This proposal introduces Ethereal: an integrated spot & perpetual futures DEX built on the upcoming Ethena Network using USDe. We are requesting that Ethereal be directly integrated into Ethena-related reserve management from launch to provide a fully onchain venue for management of spot and derivative positions backing USDe. In addition to expanded utility and demand for USDe, the Ethena community will also stand to benefit from a 15% allocation of any potential Ethereal governance token in the future should this proposal pass. We propose this potential allocation go to circulating ENA holders. This proposal will outline synergies between Ethereal and Ethena, and more importantly seek the Ethena community’s support for an integration with Ethereal in the coming months.
Background
Ethereal Overview
Ethereal V1 (testnet expected in Q4) is an L3 EVM appchain settling to the Ethena Network. This architecture aims to optimize for the benefits of isolated blockspace as well as the synergies with the Ethena ecosystem. In addition to a fully onchain exchange engine, Ethereal can support deployment of additional applications utilizing USDe to unlock specific features which can augment the functionality of the core DEX (e.g. borrow/lend markets).
Ethereal is designed to match centralized exchange performance while maintaining complete self-custody and flexibility to support features such as cross-margin, liquidity automation, and portfolio margin. Ethereal’s architecture is capable of processing 1 million operations per second with sub-20ms latency, in-line with the most performant exchanges.
Ethereal contributors include teams with decades of collective experience across web2, web3, and traditional finance, including several years as lead contributors to one of the most successful DEX protocols in the space.
Benefits to the Ethena ecosystem
Demand. Ethereal offers a new avenue to expand USDe growth and adoption. With Ethena’s inventory acting as a deep supply/demand buffer, Ethereal could offer some of the most liquid and cost effective onchain spot & perpetual futures markets available today. Increased demand for Ethereal products built on top of USDe can unlock new sources of demand for USDe.
Decentralization. Migrating USDe backing management to onchain venues can improve transparency and unlock new mechanisms available to the Ethena protocol.
Alignment. The Ethena community will also stand to benefit from a 15% allocation of any potential Ethereal governance token in the future, which will help to ensure alignment between Ethena and Ethereal community stakeholders.
Precedent. A digital dollar alongside a native reward-bearing composable asset like sUSDe enables a wide design space for new financial primitives to be built. Ethereal’s launch will provide the blueprint for other applications built using USDe on the Ethena Network, helping to drive Ethena’s transformation from an asset issuer to a platform for financial innovation.
What Ethereal is Requesting
Ethereal’s highest priority is to be aligned with the Ethena community as a partner invested in the growth and adoption of USDe in DeFi. We are requesting support from the Ethena community for an integration with Ethereal as a venue for executing hedging transactions, subject to satisfactory technical due diligence conducted by the Ethena Foundation and Risk Committee. In addition, we would request technical support for the deployment of Ethereal onto the Ethena Network to implement an integration with Ethena’s hedging engine. We believe there is potential for a mutually beneficial, symbiotic relationship based on the synergies outlined above that can provide tangible value to the Ethena community.
I’ve always loved the idea of adding decentralised venues to Ethena to remove the 100% dependency that is currently placed on centralised perpetual futures markets.
Having said that, going with an unknown and untested venue as the first and primary option seems like an unnecessary risk to take for Ethena. With multiples of billions under management, I’d imagine security should be prioritised which probably means only battle tested protocols should be considered in order to maintain confidence in the market’s perception of Ethena (has anyone at Ethena done a market analysis on what is available now?).
In crypto one issue can result in loss of confidence pretty rapidly, so I’d imagine Ethena would want to avoid unnecessary risk.
I’d much rather Ethereal launch and test itself in markets before considering it a direct integration partner personally…
This is a great proposal. Could you please expand on how integrating Ethereal for hedging transactions will affect the existing liquidity management practices of USDe? Will the move to onchain hedging through Ethereal have any notable impact on liquidity reserves or collateralization ratios?
This sounds great, but I would be extremely cautious here.
I think Ethena should wait and integrate Synthetix Perps once they are on mainnet (SOON). They are currently in audit for this, is battle tested (not some protocol that just popped up), and is committed to high quality security standards.
Ethena and Synthetix are aligned in many aspects, in particular the Synthetix platform will offer:
To be clear from the Ethena side, if this proposal is approved by the community, and subsequently the Risk Committee, the process of integrating into Ethena-related reserve management will be a slow and controlled rollout, with both the Ethena team and the Ethena Risk Committee closely monitoring the launch of Ethereal after a full technical assessment. On launch, Ethena liquidity would likely initially, subject to risk committee approved parameters, act as a liquidity buffer for Ethereal rather than an immediately material shift of Ethena hedging positions on day 1.
If this proposal is passed by the community, Ethena’s Risk Committee will be conducting a full technical assessment of Ethereal and its potential integration with Ethena, including recommending max allocation ranges on rollout.
Ethereal will undergo multiple audits from the top security firms in the space. Ethereal contributors include teams with decades of collective experience across web2, web3, and traditional finance, including several years as lead contributors to one of the most successful DEX protocols in the space.
Onchain Hedging
Moving some of Ethena’s hedges onchain would aim to improve transparency of hedging positions but the hedging strategy would remain the same - no material leverage and fully collateralized positions enabling a delta neutral strategy. If approved, Ethena could act as short side liquidity via hedging positions, potentially making funding more attractive for users and creating a liquidity flywheel on DEXs, which has not yet been achieved at scale onchain.
Other DEX Venues
With regards to other DEX venues, Ethena will continue to function as neutral infrastructure across the space working closely with existing CEX venues, and DEX venues which meet minimum functionality and liquidity requirements.
Appreciate your feedback @chase. I can assure you that Ethereal upholds the highest standards with respect to security & safety, and we have a long history working with some of the best auditing firms and security researchers in the space. We also maintain a comprehensive set of best practices including the specific features you mentioned as well many others, and will continue to engage with the community and provide more information during this process.
I’ve reviewed the proposal for integrating Ethereal, but I noticed there’s no specific mention of how this integration will impact the existing risks to the Ethena project, particularly concerning USDe.
Could someone from the team, or the community, provide more clarity on how the integration with Ethereal might affect the current risk factors? Specifically, I’m curious about how moving some of Ethena’s reserve management to an on-chain venue (Ethereal) could influence liquidity management and collateralization ratios.
It would be great to understand if new risks are introduced or if existing risks are mitigated through this proposal.
Looking forward to hearing thoughts from the community and the team.
Just posted this thread sharing a bit more context on Ethereal
We are very eager to engage with the community on this! Please don’t hesitate to reach out here or ping directly with any thoughts, and stay tuned for more to come.
Thanks for the great question, a lot of the points were addressed in the previous answer but to answer some of yours directly:
Ethena will take a slow and controlled approach to integrating with Ethereal, if approved by both the community and the risk committee. Ethena would keep within the same OI caps in line with what CEX’s currently enforce with regards to individual entities, in order to ensure Ethena is not too large of a percentage of open interest on Ethereal. Naturally there is also less inherent counterparty risk using onchain DEXs versus centralized execution venues. Ethena does not build up concentrated positions across exchanges, contracts or custodians and Ethereal would be no different. The Risk Committee will be doing their own due diligence of Ethereal and recommending an initial max allocation range if it passes. On launch, Ethena liquidity would initially be intended to act as a liquidity buffer for Ethereal rather than an immediately material shift of Ethena hedging positions on day 1.
The Ethereal team above have committed to working with the highest quality security firms and researchers in the space in order to minimize any smart contract risk, which would be the only new risk introduced by moving some of Ethena’s hedging positions onchain. Ethena will also be engaging in its own independent technical assessment of Ethereal.
With regards to liquidity management and collateralization ratios, most of that was addressed in the previous answer, but to reiterate: Moving some of Ethena’s hedges onchain would aim to improve transparency of hedging positions but the hedging strategy would remain the same - no material leverage and fully collateralized positions enabling a delta neutral strategy.
