Ethena plans to use up to 1.2% of backing assets to buy discounted USDe below $0.99 via off-exchange settlements

Ethena Labs has proposed a new emergency-stabilization mechanism for its synthetic stablecoin, USDe, following the events of the October 10-11 market dislocation that saw the token price fall as low as $0.6567 on Binance despite the protocol remaining solvent and redemption flows continuing uninterrupted.

The measure is designed to prevent similar depegging events from occurring on secondary markets when trading conditions become disorderly.

A response to October’s exchange-driven dislocation

According to Ethena, they currently have “$5 billion of stablecoins in the backing of USDe, most of which are readily available and liquid to meet redemption requirements at any given time.” 

However, during the high-volatility event that hit the crypto market on October 10, a few crypto assets depegged from their original price, and the USDe stablecoin was part of them. For USDe, it was a combination of exchange-level constraints and rising Ethereum gas fees that prevented market makers from arbitraging the token back to its $1 redemption value. 

The disruption led to a sharp dislocation in the USDe/USDT pair on Binance, where the token’s price slid below $0.99 and rapidly collapsed to $0.6567 within minutes.

Liquidations of leveraged positions spilled directly into the spot order book, which in turn created a self-reinforcing cycle of sell pressure, liquidation, and a decline in price.

It was a different story on the decentralized front, with USDe briefly going down to $0.997 on Curve’s USDe/USDC pool. According to Ethena, they were busy during that period of volatility, processing over $2 billion in redemptions in a 24-hour window without operational issues. This also showed that the depeg incidence was local to Binance.

Mechanism to buy and burn discounted USDe

To prevent a similar event from occurring again in the future, Ethena Labs is now proposing that it use up to 1.2% of its backed assets, roughly $95 million based on current supply, to purchase USDe on secondary markets when the token trades at $0.99 or below. 

It will be making these purchases by placing bids on centralized exchange order books; however, the transactions will be settled through off-exchange channels to avoid depositing collateral directly onto trading venues.

Any USDe bought under the program is expected to be burned immediately, which in turn will reduce supply and increase the collateralization ratio of the remaining tokens. 

As a result of the buybacks taking place at a discount to $1, Ethena would, in effect, capture incremental reserves, generating a net benefit for the protocol.

The economic effect would be similar to a standard redemption, such as exchanging USDe for USDT or another stablecoin, but executed as a targeted intervention during moments of severe stress.

Ethena stated that the tool is intended for use in “abnormal market dislocations,” defined as a drop in market price below $0.99, and not for routine peg maintenance. 

The foundation also shared that it will be publishing an ad hoc proof of reserves within 24 hours of any activation, providing transparency on the size and impact of the intervention. It also added that the mechanism could help absorb liquidity shocks caused by market-maker withdrawal during periods of elevated gas fees.

Awaiting a governance review

Ethena’s Risk Committee is currently reviewing the proposal and is expected to publish its recommendations before considering it for approval. 

If approved, the protocol will gain the discretion to deploy the stabilization mechanic during future episodes of extreme volatility.

While USDe is not structured like a traditional centralized stablecoin, its growth, which has made it the third-largest stablecoin by market capitalization, has raised expectations that the protocol should provide tooling to prevent deviations, especially as large amounts of crypto collateral in leveraged trading systems depend on predictable stablecoin pricing.

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