Proposal: USDe Redeem for Dislocations on Secondary Markets

General
1

Summary

This proposal outlines a suggested mechanic whereby:

  • Ethena currently has $5bn of stablecoins in the backing of USDe, most of which are readily available and liquid to meet redemption requirements at any given time.

  • USDe may be purchased with USDT (or other stablecoins) held in the backing of USDe (as a substitute for normal redemption flows) in order to support orderly secondary market liquidity and operations during abnormal market dislocations.

  • The effective impact would be identical to a normal USDe burn for USDT (or another stablecoin) redemption, except that the “redemption” would be made for under $1 of backing assets.

  • The purchases would be executed via bids placed on centralized exchange orderbooks, up to a specified capped size and only below a price threshold, using off-exchange solutions (i.e., no backing assets would be deposited to exchanges directly).

  • The proposed amount earmarked for this mechanic would be 1.2% of USDe’s total backing assets, which would equate to ~$95m based on the current USDe supply.

  • The initial proposed threshold at which bids would be placed would be at a price of 0.99 or lower.

  • USDe acquired via this mechanic would be immediately burned following trade settlement. The net result is an equal reduction in assets and liabilities, outside of the incremental assets generated purchasing USDe below $1.

  • When gas fees spike on Ethereum mainnet, as they did on Friday 10th October, many market makers’ operations are severely impacted and as a result they decide not to arbitrage on exchanges until gas cools down, exacerbating any liquidity issues on secondary markets in times of stress.

  • Due to the spread captured in a scenario where USDe market price has dislocated from redemption value, Ethena is able to bear the cost of gas in volatile markets.

  • An ad-hoc Proof of Reserve would be provided within 24hrs of any use of this mechanic.

  • For absolute clarity, this is intended for use only in severe market dislocations, as defined by USDe price trading below 0.99, and is not intended for every day use.

The net impact of the transaction would be increasing the collateralization ratio of USDe, reducing the USDe supply, and supporting the secondary market USDe price - with excess USDT (or other stablecoins) captured being used as reserves.

Background

On the evening of October 10th, the USDe/USDT pair on Binance began to depeg past 0.990 and hit as low as 0.6567 minutes later, resulting in a significant haircut to Binance users’ USDe collateral value and likely playing a part in the liquidation events seen on Binance during the market volatility.

Unlike Bybit, Binance did not integrate direct mint/redeem functionality for USDe on its platform. As a result, liquidations and sell orders of USDe on Binance were directed to the USDe/USDT orderbook instead of directly redeeming with Ethena.

It was reported that trading firms were unable to withdraw or deposit inventory from Binance for prolonged periods of time, which greatly exacerbated the issue. This had a significant impact on the USDe price in the Binance USDe/USDT spot order book and apparently resulted in a cyclical loop of USDe liquidations → USDe depeg → more liquidations.

For reference, Bybit’s USDe/USDT pair only depegged to a low of approximately 0.9408, despite Bybit also greatly slowing the pace of deposits & withdrawals for users.

Meanwhile, USDe pricing on DEXs was remarkably stable, with Curve’s USDe/USDC pair only briefly dipping to 0.997.

Ethena’s primary mint/redeem facility with whitelisted parties functioned without any issues throughout the volatility, servicing over $2bn worth of instant USDe redemptions in a 24hr period.

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In this scenario, anyone that was able to bid USDe price below $1 was able to capture a spread by subsequently redeeming USDe with Ethena for $1 of USDT/C. However, due to the apparent Binance exchange issues noted above market makers weren’t able to step in and defend the USDe peg on Binance, with 2% bid depth dipping as low as $6m during the crash.

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If adequate size was able to be placed on the bid side for USDe, the secondary price would not have dislocated so severely on Binance specifically in a scenario where Ethena was fully solvent and operating as normal and true redemption value for USDe was not impaired.

Additional last-resort acquisitions and burns of USDe at a discount would have reduced the idiosyncratic price impact on Binance while capturing a benefit to Ethena, a net benefit for the protocol overall.

Next Steps

Risk Committee members have been notified of this proposal in advance and will post their recommendations in the comments below this post. Should the proposal receive approval from the Risk Committee, Ethena will have the ability to purchase discounted USDe on secondary markets using backing assets, which will be immediately burned following trade settlement. This is intended for use only in severe market dislocations, as defined by USDe price trading below 0.99, and an ad hoc Proof of Reserve will be provided within 24hrs of using this mechanic.

2

Kairos Research supports this proposal.

The October 10th event for Ethena was a venue-specific market failure, not a solvency issue. Allowing the protocol to purchase USDe below $0.99 with capped size and off-exchange execution simply extends the existing redemption logic into moments where external arbitrageurs are unable to operate.

We believe this proposal strengthens USDe’s resilience without distorting normal market behavior. We view it as a prudent, limited, and an overall beneficial addition to ensure USDe remains robust in the most challenging conditions.

3

LlamaRisk supports the objective of the proposal to use backing assets to support the USDe peg during market dislocations, as it proactively addresses secondary market stability. Our primary friction point, however, is the information asymmetry this creates. Ultimately, our review has identified several recommendations, turning this proposal into an opportunity to improve commitment to transparency.

Key Considerations

  1. Information Asymmetry: The proposed mechanism inherently operates with an information advantage, given the Ethena team’s real-time knowledge of its reserves. The key to ensuring market confidence is to minimize this information gap. While we have no concerns about how the Ethena team would manage this, building a system that is transparent by design will preemptively address any potential community perception of “arbitraging insolvency” and build deeper, more durable trust.

  2. Legal and Operational Diligence: From a legal perspective, by directly intervening in the secondary market through bidding on USDe with reserve assets at prices below par, Ethena may inadvertently attract heightened regulatory attention. Though the legal frameworks currently governing Ethena’s activities do not expressly impose specific obligations related to such interventions, regulatory landscapes across relevant jurisdictions need to be continuously monitored for any evolving requirements or interpretive shifts. Actions perceived as “artificial price support” present unique legal sensitivities, particularly if disclosures are not clear and forthright. Operationally, securing explicit confirmation from exchange partners that these activities comply with their terms of service is a critical step for seamless execution.

Recommendations for Enhancement

To improve the robustness of the proposed mechanism, we encourage the Ethena team to consider the following enhancements:

  1. Deepen the Commitment to Transparency: We recommend upgrading Proof of Reserve reporting to a more frequent cadence, moving towards a more up-to-date view of the protocol’s health. We acknowledge that this would require additional operational overhead, improving the way USDe’s backing is traced along the CEXs, onchain and offchain custodian accounts, and internally controlled wallets. Nonetheless, it is the key to setting a new industry benchmark for transparency and trust. As independent attestors of Ethena’s Proof of Reserve, we are ready to help support it.

  2. Codify the ‘Solvency-First’ Principle: We recommend Ethena commit to using the system solely when USDe is verifiably fully collateralized. This aligns the mechanism’s use with PoR attestations and makes it unequivocally clear that this is a tool for stabilizing a healthy system, not for managing distress.

We are inclined to support this initiative and work with the Ethena team and other stakeholders to bring it to fruition.

4

Steakhouse is supportive of this proposal. A capped, rules based facility to route discounted secondary purchases through the normal mint/burn path is a sensible way to contain venue specific dislocations like those observed on October tenth. It reinforces confidence without changing the economic substance of redemptions and sits well within the existing risk framework.

The only area where a touch more clarity would help the broader community is how the 0.99 condition will be identified in practice, simply to ensure the mechanic is viewed as predictable and objective. This does not affect our support.

Overall the approach is clean, conservative, and appropriate for rare dislocation scenarios. We are in favor of proceeding.

5

Blockworks Advisory supports the proposal.

Key strengths

  • This proposal addresses a real problem: The October 10th incident clearly demonstrated a gap in the system. While primary redemptions worked perfectly ($2b processed), the Binance order book collapsed to 0.656 due to exchange-specific operational issues, not USDe solvency problems. Liquidity depth was really thin and timely bids would have been great.

  • Smart arbitrage capture: The mechanic essentially lets Ethena act as an arbitrageur of last resort, buying discounted USDe and burning it. This improves collateralization while supporting the peg, which is a win-win that also sends profits to the Reserve Fund.

  • Sizing seems appropriate: At $150m (1.2% of supply on October 10th) with a 0.99 trigger, this seems calibrated for genuine dislocations rather than normal volatility. It’s meaningful without being so large it crowds out market makers, especially considering the 2% bid depth dipped as low as $6m on Binance during the crash.

  • Posting PoR within 24h of using the mechanism is very important, we strongly agree that this needs to be maintained. Ideally, general PoR cadence should be increased, so that at any time anyone can have transparency and peace of mind about the full, attested collateralization of USDe.

Key concerns

  • Our primary concern is whether this mechanism addresses the root cause. A backstop may inadvertently reduce exchange incentives to integrate direct mint/redeem, Binance’s lack of integration contributed to this issue, and the backstop could enable further delays. More fundamentally, incentivizing deeper USDe liquidity as supply grows would naturally prevent these situations and provide a sustainable solution. Ethena confirmed that Binance mint/redeem integration remains a top priority with ongoing discussions. This proposal effectively addresses immediate needs while generating protocol revenue, making it a pragmatic interim solution.

  • Permanent bids: Keeping $150m in permanent bids across exchanges might telegraph Ethena’s backstop level to the market, potentially opening up a door to bad actors trying to take advantage of these bids. However, this risk seems minimal relative the proposal’s benefits.

6

Credio (by Untangled) supports this proposal. The proposed safeguards e.g. conditions for implementation, execution path, ad-hoc POR, appear adequate. We also think that being transparent about bid size sends the positive signal that there is amble liquidity to cover such idiosyncratic depeg events.