Introduction
In response to the proposal for Ethena to supply USDtb to the Aave market, we present an analysis of liquidity provision for USDtb on Aave. A competitive borrow rate for USDtb could enable a looping strategy where users lock sUSDe or the likes as collateral to borrow USDtb, which will then be used to buy more sUSDe. A narrower spread between USDtb borrow rate and sUSDe yield could lead to a reduction in USDe supply. As such USDtb provision into Aave could lead to heightened volatility of USDe supply.
A framework for supplying USDtb to Aave
With Ethena’s role as the main/sole supplier of USDtb on Aave, at least at the start, our analysis focuses on dynamically controlling the supply of USDtb into Aave to achieve two objectives:
- Maintain Competitive Borrow Rates: Ensure the borrow APR remains below a predefined threshold, ( r ), which represents the target lowest APR among stablecoin lending options.
- Manage Liquidity Risk: Limit the total supplied USDtb to a maximum cap, ( k ), preserving token liquidity outside Aave.
Using Aave’s interest rate model, we derived the minimum supply needed to keep the borrow APR at or below ( r ), assuming utilization stays below Aave’s optimal threshold (92%). For instance, with a borrow demand of 100 million USDtb and a target APR of 4%, approximately 163 million USDtb to be supplied to maintain the desired rate.
This framework allows Ethena to adjust supply based on expected demand and desired APR.
Recommendation
Our analysis supports Ethena supplying USDtb to Aave, provided supply levels are dynamically managed using the framework outlined:
- Setting an initial supply based on current borrow demand and a conservative APR target, subject to Aave’s supply cap of $50m at the beginning.
- Monitoring utilization and adjusting supply to maintain the target APR, while respecting the cap ( k ).
For detailed methodology, refer to our full analysis (link-to-whitepaper).