Introduction
In response to the proposal to onboard Aave’s aUSDC and aUSDT as USDe backing assets, we, Untangled Credio, present an analysis of the liquidity and yield dynamics of these assets on the Aave protocol, to inform the community’s evaluation of the proposal.
This analysis is independent of the one on USDtb posted under that thread. For a combined view of the Ethena Risk Committee across all Aave stablecoin supply proposals (USDC/T and USDtb), go here.
Supply caps
Our simulation engine, trained on 30 days of historical data and projecting over a 7-day horizon, analyzed 10,000 liquidity trajectories for aUSDC and aUSDT at Ethereum block 22247319. Key findings include:
- Liquidity up to Optimal Utilization Threshold: To avoid pushing Aave’s utilization rate above its optimal threshold (92%), aUSDC maintains a mean liquidity of $570M (1st percentile: $372M), and aUSDT shows $733M (1st percentile: $148M).
- Total Available Liquidity: aUSDC offers a mean available liquidity of $576M, with a 1st percentile (worst-case) of $372M. For aUSDT, the mean is $935M, with a 1st percentile of $275M. This suggests substantial withdrawal capacity, even in stressed scenarios.
We recommend a combined supply cap of $500 - $600m - Staying below these thresholds ensure stable APRs and reduces the risk of liquidity crunches. However, aUSDT’s lower 1st percentile liquidity suggests it may face tighter constraints under extreme conditions, warranting cautious allocation.
Yield Potential
We estimated the supply APR (yield) for liquidity providers based on Aave’s interest rate model and simulated utilization rates. The average supply APR over the 7-day forecast reflects stable returns, driven by Aave’s piecewise interest rate structure (base rate: 0%, slope 1: 6%, slope 2: 35%, reserve factor: 10%). While exact APRs vary with utilization, our simulations show that yields remain competitive and predictable, aligning with USDe’s goal of stable backing asset returns. High utilization scenarios (>92%) could spike APRs, but Aave’s model typically restores equilibrium by incentivizing repayments or new liquidity.
Backtest results
We backtested our simulation engine across 100 rolling 30-day windows, starting from December 13, 2024 (block 21395862). The realized minimum liquidity for aUSDC and aUSDT consistently fell within the predicted distributions.
Other Considerations
While aUSDC and aUSDT exhibit large liquidity, Ethena should consider:
- Liquidity Volatility: aUSDT’s higher standard deviation ($330M vs. aUSDC’s $80M) suggests greater liquidity fluctuations, which could impact USDe’s stability in certain scenarios.
- Utilization Spikes: Exceeding the 92% optimal utilization threshold could temporarily elevate APRs and reduce available liquidity, though Aave’s design mitigates prolonged imbalances.
- Protocol Risks: As with any DeFi protocol, Aave faces smart contract and market risks, which should be monitored for USDe’s backing portfolio.
Recommendation
Our analysis supports the onboarding of aUSDC and aUSDT as USDe backing assets due to their deep liquidity and reasonable yields. We recommend a combined supply cap of ~ $500m - $600m for USDC/T.
We advise ongoing monitoring of utilization rates and liquidity metrics to ensure alignment with USDe’s peg stability objectives. Also the total exposure to Aave across all stablecoin markets USDC/T and USDtb should be capped and monitored.
We welcome community feedback. For detailed methodology and results, refer to our full analysis (link-to-whitepaper).