Current Allocation Approach

Staked ETH

In line with the principles of prioritizing liquidity and allocations that align with risk profiles, the protocol reduced the proportion of ETH LSTs compared to the total backing assets to less than 6%.

Liquid Stables

In an environment when certain perpetual contracts are yielding less than US treasuries, it is naturally unappealing for the protocol to hold perpetual futures positions. Additionally, in phases of market downturn, funding rates are at higher risk of turning negative, which could put additional pressure on the protocol.

With that in mind, Ethena started to allocate a greater portion of the USDe backing assets to stablecoins, specifically USDC on Coinbase. Each stablecoin offers a compelling yield, with USDC on Coinbase closely tracking US treasury yields.

Introducing stablecoins as backing assets for USDe is expected to ease pressure on the protocol during down markets, while maintaining the flexibility to transition to perpetuals when funding improves:

1. Bull markets: perpetual future funding likely improves and more of USDe’s backing will shift towards perpetual futures, capturing the basis and the upside that funding rates have to offer. Liquid stablecoin allocations would be lower in this scenario.

2. Bear markets: funding rates lower and US treasury yields outperform. More of the backing is allocated towards liquid stablecoins, easing pressure on the protocol while potentially earning close to U.S. treasury rates on a portion.