Proposal: Onboard SOL as a USDe Backing Asset

EthenaLabs_Research
Wed, 09 Oct 2024 16:27:59 +0000
General

Summary

This proposal recommends an allocation of USDe’s backing to SOL utilizing substantially the same mechanics as Ethena’s hedging mechanism currently in place with BTC and ETH perpetual futures.

The proposed allocation would be scaled into slowly in consultation with the Risk Committee considering SOL perpetual futures shorter history of trading, less liquidity, and less historical funding rate data. However, SOL’s ~$2bn of open interest across venues where Ethena presently executes hedging transactions, combined with more favorable funding so far in 2024 relative to BTC and ETH, presents an attractive opportunity to further align Ethena and USDe with one of crypto’s largest ecosystems and potentially increase protocol revenue when market conditions improve.

Background

In August, Ethena announced USDe’s launch on Solana using Layerzero’s OFT standard. As part of the launch, SOL’s potential onboarding as a USDe backing asset was announced, subject to Risk Committee approval.

In addition to potentially increasing protocol revenue via SOL funding rates, this will unlock $2-3 billion in additional open interest – allowing Ethena to continue scaling USDe from its current supply of approximately $2.5 billion and keep pace with any potential increase in market demand.

Data (Source: Laevitas)

Funding | BTC | ETH | SOL
2 week | 6.4% | 7.4% | 8.2%
1 month | 4.5% | 6.1% | 6.6%
3 month | 4.6% | 5.1% | 5.9%
| | |
Open Interest | | |
October 24 | $23.7bn | $8.8bn | $2.2bn

Proposal

Begin adding SOL as a USDe backing asset in a controlled and methodical fashion in consultation with the Risk Committee, while funding rates and liquidity for SOL contracts are closely monitored.

Today Ethena represents 3% of BTC open interest and 9% of ETH open interest. SOL represents ~$2bn of open interest of which $100-200mn is a reasonable initial target to scale into. $100-200mn of SOL positions would represent 5-10% of SOL open interest, approximately in line with Ethena’s current BTC and ETH weights in their respective markets.

BNSOL (Binance Liquid Staked SOL) and bbSOL (Bybit Liquid Staked SOL) to be considered in addition as a backing asset for USDe, in the same proportion to the overall SOL allocation as ETH LSTs represent with respect to the total ETH allocation within the overall backing of USDe. For context, ETH LST’s make up a third of the overall ETH allocation currently, and we propose the aforementioned SOL LST’s do not exceed one third of any proposed SOL allocation.

As Ethena Labs Research is a non-voting member, this proposal will be subject to Risk Committee approval from other members, who must vote unanimously in order for SOL to be approved as a backing asset.

The Risk Committee has 7 days after this proposal is published to deliberate and arrive at a decision, each replying in this forum with confirmation of their vote.

15 posts - 13 participants