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  • Ethena Overview
  • How USDe Works
  • Genesis Story
  • Alternatives: Existing Stablecoins
  • Size of the Opportunity
  • USDtb
  • Ethena Network
  • ENA
    • Tokenomics
  • Video Guides
    • How to Buy USDe
    • How to Stake USDe
    • How to Stake ENA
    • How to [Un]lock positions
  • Solution Overview
    • USDe Overview
      • Delta-Neutral Stability
      • Delta-Neutral Examples
      • Scalability
      • Censorship Resistance
      • Regulatory Compliance
    • Protocol Revenue Explanation
      • Historical Examples
      • Rewards Mechanism Explanation
      • sUSDe Rewards Mechanism
    • Underlying Derivatives
      • Futures vs Perpetuals
      • Inverse vs Linear Contracts
      • Basis Spread
    • Peg Arbitrage Mechanism
    • Liquid Stables: Dynamic Allocation
      • Current Allocation Approach
    • Scenario Analysis
    • Risks
      • Funding Risk
      • Liquidation Risk
      • Custodial Risk
      • Exchange Failure Risk
      • Backing Assets Risk
      • Stablecoin-Related Risks
      • Margin Collateral Risks
    • Governance
      • Risk Committee
  • Backing Custody & Security
    • Overview
      • Off-Exchange Settlement in detail
      • Copper Clearloop Case Study
    • Real-Time Dashboards
  • Solution Design
    • Overview
      • Github Overview
    • Key Trust Assumptions
      • Matrix of Multisig and Timelocks
    • Minting USDe
      • Order Validity Checks
      • User Security Measures
      • Mint & Redeem Key Functions
      • Mint and Redeem Contract V2
    • Staking USDe
      • Staking Key Functions
      • User Security Measures
    • Use of Oracles
    • Hedging System
      • Internal Services
      • Managing Risk from dependencies
    • Reserve Fund
    • Key Addresses
    • Backing Asset Custody
  • API Documentation
    • Overview
  • Resources
    • Custodian Attestations
    • FAQ
    • Data Repository
    • USDe + sUSDe Custodian Availability
    • Audits
    • Media Assets
    • General Risk Disclosures
    • Privacy Policy
    • Terms of Service
    • USDe Terms and Conditions - EEA
    • USDe Terms and Conditions - Non EEA
    • USDe Mint User Agreement - Non EEA
    • Testnet
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  • Transparency
  • Approach to Decentralization

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  1. Backing Custody & Security

Overview

A focus on security & control

"Backing Custody" refers to where protocol backing assets are held.

To access centralized exchange liquidity, Ethena must provide backing assets to support the delta hedging derivative positions that act as the peg stability mechanism.

Ethena holds all backing assets with "Off-Exchange Settlement" solutions. These providers both custody deposited assets as well as enable Ethena to delegate/undelegate assets to/from centralized exchanges without ever transferring the assets to the exchanges.

"Off-Exchange Settlement" providers enable Ethena to settle the outstanding PnL of Ethena's derivatives positions frequently. This enables Ethena to mitigate potential impact in the event of an exchange failure between settlement cycles.

Most importantly, Ethena depositing backing assets assets with an "Off-Exchange Settlement" provider does not transfer beneficial title over the assets to the provider or exchange partners. In the event of an agreed exchange failure, Ethena should be able to delegate funds to another exchange to support hedging requirements.

"Off-Exchange Settlement" providers such as Copper, Ceffu, and Fireblocks have long been used by institutional participants in the space to ameliorate this exact risk.

Transparency

Ethena strongly believes in users' ability to independently verify the existence and control of the protocol backing as well as the hedging derivatives positions.

  • All "Off-Exchange Settlement" providers may enable the provision of onchain wallet addresses so users can validate the existence of the protocol backing assets; however, as some backing assets are held in omnibus accounts with other assets, this might not be feasible.

  • Periodic attestations (at least monthly) by custodial partners of backing asset value held within institutional custodial solutions will be published to provide transparency where addresses are not able to be provided.

  • Ethena is actively exploring tools to help publicly prove & enable users to independently verify the existence of hedging derivatives positions.

Approach to Decentralization

There are a variety of trade-offs to consider when evaluating the degree to which the protocol relies on maximally decentralized solutions.

The core mission of creating a stablecoin equivalent that is not reliant on banking infrastructure has to date required either:

  1. Capital inefficient overcollateralized "loans" onchain.

  2. Unstable algorithmic designs.

  3. Unscalable delta-neutral designs that are fully reliant on decentralized exchanges.

In order to address the shortcomings of prior delta-neutral peg mechanism designs it is necessary to interact with centralized liquidity venues where open interest and trading volume on derivatives are >25x larger than onchain liquidity venues.

However, doing so introduces new custodial risks with exchanges. How does Ethena address this?

The focus is generally on leveraging solutions for the most important qualities of decentralized exchanges, namely:

  1. Holding of assets outside opaque centralized servers.

  2. Fully auditable and transparent.

  3. Permissionless and programmatic withdrawal.

The use of "Off-Exchange Settlement" providers largely addresses these qualities & enables Ethena to create a synthetic dollar that can meaningfully scale without being overly reliant upon a single source of liquidity, a single custodian of funds, etc.

Last updated 7 months ago

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