Summary
This document analyzes Ethena Labs’ intent to shift part of the capital away from the Reserve Fund to reinforce the direct over-capitalization figure of USDe. This is further motivated by the current market conditions, which lead to the backing of USDe to be shifted away from perpetual futures to yield-bearing/RWA stablecoins. Ultimately, this process must adhere to all risk management standards, which have been scrutinized and would further be approved by the Risk Committee.
As Reserve Fund working group members, LlamaRisk and Blockworks, we have evaluated this intent and present formal guidance for a potential capital shift in the following sections. We support the proposal to reduce the Reserve Fund by $5M and redirect it into USDe stablecoin backing, contingent on the allocation being held in stablecoins within the redeem contract. We have also provided guidance for future Reserve Fund re-allocations and aim to guarantee mutual commitments from Ethena Labs and Ethena Foundation.
Reserve Fund Drawdown Simulations
Given below are estimations of required Reserve Fund sizing to withstand a variety of possible scenarios based on methodologies by LlamaRisk and Blockworks. We briefly outline the methodology for each scenario and categorize them by how conservative the assumptions are. Recommended Reserve Fund capitalization can be highly volatile, depending on market conditions and the exposure of Ethena’s backing to perpetual futures, and values given here are only reflective of current conditions.
Blockworks Highly Conservative Scenario
Full details: Blockworks RF Drawdown Methodology
Assuming a highly conservative scenario where Ethena chooses to unwind all positions within 24 hours during a severe market downturn, prioritizing immediate action to preserve full USDe collateralization, the Reserve Fund needs to cover two key costs: negative funding rates during that window and slippage from exiting positions. Note that the likelihood of requiring 100% position closure in 24 hours is very low and this scenario addresses a worst-case possibility in terms of funding rates.
To estimate funding costs, we can use a dynamic model that builds on the approach of looking at the share of backing in perpetuals by also factoring in the specific assets and venues involved, allowing for a more nuanced assessment. The model considers the most extreme historical funding events, specifically the worst 0.1% of datapoints for each asset and exchange pair, and applies those rates to Ethena’s current allocation to estimate potential funding cost exposure under stress. This becomes especially important as more volatile collateral assets like SOL are added, and as certain venues prove better equipped than others to handle extreme market conditions. The same total allocation can carry very different risk profiles depending on where and how it’s deployed, which in turn affects the size needed for the Reserve Fund.
Slippage is the second major cost, incurred both when closing short positions and selling spot. For now, we estimate this at 1%, though we expect to refine this once Ethena’s trading data is made available.
Source:
Blockworks RF Drawdown Methodology, April 24th, 2025
Based on this methodology, the Reserve Fund would need to currently hold approximately $22.9 million to be sufficiently capitalized. At this level, Ethena would be able to fully unwind its current positions even under historically extreme negative funding conditions, while maintaining solvency throughout.
LlamaRisk RF Drawdown Methodology
Late last year, LlamaRisk presented a revised Reserve Fund Drawdown Methodology V2, which takes into account current and historical market conditions as well as USDe collateral distribution, stablecoin buffer, and sUSDe supply. At the time of that analysis, market conditions were largely positive, and the majority of the backing was allocated to perpetual future hedging positions. However, over the course of the months, the market has experienced a regime shift, minimizing funding rate yields. Consequently, it has resulted in Ethena gradually exiting the perpetual hedging positions and shifting towards stablecoin backing. The stablecoin backing now resides mainly in sUSDS and USDtb, both of which are reward-accruing.
The V2 methodology was specifically designed to adapt to these changing conditions and recommend appropriate capitalization levels. At the time of the V2 methodology publication, recommended capitalization reached $62M under the most conservative scenario, however, these levels do not reflect the current conditions and require a revision. Therefore, below we present up-to-date drawdown simulations that estimate the current Reserve Fund capitalization needs.
LlamaRisk Conservative Scenario
Full details: RF Drawdown Methodology V2
Under this defined scenario, the impact caused by negative funding rates and perpetual exit slippage is only applicable to the portion allocated in perpetual positions. In this case, we assume that all positions would need to be closed in the timespan of 24 hours, incurring 0.5% negative funding rate losses as well as 75 bps slippage losses (slippage estimations here are conservative and subject to future refinement). Adjusting for the stablecoin portion, we can observe the following estimate of the required reserve fund size:
Source: Reserve Fund Drawdown Methodology V2, April 24th, 2025
Simulating this short-term risk scenario results in the currently recommended reserve fund size estimation of $17.2M. Under this reserve fund size, Ethena would remain solvent and be able to serve all USDe redemptions, even under the worst tail risk scenario that would require closing all perpetual positions in a short timeframe.
LlamaRisk Moderate Scenario
Full details: RF Drawdown Methodology V2
This scenario assumes that a decline in funding rates would trigger a significant amount of sUSDe to enter the unstaking queue, leading to a potential wave of USDe redemptions. The maximum amount of USDe is based on the current circulating supply and the assumption that USDe in liquidity pools will not be redeemed. It is also assumed that Ethena will prioritize timely redemptions to prevent the USDe price from de-pegging, using its stablecoin buffer for instant redemptions and closing perpetual positions for the rest. Additionally, the scenario assumes that redemptions requiring the closure of perpetual positions will be managed with slippage capped at 75 basis points and funding rate losses limited to 5 basis points, while any remaining positions could face up to 50 basis points in funding losses before being gradually wound down with lower slippage.
Source: Reserve Fund Drawdown Methodology V2, April 24th, 2025
This scenario results in a currently recommended reserve fund size of $10.6M that may fluctuate based on a changing stablecoin buffer. Under this Reserve Fund size, Ethena could successfully serve all redemptions of circulating USDe while being able to wind down the perpetual positions more gradually and over a larger time frame, assuming that the funding rates are milder than a tail-risk scenario.
Reserve Fund Considerations
Projected Future Reserve Fund Capital
While current estimates put the Reserve Fund’s requirements well below its current capitalization, it is important to outline that as soon as funding rate yields improve, Ethena would act quickly to capture the highest available yield and shift back to perpetual futures hedging positions. In such a case, recapitalization could be done via a direct treasury injection if needed, but the ideal path is for the Reserve Fund to rebuild organically—by redirecting a portion of the protocol’s yield away from sUSDe holders and toward the Reserve Fund for a period of time.
Because of this, we believe the buffer should consistently exceed the minimum recommendation at any specific point in time. To size it appropriately, we use the historical allocation of hedging positions in the backing—and the corresponding Reserve Fund requirements—as a reference point.
Source:
Blockworks RF Drawdown Methodology, April 24th, 2025
Over the last six months, conservative estimations indicate that the Reserve Fund would have needed closer to $50 million to consistently cover risks, representing between 0.5% and 1.2% of the total supply. Again, this assumes a worst-case scenario where Ethena closes all perpetual positions in a 24-hour window. While current estimates suggest that an appropriate Reserve Fund size would be between $10.6M and $22.9M based on the past month of activity, a longer look-back shows that requirements have historically been much higher. We may, however, advise that the $50m estimate of historical capitalization requirements could be gradually reduced if low to negative funding rate conditions persist.
Over roughly six weeks, between September 24th, 2024 and November 13th, the estimated Reserve Fund size as a percentage of total backing increased from 0.8% to 1.2%, representing a $15 million rise. This highlights the importance of building a buffer that isn’t just reactive to recent conditions, but large enough to absorb periods of higher perpetual futures exposure or more volatile funding environments.
Exchange Hack Risk
In addition to the stability and market risks prevalent when Ethena shifts towards perpetual futures positions, the centralization and CEX-related risks are more persistent. The recent Bybit hack incident indicated that in more unfortunate cases, part of the backing could become inaccessible for prolonged periods, also resulting in a full unrealized PnL loss in case of complete CEX insolvency.
While Ethena has successfully managed to mitigate the exposure to Bybit shortly after the incident, the lack of transparency and dependency on operational effectiveness present a risk that should be taken into account when setting the appropriate Reserve Fund capital requirement. Hence, it is advisable that an additional Reserve Fund capital buffer is allocated to cover such risks.
Asset Reallocations
The current composition includes RWA and yield-bearing stablecoins as well as a large LP position:
- USTB ($5.2m)
- USDtb ($19.2m)
- Curve USDtb-USDC LP ($20m)
- sUSDS ($14.1m)
- sDAI ($2.3m)
Source:
LlamaRisk Ethena Risk Dashboard, April 25th, 2025
The proposal does not specify which asset allocation would be moved out of the Reserve Fund. It is expected that Ethena would clarify the exact asset(s) to re-allocate in a subsequent proposal after the re-capitalization intent is approved by the Risk Committee.
Recommendations
As USDe’s backing shifts through daily capital re-allocations—whether to adjust stablecoin exposure, rotate perp positions to chase better funding rates across assets and venues, or respond to changes in USDe supply—the Reserve Fund needs to act as a reliable capital buffer. It should be robust enough to absorb the potential risk of yield optimization strategies and supply fluctuations, as well as withstand losses such as unrealized PnL from possible exchange hacks. To ensure this, the sizing logic should be revisited frequently to stay aligned with market conditions and backing dynamics.
We recommend that the Reserve Fund subcommittee publish a monthly report assessing the fund’s adequacy based on the latest backing composition and projected market environment. The goal of this review is to evaluate whether the Reserve Fund remains sufficiently capitalized and to offer guidance on whether additional capital is advisable.
Taking into account the historical data and a cautious approach to managing USDe’s reserves, we support the proposal to reduce the Reserve Fund by $5M and redirect it into USDe stablecoin backing, contingent on the allocation being held in stablecoins within the redeem contract. This adjustment keeps the Reserve Fund sufficiently capitalized by conservative historical estimations while improving USDe’s collateralization, ultimately without introducing additional risk into the system.
