Protocol Background & collateral evaluation
Morpho Midnight
Morpho Midnight is a noncustodial protocol for fixed-rate, fixed-maturity lending. It publicly launched on 21 July 2026, initially supporting USDC loans against cbBTC collateral on Base. Its introduction expands Morpho’s offering to participants seeking certainty over financing costs, investment returns and repayment dates. Midnight operates alongside Morpho Blue, which provides variable-rate, open-term lending. Morpho Blue was already approved as a lending venue for Ethena by the Risk Committee in 2025.
Loan activity on Morpho Midnight so far
So far, Morpho Midnight originated $5.55M in loans with $2.63M outstanding loans at the moment of the analysis.
These figures demonstrate actual lending activity, although adoption remains small relative to Ethena’s proposed allocation. A $20 million deployment would equal approximately 7.6 times the reported outstanding loan book and 3.6 times cumulative originations.
Security Audits
| Provider | Report reference | Coverage |
|---|---|---|
| Spearbit | 7 April 2026 | Midnight security review |
| Spearbit | 13 May 2026 | Midnight core review |
| StErMi | 19 May 2026 | Midnight security review |
| Cantina Competition | 29 May 2026 | Public security competition |
| Blackthorn | 2 July 2026 | Midnight security review |
| Trust Security | 2 July 2026 | Midnight audit and mitigation review |
| Spearbit | 2 July 2026 | Review of competition-related fixes |
Our considerations for Morpho Midnight allocation
Midnight offers a relevant mechanism for Ethena’s fixed-term lending book and has undergone substantial external review. Nevertheless, its approximately eight-week public operating history and modest reported originations warrant treatment as an emerging venue.
The current evidence supports continued diligence and consideration of a controlled initial allocation.
The proposal
How this loan would work
Ethena supplies dollar stablecoins, borrowers receive those stablecoins and lock cbBTC as collateral. Ethena receives a fixed-maturity credit claim. The borrower keeps the economic upside and downside of its BTC while the position remains solvent; Ethena earns a fixed return and bears loss if contractual repayment and collateral recovery fail.
A lender buys units below their maturity value with a credit unit representing one loan token of gross claim, subject to fees and market losses. The borrower’s full maturity debt includes the term return from inception. Health checks therefore use that face debt; adding the same interest again would double count it. Positions in the same market are fungible, and lender losses are shared proportionally within that market.
In this case, Ethena would supply $20 million in dollar stablecoins (USDC) against cbBTC collateral for a 30-to-60-day term at a fixed gross APR of 6% on Base. Assuming full repayment, the deployment would generate $197,260.27 in gross interest, resulting in a total maturity claim of $20,197,260.27 for the 60-day term. This amount does not take into account the fees that might be applied to the loan that are included in later in the analysis.
Borrowers retain economic exposure to BTC while their positions remain open. Ethena receives a fixed-maturity credit claim denominated in USDC.
| Loan A | Loan B | |
|---|---|---|
| Cash advanced | $20,000,000 | $20,000,000 |
| Illustrative term | 30 days | 60 days |
| Gross interest at 6% APR | $98,630 | $197,260 |
| Gross maturity claim | $20 098 630 | $20 197 260 |
The fees
Morpho Midnight’s documentation includes two distinct fees that will be applied to Ethena’s loan.
Ethena would participate as both the lender, purchasing the maturity claim, and the taker, accepting the borrower’s offer. These roles apply both separate protocol fees to Ethena. Their actual amounts depend on the market configuration.
The fees applied to Ethena’s loan
- Settlement fee
The settlement fee is charged when an offer is taken. Mechanically it inserts a spread between the buyer’s and the seller’s settlement price. This fee is exclusively paid by the taker and should be included in the calculation of the APR of this loan.
Why Ethena pays this fee: Ethena accepts the borrower’s offer as taker.
What this fee does: Increases the upfront purchase price of the credit claim.
- Continuous fee
The continuous fee accrues every second on outstanding credit and is borne by lenders only: the holders of credit, and it is capped at 1% annualized.
The continuous fee can be zero or a positive rate up to 1% annualized. It is calculated on credit, rather than as a percentage of interest earned. The applicable rate is fixed when the credit is acquired; subsequent market changes do not retrospectively reprice that existing credit.
Why Ethena pays this fee: Ethena holds the credit claim as lender.
What this fee does: Reduces the amount ultimately receivable.
Who sets the fees?
The published implementation assigns fee-setting authority to the feeSetter address, which is appointed or replaced by the protocol’s configurator. The fee setter can establish defaults for a loan token and adjust fees for individual markets, within the contract’s limits.
Protocol administration controls the appointment. The configurator can appoint a fee setter, which can then configure market fees. At the moment the configurator is the Morpho DAO labeled address.
Impact on the proposed loan yield
| Item | Amount |
|---|---|
| Principal received by the borrower | $20,000,000 |
| Gross interest (6% rate) | $197,260 |
| Settlement fee paid at execution | $16,831 |
| Continuous fee deducted from the claim | $33,201 |
| Total modeled protocol fees | $50,032 |
| Ethena’s total upfront cash outflow | $20,016,831 |
| Net maturity receipt, assuming full repayment | $20,164,059 |
| Net interest after modeled protocol fees | $147,228 |
| Net annualized return on upfront cash | 4.47% |
Assumptions: 1% continuous fee (annualized), 0.5% settlement fee (annualized).
Our consideration
Given the risk profile of this allocation, we recommend that both the settlement and continuous fees be waived as a minimum condition for deployment. This would allow Ethena to retain the full contractual interest over the 60-day term, before any other costs. Both of these fees should be disabled at launch, but an additional confirmation would be needed. This part will be addressed at the end of this proposal.
Liquidation mechanism & available cbBTC liquidity on Base
The Liquidation mechanism on Morpho Midnight
Morpho Midnight permits onchain liquidation, but successful recovery depends on liquidators being able to fund repayment and dispose of the collateral economically. For Ethena’s proposed $20 million deployment, the liquidity assessment must cover the $20,197,260 gross maturity claim, including the contractual interest, and the additional collateral allocated as a liquidation incentive.
Morpho Midnight provides two liquidation mechanisms:
- Health-based liquidation: available before or after maturity when debt exceeds the collateral’s oracle value multiplied by its LLTV. With cbBTC as the sole collateral and an 86% LLTV, liquidation becomes possible above that threshold. The recovery close factor generally limits repayment to the amount required to restore health, subject to specified exceptions.
- Post-maturity liquidation: any outstanding debt becomes liquidatable after the maturity timestamp, irrespective of collateralization. This mechanism allows full repayment without the recovery close factor restriction. The incentive increases from zero to its maximum over 60 minutes. This is an incentive ramp, not a repayment grace period; an unhealthy position can still be liquidated through the health-based mechanism at the maximum incentive.
A liquidator pays USDC into the market and receives cbBTC. Recovered USDC supports lender withdrawals, but Ethena does not automatically receive collateral following a default. Any recognized bad debt reduces lenders’ claims proportionally within the same market.
The published contract transfers collateral before invoking the liquidation callback and collecting repayment. This enables an atomic transaction that receives cbBTC, sells it on Base and uses the proceeds to fund repayment. If the sale cannot generate sufficient USDC and no additional funding is supplied, the transaction reverts.
Observable liquidity for cbBTC/USDC pair
On 15 September 2026, Aerodrome’s liquidity interface displayed the following balances for its four largest cbBTC/USDC pools. Pool labels follow the interface’s concentrated-liquidity identifiers.
| Aerodrome cbBTC/USDC pool | Combined pool TVL | USDC balance | cbBTC balance |
|---|---|---|---|
| Concentrated 2,000 | $6,922,622 | 3,585,217 USDC | 42.71 cbBTC |
| Concentrated 100 | $6,279,257 | 3,323,152 USDC | 37.83 cbBTC |
| Concentrated 50 | $4,990,461 | 2,515,204 USDC | 31.68 cbBTC |
| Concentrated 500 | $520,596 | 262,741 USDC | 3.30 cbBTC |
| Total observed | $18,712,936 | 9,686,314 USDC | 115.52 cbBTC |
These four pools contain approximately $9.69 million USDC. Without replenishment or additional routes, their combined USDC balances cannot fund the $20.197 million maturity repayment.
Oracle specification and valuation risk
Oracle used on Morpho Midnight
The oracle determines collateral value, borrowing capacity and the amount of cbBTC transferred during liquidation. Its configuration is therefore a material component of the loan’s risk parameters.
The cbBTC/USDC Midnight market on Base, with an 86% LLTV and maturity on 25 September 2026, references the oracle described below. In this analysis we assume that the Ethena loan will use the same oracle.
| Parameter | Observed specification |
|---|---|
| Network | Base |
| Oracle implementation | MorphoChainlinkOracleV2 |
| Oracle address | 0x663BECd10daE6C4A3Dcd89F1d76c1174199639B9 |
| Underlying price source | Chainlink BTC/USD |
| Feed address | 0x64c911996D3c6aC71f9b455B1E8E7266BcbD848F |
| cbBTC valuation | BTC/USD price, implicitly assuming 1 cbBTC = 1 BTC |
| USDC valuation | Implicitly assumes 1 USDC = $1; no USDC/USD feed configured |
| Additional feeds and vault conversions | None configured |
| Price-age validation | No explicit staleness check in the wrapper’s feed-reading library |
| Sequencer protection | No explicit Base sequencer-uptime check in the wrapper |
Chainlink’s published feed page lists a 0.10% deviation threshold.
Implications for collateral valuation
This configuration tracks Bitcoin price movements but does not directly capture a discount between cbBTC and BTC. A disruption to Coinbase redemption or confidence in cbBTC could therefore reduce realizable collateral value without a corresponding reduction in the oracle price. The absence of a USDC/USD feed similarly means that changes in USDC’s dollar value are not reflected in the collateral-to-debt exchange rate.
This creates another barrier for the on-chain liquidation. Assuming BTC is unchanged and USDC remains at $1, a position with an 80% oracle-based LTV would have an 88.9% LTV against realizable collateral value if cbBTC traded at a 10% discount to BTC.
The position could remain healthy under the oracle’s valuation despite exceeding the 86% threshold when assessed against its market value. Independent monitoring can identify this discrepancy, but cannot make a position liquidatable before maturity unless the protocol’s actual liquidation conditions are met.
Our consideration
We recommend making the proposed allocation conditional on a documented and tested liquidation arrangement incorporating cbBTC conversion through Coinbase. Coinbase states that eligible customers can deposit cbBTC and receive the underlying BTC at a 1:1 ratio. This would allow the liquidator to sell BTC after conversion, avoiding dependence on Base’s cbBTC trading liquidity and avoiding the cbBTC discount that could be present on chain, provided conversion remains available at parity.
This arrangement mitigates the economic impact of a secondary-market discount while retaining redemption and counterparty risk. If cbBTC trades below BTC because of temporary selling pressure on Base, successful conversion can preserve the collateral’s underlying BTC value.
The liquidation itself must still be completed onchain through Midnight. The liquidator must satisfy the market’s liquidation conditions and supply the required stablecoins to receive the collateral. Although Midnight supports a liquidation callback, the Coinbase conversion and sale cannot fund repayment within that same atomic transaction. The arrangement therefore requires stablecoin funding available independently of those later proceeds.
Risks identified
The main risk we identify in this proposal lies in the actual ability to liquidate the position without loss when BTC declines. On Midnight, a position can only be liquidated without loss within a relatively narrow price window, during which up to the full debt may need to be repaid in USDC, and those USDC must be available somewhere on Base.
The following sections quantify this window, the amount of cbBTC that must be sold at each price level, what the available liquidity on Base could theoretically fund, and the loss Ethena would bear when it cannot.
- The position becomes liquidatable as soon as the debt exceeds 86% of the collateral value (86% LLTV). The debt taken into account is the face debt at maturity, equal to $20,197,260 for the 60-day term, from day one.
- A liquidator repaying $1 of debt receives $1.0438 of cbBTC at the oracle price (4.38% liquidation incentive, taken from the borrower’s collateral; LIF = 1 / (1 − 0.3 × (1 − 0.86))). Before maturity, the liquidator can only repay the amount required to bring the position back below 86%.
As long as the collateral value remains above debt × 1.0438, the full debt remains economically covered through liquidation. Once the collateral value falls below this level, there is insufficient cbBTC to repay the debt and pay the liquidation incentive. The difference is recognized as a loss on Ethena’s credit claim, assuming Ethena is the sole lender in the market:
Ethena loss = debt − collateral / 1.0438
For a borrower opened at a 50% LTV (collateral of $40.4M = 525.7 cbBTC), this results in two price thresholds:
- Liquidatable from $44,677 (BTC −41.9%): at this price, liquidating a small amount of cbBTC is sufficient to bring the position back within the required collateralization threshold.
- Losses begin from $40,107 (BTC −47.8%): at this price, the full 526 cbBTC would need to be sold. Below this level, even liquidating the entire collateral would no longer be sufficient to fully cover the debt ($0.85M shortfall at −50%, and $4.72M at −60%, assuming no prior liquidation had occurred).
Between the two thresholds, the BTC price declines by 10.2%. This is the window during which liquidation must occur, and the longer liquidation is delayed, the more collateral must be sold.
The reason is the liquidation incentive. For example, consider $100 of collateral against $88 of debt (88% LTV, above the 86% LLTV). The maximum permitted debt is $86, so the position exceeds the threshold by $2.
If the liquidator repays $10 of debt, debt falls to $78, but the liquidator receives $10.44 of collateral. Collateral therefore falls to $89.56, and the maximum permitted debt becomes 86% × $89.56 = $77.02. The debt remains above this level, meaning the position is still not healthy.
A $20 repayment is required to restore the position: debt falls to $68, collateral to $79.12, and the maximum permitted debt becomes $68.04.
Eliminating a $2 excess therefore requires approximately $20 of debt repayment, or roughly 10 times the initial excess.
Applied to the position, the same calculation can be performed at each BTC price level:
| BTC decline | Price | Collateral (525.7 cbBTC) | Maximum permitted debt (86%) | Debt | Excess | Debt to repay (≈ 10× the excess) | cbBTC to sell (repayment × 1.0438 / price) |
|---|---|---|---|---|---|---|---|
| −43% | $43,802 | $23.03M | $19.80M | $20.20M | $0.39M | $3.9M | 92 |
| −45% | $42,265 | $22.22M | $19.11M | $20.20M | $1.09M | $10.6M | 263 |
| −47.8% | $40,107 | $21.08M | $18.13M | $20.20M | $2.07M | $20.2M (full debt) | 525 (entire collateral) |
At −47.8%, restoring the position to a healthy state would require repaying the entire debt and selling the entire collateral. This represents the threshold for this liquidation.
Thresholds by opening LTV
The initial LTV is determined by the borrower.
| LTV at position opening | Liquidatable from | Losses begin from | Loss if BTC falls 30% with no liquidation | Loss if BTC falls 50% with no liquidation |
|---|---|---|---|---|
| 50% | $44,677 (−41.9%) | $40,107 (−47.8%) | 0 | $0.85M |
| 60% | $53,613 (−30.2%) | $48,128 (−37.4%) | 0 | $4.07M |
| 70% | $62,548 (−18.6%) | $56,150 (−26.9%) | $0.85M | $6.38M |
| 80% | $71,484 (−7.0%) | $64,171 (−16.5%) | $3.27M | $8.10M |
At an 80% opening LTV, a BTC decline of the magnitude observed on 10 October 2025 (−16.9% over three hours) would be sufficient to move the position into the loss zone.
Liquidation and losses are calculated on a position-by-position basis. However, any loss generated by a borrower within the market is mutualized across all lenders in that market. The relevant risk therefore depends on the LTV of each individual position within the market.
Liquidation capacity on Base
The four Aerodrome cbBTC/USDC pools contain $9.69M in USDC. However, these static pool balances should not be treated as available liquidation capacity : to obtain USDC, the liquidator sells cbBTC into the pool, and each sale pushes the cbBTC price lower within the pool. The liquidator becomes uneconomic once the sale discount against the oracle price exceeds 4.20% (1 − 1/1.0438: the 4.38% incentive expressed on the collateral value, before gas and fees). The same tolerance is 6.90% at 77% LLTV (1 − 1/1.0741). The final dollars of pool liquidity are therefore not practically reachable.
The more relevant measure is market depth: the amount of cbBTC that can be sold in a single transaction without exceeding a given level of price impact.
This has two implications:
- A further 2% BTC decline beyond the liquidation threshold would require approximately $4M of debt repayment. Base provides roughly $0.4M of executable depth per transaction, approximately ten times less.
- The Aerodrome pool nevertheless processes $18.6M of daily volume with only around $0.1M of −2% depth. This indicates that liquidity is continuously replenished through arbitrage: arbitrageurs buy discounted cbBTC on Base against USDC and resell it on Coinbase. The amount that can be liquidated over several hours therefore depends on arbitrage capital rather than the static liquidity held in the pool. This capacity is not directly observable onchain and would need to be secured contractually with a liquidator.
This depth is also not reserved for Ethena. A BTC decline large enough to make Ethena’s position liquidatable would likely make several other cbBTC-backed positions on Base liquidatable at the same time.
At the moment, there is a total of $2.42B cbBTC collateral sitting in various protocols on the base chain. Based on the BTC price decline, these positions would also find themselves at the liquidation level.
| BTC price drop | BTC price | Cumulative collateral liquidated |
|---|---|---|
| '-5% | $71,946 | $1.30M |
| '-10% | $68,159 | $28.95M |
| '-15% | $64,372 | $63.21M |
| '-20% | $60,586 | $112.68M |
| '-25% | $56,799 | $235.58M |
| '-30% | $53,013 | $397.97M |
| '-40% | $45,439 | $1.01B |
| '-50% | $37,866 | $1.78B |
| '-60% | $30,293 | $2.17B |
| '-70% | $22,720 | $2.31B |
| '-80% | $15,146 | $2.39B |
The total liquidity available on Base would take a severe hit if BTC was to drop sharply. Liquidators would have to choose alternative venues in order to liquidate this collateral efficiently.
| Threshold | BTC price | % drop | Cumulative to liquidate | Liquidity available |
|---|---|---|---|---|
| Direct stablecoin liquidity ($37.1M) exhausted | ~$67,322 | 11.1% | $37.4M | Matches $37.1M direct USDC/EURC pools |
| Full DEX liquidity, all routes incl. WETH/ETH ($118.2M) exhausted | ~$59,978 | 20.8% | $139.0M | Matches $118.2M total DEX TVL |
| Largest single bin | ~$46,513 | 38.6% | $143.3M in one bucket | 3.9x the entire direct stablecoin pool base |
| BTC price | % below current | Collateral in bracket | Est. price impact | Est. USD received |
|---|---|---|---|---|
| $72,218 | 4.6% | $1.30M | 6.5% | $1.21M |
| $70,994 | 6.3% | $10.56M | 43.0% | $6.02M |
| $69,770 | 7.9% | $4.35M | 67.4% | $1.42M |
| $68,546 | 9.5% | $12.75M | 79.2% | $2.66M |
| $67,322 | 11.1% | $8.44M | 87.1% | $1.09M |
| $64,874 | 14.3% | $14.17M | 93.8% | $883K |
| $61,202 | 19.2% | $22.53M | 97.6% | $544K |
| $58,754 | 22.4% | $44.78M | 98.9% | $484K |
| $46,513 | 38.6% | $143.31M | ~100% | $54K |
Simulation: BTC declines, who repays, and what does the market lose ?
Under the proposal as currently structured: $20.2M debt, 86% LLTV, borrower opened at 50% LTV. BTC declines in successive steps. At each step, the liquidator repays the amount required to bring the position back to 86%, subject to its available capacity. Four liquidation capacities are modeled:
- Base only: $0.4M per step, based on −2% market depth and assuming liquidity is replenished between steps. The liquidator has no independent USDC funding and, at each step, sells only the amount of cbBTC that Base pools can absorb without pushing the cbBTC price down by more than 2%, based on CoinGecko depth data.
- Pre-funded liquidator with $5M, $10M, or $20.2M: USDC is already available on Base, subject to the stated total funding commitment.
The reported loss represents the total loss that would result if the remaining position were fully settled at that BTC price, including both losses already realized and any shortfall on the remaining outstanding debt.
| BTC decline | Base only: cumulative cbBTC sold / outstanding debt / loss | $5M: cumulative cbBTC sold / outstanding debt / loss | $10M: cumulative cbBTC sold / outstanding debt / loss | $20.2M: cumulative cbBTC sold / outstanding debt / loss |
|---|---|---|---|---|
| −41.9% ($44,677) | 3 cbBTC / $20.06M / 0 | 3 / $20.06M / 0 | 3 / $20.06M / 0 | 3 / $20.06M / 0 |
| −43% | 13 / $19.66M / 0 | 92 / $16.35M / 0 | 92 / $16.35M / 0 | 92 / $16.35M / 0 |
| −45% | 23 / $19.26M / 0 | 120 (exhausted) / $15.20M / 0 | 230 / $10.74M / 0 | 230 / $10.74M / 0 |
| −47.8% ($40,107) | 33 / $18.86M / 0 | 120 / $15.20M / 0 | 244 (exhausted) / $10.20M / 0 | 369 / $5.40M / 0 |
| −50% | 44 / $17.74M / $0.73M | 120 / $15.20M / $0.27M | 244 / $10.20M / 0 | 430 / $3.17M / 0 |
| −55% | 56 / $15.56M / $2.50M | 120 / $15.20M / $1.76M | 244 / $10.20M / $0.88M | 523 / $0.07M / 0 |
| −60% | 70 / $13.43M / $4.23M | 120 / $15.20M / $3.25M | 244 / $10.20M / $1.91M | 526 / 0 / 0 |
- Observable Base liquidity provides limited standalone liquidation capacity.: only 70 cbBTC are sold in total, resulting in a $4.23M loss at −60%, compared with $4.72M if no liquidation occurs.
- A pre-funded liquidator continues repaying debt until its USDC capacity is exhausted, after which the remaining debt continues to deteriorate with the BTC price. With $10M of funding, approximately half of the position is liquidated before BTC reaches −47.8%. The remaining $10.2M of debt stays open, resulting in a $0.88M loss at −55% and a $1.91M loss at −60%.
- Sufficient funding removes the modeled funding constraint, but successful recovery also depends on liquidation timing, oracle updates and collateral execution. With $20.2M of capacity, the position is fully liquidated at approximately −55%, after 526 cbBTC have been sold.
Loan size: $20M or $10M?
Using the same simulation, the table below shows the total loss at a 60% BTC decline depending on the loan size and the liquidator’s available capacity, assuming an 86% LLTV and a 50% initial LTV:
| Debt | No liquidation | Base only | $5M liquidator | $10M liquidator | $20M liquidator |
|---|---|---|---|---|---|
| $20.2M | $4.72M | $4.23M | $3.25M | $1.91M | 0 |
| $10.1M | $2.36M | $1.89M | $0.96M | 0 | 0 |
Reducing the loan size does not change the BTC price at which losses begin, as this threshold depends only on the initial LTV and the LLTV. It reduces losses proportionally and, more importantly, brings the debt closer to the amount that a liquidator can actually repay.
The relevant constraint is therefore: loan amount ≤ USDC amount the liquidator commits to provide.
Base liquidity should not be included in this calculation, whether the loan size is $20M or $10M.
LLTV: 86% or 77%?
Midnight’s enabled parameter set includes a 77% LLTV. Ethena does not create markets on Midnight and can only allocate to markets listed by Morpho; the comparison below therefore shows what a 77% market would change, not a parameter Ethena can set. Using the same debt ($20.2M) and the same initial LTV (50%):
| LLTV | Liquidation incentive | Liquidatable from | Losses begin from | Loss-free window | cbBTC to sell per additional 1% BTC decline |
|---|---|---|---|---|---|
| 86% | 4.38% | $44,677 (−41.9%) | $40,107 (−47.8%) | 10.2% | 46 |
| 77% | 7.41% | $49,899 (−35.1%) | $41,270 (−46.3%) | 17.3% | 25 |
What changing the LLTV does and does not change:
- It does not replace liquidator capacity. With a liquidator funded with $10M, the loss at −60% is $1.78M at 77% LLTV versus $1.91M at 86% LLTV. The portion of debt that is not covered by liquidation capacity remains exposed.
- It does not materially move the price at which losses begin, and moves it slightly in the wrong direction because of the higher liquidation incentive. If no liquidation ever occurs, a 77% LLTV does not help.
- It changes the time available to liquidate. Liquidation begins at −35% instead of −42%; the loss-free window increases from 10.2% to 17.3%; and each additional 1% decline requires selling 25 cbBTC instead of 46.
In practice, if the BTC price moves sharply between two liquidation opportunities, for example because the sequencer is unavailable or the liquidator reacts late:
| Price drop between two liquidation opportunities | Loss at 86% LLTV | Loss at 77% LLTV |
|---|---|---|
| 10% | 0 | 0 |
| 15% | $1.07M | 0 |
| 16.9% (10 October 2025, three hours) | $1.50M | 0 |
| 20% | $2.20M | $0.66M |
At 86% LLTV, the loss-free window is narrower than the largest intraday move observed since March 2020. At 77% LLTV, the window is wider.
Verification using the 10 October 2025 move: assume the position is exactly at the liquidation threshold and BTC then falls 16.9% without any liquidation being possible.
At 86% LLTV, the collateral would be worth $19.52M, compared with $21.08M required to cover the debt and liquidation incentive ($20.2M × 1.0438), resulting in a $1.50M loss.
At 77% LLTV, $21.69M would be required ($20.2M × 1.0741). Under the modeled assumptions, once liquidation becomes possible again, the liquidator can repay the full debt without loss to Ethena, provided that sufficient committed USDC capacity remains available and the liquidation is executed before any further material BTC decline.
Our initial analysis identified a fundamental issue.
The issue is liquidation. At an 86% LLTV, the position can only be liquidated without loss within a 10.2% BTC downside window, during which the amount required rises to as much as the full debt, in USDC available on Base at the time of the transaction. Base onchain liquidity cannot provide this USDC: approximately $0.4M of executable depth per transaction under current conditions, compared with nearly $4M of debt repayment required for a further 2% decline beyond the liquidation threshold, in a context where $2.42B of cbBTC collateral on Base could become liquidatable at the same time.
Without a liquidator providing its own USDC, neither a $20M nor a $10M loan can be supported without loss risk. With a liquidator funded up to the amount of the debt, losses are zero across all simulated downside scenarios.
Our initial recommendations therefore follow:
- Loan amount ≤ USDC committed by a pre-funded liquidator, with a documented and tested route to convert cbBTC at par outside Base pools before funding; without such a liquidator, no $20M deployment.
- Prefer a 77% LLTV, which increases the loss-free window from 10.2% to 17.3% and absorbs a move comparable to 10 October without loss.
- Opening LTV ≤ 60% for funded positions.
- Midnight fees (settlement and continuous) set to 0%.
Sharing our conclusions
Following discussions with the Ethena team, which provided additional details on the counterparty and the liquidation setup, our assessment has evolved.
Three elements are decisive. cbBTC has already been approved as collateral on the governance forum. The counterparty is a leading institutional participant that offers this loan to its own users as part of an existing BTC-backed credit product. And liquidation does not rely solely on onchain execution on Base: it can be carried out outside Base, with cbBTC converted at par, directly addressing the funding constraint that our analysis identified as the primary risk. The uncertainty around the counterparty and the liquidation issue are therefore resolved together.
The Ethena team has also confirmed that Midnight fees will not apply to this allocation.
On this basis, we are able to support the deployment of $20M across these markets at a 6% annual rate. During the life of the loan, we will monitor the market’s LTV distribution and the effective allocation between the two maturities, and conduct a review at the end of the first cycle before any renewal or increase in allocation.