Blockworks Advisory Reelection Intent
Blockworks Advisory is proud to have played an integral role as a member of Ethena’s Risk Committee, helping to shape its priorities and drive meaningful outcomes. Throughout this term, we have consistently aimed to provide an unbiased, objective, and data-driven perspective in all decision-making processes. Our active participation in discussions, idea exchanges, and strategic planning has undoubtedly contributed to the evolution of Ethena’s risk management frameworks. As the first six-month term concludes, we are eager to continue our role within the Risk Committee and remain deeply committed to Ethena’s long-term success.
We believe that establishing robust frameworks is essential for navigating the complexities of our nascent industry. Ethena stands at the forefront of innovation in this evolving landscape, where no predefined standards exist. While this environment often allows for tailored problem-solving and agile decision-making, it also underscores the need to develop structured frameworks that can be continuously refined and improved. This principle has been central to our work within the Risk Committee and is reflected in the key initiatives we have contributed to, as outlined below.
Onboarding new assets
At the heart of Ethena’s USDe lies its hedging strategy. To keep USDe on a growth trajectory, these hedges need to expand in both depth and breadth. One concern that has been often cited, is that if Ethena’s market share in individual assets or venues grows too large, it could squeeze yield opportunities by eroding the typical funding rate imbalances that drive basis trade profits. In other words, growth and risk management must move in lockstep. That’s why our first priority was developing a framework to guide the onboarding of new backing assets and identify additional trading venues.
Ethena Labs first proposed adding SOL as a collateral asset for USDe, leveraging similar hedging mechanics already used with BTC and ETH. Blockworks Advisory supported this proposal, citing Solana’s established ecosystem, robust liquidity, and revenue potential. At the time, Solana’s market cap of $71.9 billion made it the fourth-largest non-stable crypto asset, trailing only Bitcoin, Ethereum, and BNB. By integrating SOL, Ethena seeks to diversify USDe’s backing, broaden yield opportunities, and stabilize income streams.
Key considerations we’ve established as a framework for asset evaluation (further described here)
- Liquidity and Availability – Ensuring exchanges offer sufficient liquidity for favorable funding rates, particularly during market volatility, to support efficient hedging.
- Volatility and Funding Rates – Evaluating the asset’s volatility and its impact on funding rates and hedging costs to maintain profitability.
- Liquidation Risks – Managing exposure limits to mitigate the risk of liquidation, especially for derivative instruments like liquid staking tokens (LSTs).
- Exit and Rebalancing Strategies – Defining clear criteria for adjusting or unwinding positions if market conditions make them unviable.
Funding Rate Analysis
Building on our initial framing, we took the lead on one of the core issues—funding rates—by presenting a detailed analysis to support the decision-making process. To facilitate a more informed evaluation of venues and assets that is consistent and unbiased, we developed a novel framework for assessing funding rate distributions in the context of Ethena. This framework incorporates a comprehensive statistical analysis of historical funding rates, including autocorrelation analysis to measure predictability and, crucially, extreme event duration analysis to assess risk exposure. Further details on our analysis and key findings for SOL can be found here.
Onboarding new venues
To support Ethena’s growth, safely expanding hedging positions to new venues is a key priority. Decentralized exchanges, and their enhanced transparency, present a significant opportunity for Ethena’s future. In response to the first forum proposal to diversify USDe’s hedging positions and onboard Hyperliquid, Blockworks Advisory identified four key considerations that should serve as the foundation for a robust, scalable framework applicable to any venue.
Key considerations we’ve established as a framework for venue evaluation (further described here)
- Security – The exchange must have a robust history of security, including regular and up-to-date smart contract audits by top-tier, reputable audit firms.
- Open Interest – The exchange should offer sufficiently large open interest to ensure Ethena’s positions remain a small portion of the total, avoiding any market-moving impact or liquidity concerns.
- Funding Rates – Funding rates must align with those offered on centralized exchanges currently used by Ethena, particularly avoiding lower funding rates.
- Legal and Regulatory Compliance – A thorough legal due diligence process should be conducted and verified by the Ethena Foundation to ensure the exchange operates within acceptable regulatory frameworks.
Our analysis of Hyperliquid through the established framework has highlighted its potential as a promising venue from a funding rate perspective. However, certain security and clarity concerns remain, which must be addressed before moving forward. This structured approach has proven valuable, as it provides a clear roadmap for identifying and addressing key gaps, ensuring that venues meet the necessary criteria for eligibility. By systematically evaluating each factor, Ethena can make informed decisions and exchanges can focus on the areas that require improvement to align with our standards.
The application of this full framework to Derive would be premature, as its current open interest is too low to justify a meaningful evaluation of other key factors. Considerations to this proposal can be found here. Since funding rates are closely tied to open interest levels, conducting a meaningful analysis should only occur once a minimum threshold is met. This led to internal discussions concerning how this minimum threshold should be derived.
Establishing a clear open interest benchmark is crucial for other exchanges looking to integrate with Ethena, providing them with a concrete target to work toward. To justify the operational effort and integration risks, we recommend that an exchange should be capable of representing at least 1% of Ethena’s total positions. At the same time, Ethena’s positions should not exceed 10% of that venue’s total open interest, with a conservative cap of 5% for new venues. This implies that a candidate exchange should have a total open interest of at least 20% of Ethena’s non-stable collateral to be considered viable. For example, assuming Ethena’s non-stable collateral totals $5 billion, a prospective venue should have a minimum open interest of $1 billion across relevant assets such as BTC, ETH, and SOL, if applicable.
Reserve Fund management
Onboard RWA backing
One key contribution to Ethena’s risk management involved conducting thorough due diligence, analysis, and recommendations for selecting RWAs for the Reserve Fund. Blockworks Advisory meticulously reviewed all proposals, researched the protocols and their teams, and assessed associated risks. Taking a leadership role, we facilitated discussions to determine the most suitable protocols for Ethena, providing a structured framework and well-defined selection criteria for other Risk Committee members to use. This comprehensive effort ultimately resulted in the announcement of the selected products, which can be found here.
USDtb as a USDe Backing Asset and Eligible Asset for the Reserve Fund
The previous analysis of RWAs enabled us to confidently endorse USDtb as both a USDe backing asset and an eligible asset for the Reserve Fund in Ethena Labs’ latest proposal. Additional insights and considerations are available here.
Reserve Fund sizing
By gaining a deep understanding of Ethena’s competitive landscape and the need to maintain a robust risk posture, we helped determine the growth parameters for the ENA fee switch. Through market analysis and strategic growth discussions, we provided recommendations that align with Ethena’s long-term goals. Most importantly, we helped define the critical risk parameters required for an effective fee switch, which are detailed here.
A key focus of our discussions has been determining the appropriate sizing of the Reserve Fund. As revenue distributions are to begin after the Reserve Fund reaches a sufficient capitalization level, since the approval of the fee switch our efforts have been dedicated to defining what constitutes “sufficient” capitalization.
A dedicated working group, comprised of a few members from the Risk Committee, has been formed to explore various approaches and potential improvements. We are committed to continuously contributing to this group to develop a comprehensive framework that incorporates diverse perspectives and inputs. Currently, our approach leverages a direct two-cost framework, incorporating dynamic funding rate estimations and refined slippage assumptions to ensure a realistic and robust fund that can keep Ethena safe during extreme downturns. The details of our current methodology can be found in our working document here.
Future Work
Blockworks Advisory is committed to further streamlining the decision-making process by enhancing the foundational frameworks we’ve established, particularly those related to new exchanges and backing assets. These frameworks are essential in guiding USDe’s safe expansion and deeper integration across DeFi. Additionally, we will continue refining the Reserve Fund sizing, which we consider crucial for Ethena’s risk management as well as USDe’s growth. Beyond these core initiatives, we remain readily available to address any immediate needs as they arise, continuing the proactive support we have provided throughout this term.
We look forward to ongoing collaboration with the Risk Committee members to support Ethena’s sustainable growth.
