Ethena Monthly Reserve Fund Recommendations
Summary
This analysis is presented by LlamaRisk and Blockworks Advisory, members of the Risk Committee leading risk recommendations on the Reserve Fund. We will periodically re-evaluate the fund’s size based on market conditions, changes in USDe’s backing, and projected capital needs.
Funding rates have recently recovered from the lows seen in April and early May. During that period, a proposal to allocate a portion of the excess Reserve Fund to USDe backing was approved but later abandoned as market conditions shifted. Concurrently, the USDe supply has rebounded to $5.88 billion, a recovery accelerated by the adoption of USDe-related assets on Aave.
The Reserve Fund currently holds $61.1 million. LlamaRisk’s analysis, using the Reserve Fund Drawdown Methodology V2, indicates a need for $35.8 million under conservative scenario, while Blockworks Advisory recommends $41.8 million. Looking ahead, four-week projections suggest a required fund size of $44.8 million, assuming continued growth.
Therefore, the current fund is sufficient to support near-term growth in USDe supply also assuming a similar stablecoin buffer ratio. We will conduct monthly reviews to ensure this insurance buffer remains adequate for USDe’s continued stability. The methodologies will be revised in the next update to incorporate realistic slippage data, using trading data directly from Ethena’s trading operations.
LlamaRisk Methodology & Estimations
Utilizing the Reserve Fund drawdown methodology developed by LlamaRisk, which considers current and historical market conditions, USDe collateral distribution, stablecoin buffer, and sUSDe supply, we present up-to-date drawdown simulations to estimate current Reserve Fund capitalization needs. These estimations also include a projection of USDe growth to provide future guidance. This is achieved by extrapolating growth from the previous month to one month into the future, using a 4-week moving average of the previous month’s USDe supply to determine an average weekly growth rate. The weekly growth rate is then used to establish the projected target for the next four weeks.
Conservative Scenario
In this scenario, according to the methodology, we assume all perpetual positions would need to be closed within a 24-hour time span, incurring 50 bps in negative funding rate losses and 75 bps in slippage losses. From this, we derive the following estimate for the required Reserve Fund size:
Source: Reserve Fund Drawdown Methodology V2, June 7th, 2025
Simulating this short-term risk scenario results in a currently recommended Reserve Fund size estimation of $35.8 million. With this Reserve Fund size, Ethena would remain solvent and be able to serve all USDe redemptions, even under the worst tail-risk scenario that would require closing all perpetual positions in a short time frame.
In the following month, assuming the continued USDe supply increase, we project the recommended Reserve Fund size to increase and reach up to $44.8 million.
Moderate Scenario
The moderate scenario assumes that a decline in funding rates would trigger a significant amount of sUSDe to enter the unstaking queue, leading to a potential wave of USDe redemptions. The maximum amount of USDe is based on the current circulating supply and the assumption that USDe in liquidity pools will not be redeemed. It is also assumed that Ethena will prioritize timely redemptions to prevent the USDe price from de-pegging, using its stablecoin buffer for instant redemptions and closing perpetual positions for the rest. Additionally, the scenario assumes that redemptions requiring the closure of perpetual positions will be managed with slippage capped at 75 basis points and funding rate losses limited to 5 basis points, while any remaining positions could face up to 50 basis points in funding losses before being gradually wound down with lower slippage.
Source: Reserve Fund Drawdown Methodology V2, June 7th, 2025
This scenario results in a currently recommended Reserve Fund size of $14.3 million. With this Reserve Fund size, Ethena could successfully serve all redemptions of circulating USDe while being able to wind down perpetual positions more gradually and over a larger time frame, assuming funding rates are milder than in a tail-risk scenario. Using the forecasted data, we project a recommended Reserve Fund size of $17.9 million over the coming month.
Blockworks Advisory Methodology & Estimations
Assuming a highly conservative scenario where Ethena chooses to unwind all positions within 24 hours during a severe market downturn, the Reserve Fund needs to cover two key costs: negative funding rates during that window and slippage from exiting positions. Note that the likelihood of requiring 100% position closure in 24 hours is very low and this scenario addresses a worst-case possibility in terms of funding rates.
To estimate funding costs, we can use a dynamic model that builds on the approach of looking at the share of backing in perpetuals by also factoring in the specific assets and venues involved, allowing for a nuanced assessment. The model considers the most extreme historical funding events, specifically the worst 0.1% of datapoints for each asset and exchange pair, and applies those rates to Ethena’s current allocation to estimate potential funding cost exposure under stress. This becomes especially important as more volatile collateral assets like SOL are added, and as certain venues prove better equipped than others to handle extreme market conditions. The same total allocation can carry very different risk profiles depending on where and how it’s deployed, which in turn affects the size needed for the Reserve Fund.
Slippage is the second major cost, incurred both when closing short positions and selling spot. For now, we estimate this at 1%, though we expect to refine this once Ethena’s trading data is made available.
Current Estimation and Historical Context
Based on this methodology, the Reserve Fund would today need to currently hold approximately $41.8 million to be sufficiently capitalized. At this level, Ethena would be able to fully unwind its current positions even under historically extreme negative funding conditions, while maintaining solvency throughout.
To put this into perspective, consider the estimated Reserve Fund requirement as a percentage of total backing. It highlights how the composition of assets can significantly influence the appropriate size of the Reserve Fund, even when total backing stays the same. While current estimates suggest that the Reserve Fund’s needs are below its current capitalization, it’s important to note that Ethena is expected to act swiftly to capture the highest yields available.
Taking a conservative approach, we examined the fastest 3-day increase observed in the past six months, which was 33%. Today, we recommend that the reserve fund covers 0.72% of total backing. If that same 33% jump were to begin today, the recommended reserve size could rise to around 0.96% of total backing within three days. That would translate to roughly $57 million, as an illustrative example of how quickly reserve requirements can shift due to changes in backing composition.
Recommendation
According to the consensus of recommendations, the current Reserve Fund size is sufficient to cover potential drawdowns as outlined in our modeled scenarios. This includes both the future projections and historical volatility observed in the Reserve Fund requirements. This means that no immediate capitalization increases are needed to the Reserve Fund. However, due to the changing nature of funding rates and the demand for USDe, we will continue to actively monitor the Reserve Fund to make sure the recommendations stay up to date.