[NIP-92] List a Dec 2024 USDe PT Vault (Mainnet)

[NIP] Notional Improvement Proposal
1

Vault details

Vault type: Leveraged PTs
Network: Mainnet
Borrow token: USDC
PT: Dec 2024 USDe PT

Vault strategy overview

This vault borrows the borrow token (USDC) from Notional, converts the borrow token into the PT underlying token (USDe), and buys the PT. The PT is convertible back into the underlying token subject to liquidity and can always be redeemed for the underlying token at maturity.

Notes

  1. After the PT matures, the assets convert to USDe and stop earning yield.

  2. Liquidations can only occur if they do not cause account insolvency. If a liquidation transaction would leave bad debt on Notional, it will revert.

  3. Notional is not able to redeem USDe from Ethena directly. The vault needs to rely on USDe DEX liquidity in order to convert USDe vault assets to USDC.

Vault parameters

Parameter Proposed Value Implied Leverage
LiquidationRate 1.03
MinCollateralRatioBPS 0.12 9.33
MaxDevelerageCollateralRatioBPS 0.2 6.00
MaxRequiredAccountCollateralRatioBPS 1 2.00
Maximum vault capacity 1,000,000 USDC
Minimum borrow size 60,000 USDC
feeRate5BPS 0
ReserveFeeShare 80%

USDe redemption and liquidity

KYC’ed users can redeem USDe directly for the backing collateral assets held by Ethena. This should keep the value of USDe at parity with USDC provided that Ethena does not disable redemptions.

Furthermore, USDe is highly liquid on Dexes against a variety of different leading stablecoins. Ethena has demonstrated a commitment to maintain that liquidity through incentive programs.

Protocol Pair TVL USDe Percentage
Curve USDC / USDe $20.1M 40.8%
Curve FRAX / USDe $79.9M 32.85%
Curve GHO / USDe $4.2M 47.76%
Curve DAI / USDe $16.3M 47.88%
Curve crvUSD / USDe $8.39M 39.06%
Uniswap USDT / USDe $13.2M 41.12%

Risks

The strategy’s structure (no liquidations if they cause insolvency) and risk parameterization is designed to ensure that no insolvency can occur as long as the underlying token is redeemable at the maturity of the PT at par.

However, there are many ways that this strategy can go wrong which would violate that core assumption either by causing gated USDe redemptions or a haircut on USDe redemption value.

We can reasonably expect that some of them can be mitigated with conservative risk parameters. This vault’s risk parameters imply that we can withstand a minimum of an 11% decline in the USDe price before insolvency.

That should be enough to withstand the expected solvency risks like negative perp funding and execution slippage. Here’s a summary of those risks (refer to llamarisk research for more detail: Addendum to Asset Risk Assessment: Ethena USDe - Llama Risk).

  • Perp funding goes negative temporarily. If this were to occur, Ethena would first use its accrued reserve fund to protect against negative returns. If it burned through its reserve fund, the 11% risk buffer on this strategy would still be more than enough to protect Notional from losses of this kind.

  • Disorderly trading, significant slippage, execution / risk mismanagement by the Ethena team. If there’s a rush for the exits, Ethena may be forced to close out its perp positions in large size and thin liquidity. This could cause significant exit slippage. Again though, an 11% buffer on USDe should be more than enough to protect against this kind of risk.

However, there are larger risks which are significantly more difficult to quantify and mitigate. Primarily, these include:

  1. Custodial failure / asset freezing. Ethena’s assets are custodied by a variety of centralized service providers. These service providers could theoretically freeze Ethena’s assets and not allow redemptions at the behest of state actors.

  2. Exchange failure. Ethena relies on centralized exchanges to maintain its short perps exposure. If an exchange fails to operate correctly and Ethena loses some of its short perp exposure, it could become unhedged for some period of time and be significantly exposed to movements in asset prices.

  3. Fraud. Ethena is centralized and run off-chain. This makes it theoretically possible for the Ethena team to engage in fraud that could result in significant losses for USDe holders. Due to the number of entities involved in the operation however, this would likely require some amount of collusion, which is unlikely but possible.

The primary mitigation for these larger risks is the following:

  1. Monitoring and emergency exit functionality to utilize on-chain liquidity.
  2. Absolute exposure limits.

Smart contract risk

This strategy involves smart contract risk associated with Ethena and Pendle. Both of these teams are battle-tested and have demonstrated high security standards.