, we also believe that focusing on other metrics such as overall protocol growth and adequate reserve fund size can help win integrations from top CEX. We believe that winning integrations on 3 of the top 5 derivatives exchanges is an adequate level of adoption to support sENA payouts. Hitting broader growth and reserve capitalization metrics can help ensure Ethena offers a sufficiently compelling product to win integrations from any stragglers or hold-outs.

Other Considerations for sENA Payouts

We believe that additional metrics should be considered as prerequisites for sENA payouts once the above thresholds have been met.

Most importantly, we believe that the reserve fund should be adequately capitalized vs Ethena’s exposures before sENA can receive fee switch distributions. Adequate capitalization will help assure USDe/sUSDe holders and other integration partners about the safety of the Ethena protocol which should help growth, and will also ensure that any losses that may occur can be covered with cash on hand rather than requiring a forced sale of ENA to plug the gap (which would likely happen at an unfavorable price).

We look forward to contributing to the development of a reserve fund/capitalization framework along with other risk committee members. The capitalization framework could be modeled on risk weighted asset frameworks used in the tradfi space, where low risk exposures such as tbills could require little to no excess reserves while higher risk exposures such as futures basis could require a greater amount of capital. This would help align Ethena’s capital requirements to the actual risk faced by the portfolio. In our view, the greatest risk factors impacting Ethena’s capital adequacy are likely coming from exchange insolvency, contract insolvency (autodeleveraging), and hacks or other issues at an off exchange custody provider.

We also believe that sUSDe payouts should meet a minimum threshold vs other benchmarks, such as tbills or onchain defi rates such as sUSDS or Aave USDC. Ensuring that sUSDe provides a compelling yield across market regimes will help position it as a “set and forget” product that users can hold for the long term without constant monitoring or micromanagement. In our experience working with other defi projects like MakerDAO/Sky, we have found that these long term / high inertia users generally provide significantly higher long term value vs more active allocators. Acquiring high quality / high LTV users can help the protocol achieve a better net interest margin over time, which will then support sustainably fee switch distributions for sENA stakers.

2 Likes
4

As outlined in the announcement, the Risk Committee has agreed on success metrics for considering the fee switch. This depends later on an assessment of whether the Reserve Fund is sufficiently capitalized and sUSDe yield remains competitive. Below are our recommendations and rationale for the three success metrics:

USDe Circulating Supply

  • Recommendation: >$6B
  • Rationale: USDe has consistently ranked among the top five stablecoins by market cap over the past few months. Revenue distribution should occur when the protocol is in a position of strength and has established itself as a competitive leader. The stablecoin market cap has grown steadily, with DAI and USDS currently at ~$5.5B. A $6B circulating supply would position Ethena as the third or fourth largest stablecoin, behind USDC or USDT, reinforcing its importance in the market.

Cumulative Protocol Revenue

  • Recommendation: >$250M
  • Rationale: At the time of this deliberation, protocol revenue stood at approximately $166M. Revenue sharing directly impacts the protocol’s financial health, linking it to revenue and costs. Using an absolute metric to simplify the framework, $250M strikes a balance between financial stability and ensuring excess revenue doesn’t remain idle. At this point, sharing revenue could align token holders with protocol growth without stifling further growth.

CEX Adoption

  • Recommendation: 4/5 of the top 5 exchanges by derivatives volume
  • Rationale: A key goal for Ethena is USDe adoption on major centralized exchanges as rewarding margin collateral. The majority of derivatives volume is still concentrated on CEXs, and achieving adoption signifies USDe’s integration into the industry’s core infrastructure. This would significantly expand its use cases, increasing circulating supply and protocol revenue.

These success metrics are primarily growth-oriented and do not pose direct risks to Ethena as a protocol. However, the more pressing consideration is ensuring that:

  1. The Reserve Fund is adequately capitalized.
  2. sUSDe yield remains competitive to sustain long-term attractiveness.

To address Reserve Fund capitalization, a robust framework must be defined. LlamaRisk has provided a preliminary drawdown analysis via their dashboard, which Risk Committee members can review and refine. Alternatively, Block Analitica has proposed modeling the framework after risk-weighted asset methodologies, offering a distinct approach. We’ll collaborate with the committee to develop and finalize a transparent and actionable framework.

To summarize, once the three success metrics are achieved, the priority order for yield distribution should be:

  1. Reserve Fund: First allocate yield to ensure the Reserve Fund is sufficiently capitalized (if/when needed).
  2. sUSDe Yield: Ensure sUSDe maintains its status as a high-yield stablecoin, consistently outperforming competitors like sDAI.
  3. sENA Revenue Sharing: Remaining yield can then be distributed to sENA token holders.
3 Likes