Blockworks Advisory supports this proposal.
Solana is currently the fourth-largest non-stable crypto asset by market cap at $71.9 billion at the time of writing, trailing Bitcoin, Ethereum, and BNB, which, hold market caps of $1.3 trillion, $306.2 billion, and $84.7 billion, respectively. We believe onboarding SOL as a USDe collateral asset is a sensible step, if taken carefully, for several key reasons.
Solana’s ecosystem has matured with deep liquidity in both spot and perpetual markets and growing open interest, making it suitable for Ethena’s delta-neutral strategies involving spot holdings and shorting on perp platforms.Similar to BTC and ETH, a spot and short strategy with SOL can generate yield through positive funding rates in perpetual markets. Solana’s volatility and activity offer strong revenue potential, contingent on favorable market conditions. Additionally, adding SOL diversifies USDe’s backing beyond BTC and ETH, expanding yield opportunities and potentially helping to stabilize income across different market conditions.
We propose the following analysis by the Risk Committee to determine the specific approach for integrating SOL as a USDe backing asset while minimizing risks. The focus will be on implementing this addition in a controlled and systematic manner, while continuously monitoring funding rates and liquidity.
- Availability and Liquidity of Spot and Perpetual Markets for SOL
A review of the exchanges on which to add SOL is essential. The assessment should focus on whether these platforms provide sufficient liquidity and adequate funding rates for opening short positions on SOL. Liquidity and slippage, particularly during periods of market volatility, are critical factors that can significantly impact the efficiency of the hedging strategy.
- Volatility and Impact on Funding Rates
Solana’s higher volatility compared to BTC and ETH may result in more frequent and substantial fluctuations in funding rates. These fluctuations could either enhance yield opportunities or increase the cost of maintaining the hedge. Therefore, an analysis of historical funding rate behavior on SOL perpetual contracts is necessary to determine whether it can consistently contribute to positive yield generation across different market conditions.
- Risk of Liquidation
During periods of heightened market volatility, there is an elevated risk of liquidation when utilizing LSTs. Given that spot LSTs are not the same asset as the underlying derivative positions, their price volatility could lead to liquidation events. Although the backing asset composition is to contain a relatively small proportion of LSTs, it is important to define the maximum allowable exposure to SOL LSTs and which ones are to be accepted in order to mitigate this risk effectively.
- Exit and Rebalancing Strategies
Should SOL become too volatile or unprofitable for delta-neutral strategies, a clear exit or rebalancing plan should be in place. This plan should outline the conditions under which SOL positions can be unwound or rebalanced with alternative assets, and the speed and cost at which such adjustments can be made. This aligns with the Risk Committee’s broader plan to manage all strategies dynamically, ensuring flexibility in response to changing market conditions.