Proposal: Allocating a portion of excess Reserve Fund assets to USDe backing

EthenaLabs_Research
Fri, 25 Apr 2025 13:21:28 +0000
Reserve Fund

Summary

This proposal suggests reducing the Reserve Fund size by $5m to mirror the reduction in USDe supply from 6bn to 4.8bn in the last few months. Furthermore, it is prudent to revisit overall sizing requirements for the Reserve Fund to reflect Ethena’s ability to dynamically allocate more of the backing into stablecoins - i.e., away from perpetuals - in negative funding environments, mitigating the potential impact of negative funding on the Reserve Fund assets and the backing as a whole. For context, the allocation to perpetual futures in the backing of USDe is less than 30% today, whereas original Reserve Fund sufficiency modelling assumed >80%. Considering the lower total USDe supply and the dynamic allocation of the USDe backing, at $60.9m the Reserve Fund is oversized - and this is likely true even at 6bn supply.

The $5m would be transferred to the backing assets of USDe, bolstering available USDe redemption liquidity and ensuring further over-collateralization of the backing while also remaining productive in reward accruing stablecoins.

Following on from this proposal, we encourage the Risk Committee to arrive at an updated recommended minimum Reserve Fund size given the above.

Background

Transferring $5m from the Reserve Fund directly to the backing of USDe

With USDe supply shrinking to ~4.8bn and the perpetual futures portion of the backing assets only representing 28% of the split today, the Reserve Fund is oversized for the corresponding perpetual futures backing of USDe. The Reserve Fund is sized at $60.9m while the perpetual futures portion of the backing represents just ~1.5bn of the USDe backing.

For context, perpetual futures made up over 80% of the assets backing USDe at the start of 2025 when USDe supply was above 6bn. At both a smaller total USDe supply and perpetual futures allocation today, the Reserve Fund is relatively oversized at $60.9m, approximately 4% of the perp exposure. As per Llamarisks Reserve Fund Decay model - at that size the Reserve Fund would last for over 800 days of negative -3% funding. If the Reserve Fund is scaled down by $5m to $55m, it would still survive over 700 days of the same negative funding scenario.

Sizing

We defer to the Risk Committee members to run their own analyses on an updated appropriate sizing of the Reserve Fund, specifically were it to be reduced by $5m, and potentially to revisit the overall Reserve Fund sizing requirements as a percentage of supply given the reduction in allocations to perpetuals in negative funding environments. As per the aforementioned figures on Llamarisk’s Reserve Fund Decay dashboard, if the Reserve Fund is scaled down by $5m to $55m, it would still survive over 700 days at -3% funding.

Being able to transfer the $5m from the Reserve Fund to the backing of USDe allows USDe to further over collateralize and provide more liquidity in the event of any future redemption events.

Summary

The Risk Committee is expected to deliberate on the proposal to reduce the Reserve Fund by $5m, providing scenario analysis on sizing if funding flipped negative persistently, and consider allocating that amount directly to the backing of USDe to further over-collateralize the backing assets.

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