Derive Ethena Liquidity and USDe Integration

ksett
Tue, 17 Dec 2024 09:48:49 +0000
General

Summary

This proposal requests that Ethena integrate Derive as an eligible venue for a portion of its hedging flow, subject to technical and legal due diligence by the Ethena Foundation. If approved, the proposed integration would be implemented with Risk Committee guidance as Ethena hedging flow scales alongside the growth of Derive.

Additionally, this proposal highlights the synergies between Derive and Ethena and requests that the Ethena Risk Committee conduct due diligence to assess Derive’s suitability as a hedging venue.

Background

Derive has 60,000+ total users and drives ~$250M in volumes weekly. Source: Derive: Crypto Options & Futures Trading for Bitcoin, Ethereum and altcoins.

With over $100M in TVL and over $150M open interest (OI), Derive is the largest on-chain options protocol and quickly becoming a top perp protocol. Source: https://defillama.com/protocol/derive

Derive has regularly accounts for roughly 60-80% of onchain options volumes. Source: DefiLlama https://defillama.com/options

To date, Derive has upheld an exceptional security record. Derive is fully self-custodial with a trustless on-chain risk engine and liquidation mechanism. It has been audited by a Tier 1 firm, Sigma Prime, and you can view the audit report here. Only whitelisted contracts are permitted to deploy on Derive Chain, ensuring additional security. The platform uses a secure, audited, and open-source smart contract wallet architecture, paired with a sleek user interface that allows users to generate API signing keys, control the flow of funds, and manage positions within Derive’s UI.

Below is a proposed maximum initial allocation for consideration by Ethena’s Risk Committee based on Derive’s OI on December 10th, 2024, designed to keep Ethena’s exposure to Derive at or below 10% of Derive’s OI per asset as an initial roll out. Note this is an illustrative notional allocation and the size of the allocation should be adjusted depending on changes in Derive notional OI on an asset-by-asset basis.

Token | Derive OI (options and perps) | Ethena Max Allocation (10% of OI)
BTC | $85M | $8.5M
ETH | $78M | $7.8M
Total | $163M | $1.63M

Note: Options data is included in OI as it represents risk capacity of market makers and traders in the Derive ecosystem.

Ethena x Derive Synergies

1. Long Term Alignment

sENA stakers are being rewarded with Derive Points from the Ethena Foundation, which will amount to 5% of DRV supply.

Directing a portion of hedging flow ensures the success of this partnership

Announcement: https://x.com/derivexyz/status/1863737487706951751

2. Attractive Funding Rates

Funding on Derive is structured to closely align with the methodology used by centralized perpetual exchanges. A detailed explanation of the calculation behind funding rates can be found in the docs.

1 year funding rates as per Derive’s API on December 10th, 2024

BTC:

ETH:

Over the past year, Derive’s BTC and ETH funding rates have remained near the baseline (10.95%) moreso than Binance or Bybit, with rates briefly reaching as high as 250% for BTC and over 150% for ETH.

YTD | Binance | Bybit | Derive
ETH | 12.61% | 12.21% | 16.5%
BTC | 11.76% | 11.87% | 12.71%

A more predictable, and often higher, funding rate presents a more appealing option for Ethena compared to its current approach of hedging solely on centralized exchanges.

3. Moving Ethena’s hedging flow onchain

Routing USDe hedging flows to on-chain venues can enhance transparency for users while minimizing counterparty risk associated with Ethena’s positions.

4. Integration of USDe into Derive

Ethena’s integration with other centralized exchanges, which allows USDe to be used as margin collateral, proved highly successful, reaching a peak of over 450 million USDe held on Bybit by its users. USDe has become the fastest-growing USD-denominated asset across multiple chains, outside of ETH L1, with integrations into various DeFi applications. Since its launch, Derive’s integration of sUSDe and USDe as trading collateral has also seen significant success.

$40M of Ethena products currently deposited to Derive

$13M TVL in Ethena based structured products https://www.derive.xyz/vault/susdebull

Potential to add additional strategies around sUSDe, USDe, and ENA

Proposal

Request that the Ethena Risk Committee assess the proposed integration to move a portion of Ethena’s hedging flow onchain to Derive and USDe integrated.

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