the systemic risk of USDe

In recent days, the attention of the DeFi world has been monopolized around the emerging project Ethena Protocol and its flagship product USDe, both at the center of a dispute between the MakerDAO and Aave communities.

The possibility of using USDe to generate high returns is contrasted with the fear of facing the next UST-style stablecoin, miserably depegged during the Terra/Luna ecosystem collapse.

What’s happening? Let’s see everything in detail below.

MakerDAO adds USDe, Ethena’s synthetic dollar: the Aave community is not happy about it

Two days ago MakerDAO, the entity in charge of managing the decentralized stablecoin DAI, published an update regarding the previous decision of the project to allocate a $100 million investment in the Morpho Spark DAI vault, to expose itself to the synthetic stablecoin of Ethena Labs USDe.

A few days later, representatives from MakerDAO and analysts from BA Labs (a member of the company’s advisory board), analyzing the dominance scenarios and current trends in the DeFi world, highlighted the potential benefits that could be exploited by expanding the fund allocated to USDe.

To make it short, Maker now plans to allocate a sum of 600 million dollars, to offer its users the opportunity to collateralize the “stablecoin” USDe and borrow DAI.

Actually, the “debt ceiling” proposal considers a total exposure of 1 billion dollars, of which only 60% (600 million) would actually be used in the short term, with the remaining amount to be diluted along the way.

Helpful resources:

New debt ceiling proposal:https://t.co/F27PQwOPbn

D3M revenue and deployment: https://t.co/SvZpoR1r08

Spark’s DAI MetaMorphohttps://t.co/4Ia5Kkrpya

— Morpho Labs 🦋 (@MorphoLabs) April 2, 2024

The choice to invest such a significant amount of their treasury in MakerDAO demonstrates a strong demand from users for USDe-backed loan pools, which could serve as an incentive to increase the protocol’s usage by the retail public.

USDe, in fact, in addition to opening up new potential integrations in DeFi with DAI, offers its holders the opportunity to earn airdrop points “Shards” that will be converted into ENA tokens (Ethena governance tokens) in the second round of airdrop that will take place in the coming months.

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MakerDAO with the latest revision published in the governance forum shows an unusual confidence in a product as unique as USDe, to the point of considering it even more interesting than the wrapped version sUDe, also supported by Ethena.

The difference between the two tokens is that the first one allows you to earn more Shards points, while the second one offers fewer airdrop points but with a very interesting APY, currently at 36%.

The project team, considering the potential growth of the protocol by exposing it to leverage on Ethena, considers investing in USDe rather than sUSDe less risky because the second version has a withdrawal time of 7 days while USDe redemptions are instant.

As directly quoted in the Maker forum:

“the overcollateralized loan mechanism offers a better risk remuneration compared to direct investments”.

However, while MakerDAO’s support for Ethena adds a credibility factor to a “fake” stablecoin like USDe, which has quickly reached the crazy market capitalization of 1.56 billion dollars, it worries several participants in the crypto world like Aave.

6/ A USDe depeg is only a matter of time.

The bigger this bubble gets, the more certain I am of it happening.

Imagine this: USDe market cap is around $10 billion and Maker is responsible for 2 bil of that.

These are conservative numbers (see #12 why). What happens next? pic.twitter.com/Zsck7TeSw2

— Duo Nine ⚡ YCC (@DU09BTC) April 2, 2024

Aave does not share MakerDAO’s vision and proposes to remove DAI from its lending platform

Aave, a well-known lending protocol operating on Ethereum and on other 11 chains between L1 and L2, does not agree at all with MakerDAO’s choice to expose itself so heavily on USDe with an investment of 600 million DAI.

In particular Marc Zeller, founder of the service provider Aave Chan and prominent member of the Aave community, has published a proposal in the governance section where he asks developers to remove DAI as a collateralizable asset.

Zeller is scared of the house of cards that could collapse if the support mechanism of the USDe peg were to fail, likely through a significant crash in the price of ETH, with Aave users being involved as victims.

The proposal to remove the collateral status of $DAI in Aave is now live.

This will mitigate potential contagion risks for the Aave users.

DAI remains an onboarded asset that users are free to borrow.

“Endgame” it is.https://t.co/71NP8ZMB74 pic.twitter.com/nUssFlpxvQ

— Marc “Chainsaw” Zeller 👻 🦇🔊 (@lemiscate) April 2, 2024

According to the subject in question, with this precaution, the risk of contagion of a potential collapse in the DeFi world could be limited, even at the cost of removing one of the most precious resources when it comes to decentralized loans.

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DAI is in fact the most widely used stablecoin along with USDC for the demand for money in cryptographic protocols.

However, the risk highlighted by Zeller seems too great to be taken into consideration, especially if we find a reckless management of resources in the hands of Ethena.

Furthermore, Aave wouldn’t need these strategies to grow in terms of users and usage considering that the profits recorded by the lending protocol are currently at an all-time high and could soon surpass those marked by MakerDAO.

As described textually on X by Zeller in discussing the risks of USDe systems:

“To achieve this goal, shortcuts are not necessary, shady deals behind the scenes, compromises on user security, and printing of magical money in untested protocols. Only hard work and a bunch of AIP”.

When risk is now hard to predict due to reckless management and loss of all guardrails.

My job is not to bet Aave users and stakers deposits on the guy in charge in the maker “DAO” will stay benevolent.

My job is to calc risk/reward and create proposals accordingly.

— Marc “Chainsaw” Zeller 👻 🦇🔊 (@lemiscate) April 2, 2024

Very interesting to note also how 90% of users on Aave have loans denominated in USDC and USDT, and how the platform offers a lot of liquidity for new potential customers, enough to accommodate a substantial flow of fresh debt.

Ethena and USDe: great return opportunities with great risks

The dispute between MakerDAO and Aave regarding the systemic collapse risk of the Ethena ecosystem falls within a broader discourse that must be contextualized with the role and characteristics of USDe.

This latest resource is not actually a true stablecoin, but rather should be considered as a synthetic currency that seeks to replicate in an algorithmic way the value of the US dollar. algorithmic

As long as this premise is taken into consideration, we can see Ethena as a high-yield protocol that rightly presents a different risk from that of a stablecoin, which could suffer in certain market conditions.

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Being aware of what is at stake, and looking at the issue through the lens of the bull market, we could consider MakerDAO’s move to leverage the Ethena effect as clever.

Obviously everything remains valid ONLY IF, at some point Maker decides to backtrack by removing the collateral in USDe before things start to go bad.

In fact, the mechanism that produces returns in USDe and allows the cryptocurrency to remain almost on par with the dollar, only works in bull market contexts, more precisely as long as the rates on ether perpetuals are positive and as long as ETH itself shows a bullish price action.

Everything will change as soon as we enter a bear market context.

Ethena $USDe will only survive in bull market 👇

They hold $stETH & earn 3-4%, also they short $ETH with perp futures

When are fundings are positive longs need to pay a funding fee to short sellers; this is how Ethena generates yield.

Ethena’s Size as Systemic Risk: Ethena’s… pic.twitter.com/h9AStxks6d

— Vasu Crypto (∎, ∆) (@0x_Lens) April 2, 2024

It is therefore essential to understand that the high yields offered, combined with the possibility of farming Shards points for a future airdrop, are related to the risks associated with exposure to USDe.

As already mentioned, leveraging the leverage effect is fine as long as the exposure is contained and as long as a possible implosion would not put the integrity of a protocol at risk.

Let’s say that in such a complex situation, amplified by the old fears of investors who have been burned with Terra/Luna, it doesn’t help Ethena’s due diligence that only now (after reaching a monstrous TVL) is looking for a risk manager to add to their team.

Ethena USDe market cap goes over 1 bil and they finally decide to hire a risk manager. 🤣

You’d make 200k a year just holding 1M of sUSDe. Then you get rekt.

No one can succeed at this job. USDe is market driven and when the market turns, no one can stop it. pic.twitter.com/vfvBV0Y68H

— Duo Nine ⚡ YCC (@DU09BTC) April 3, 2024

Meanwhile ENA, the governance token of Ethena that debuted yesterday on crypto exchanges with the help of an airdrop to the platform’s first users, is up +59% in the last 24 hours bringing its market capitalization to 1.3 billion dollars.



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