Ethena Labs has proposed an emergency mechanism to repurchase and burn its synthetic stablecoin, USDe, to prevent future de-pegging incidents after the token plummeted to $0.6567 in October.
The plan involves using up to 1.2% of its reserves, approximately $95 million, to buy USDe if its market price falls below $0.99 per unit. This strategy aims to counter extreme volatility and liquidity issues in secondary markets.
The proposal directly addresses a severe price dislocation experienced by USDe on centralized exchanges last fall.
🚨 Ethena Labs presenta plan de emergencia para estabilizar USDe 🚨
Tras su caÃda a USD $0,6567, el protocolo propone recomprar USDe por debajo de USD $0,99.
Utilizarán hasta USD $95 millones de reservas para evitar fuertes dislocaciones en mercados.
El mecanismo solo se… pic.twitter.com/x1DUiK6GOD
— Diario฿itcoin (@DiarioBitcoin) October 20, 2023
Under the proposed mechanism, Ethena would place buy orders on centralized exchanges. However, liquidations would occur off-exchange. This approach avoids depositing collateral directly on trading platforms.
All USDe acquired through this process would be immediately destroyed. This burning action reduces the circulating supply and increases the collateralization ratio of the remaining tokens.
The company stated that this economic effect is comparable to a conventional redemption, but it would only be applied during periods of severe market stress.
The incident in mid-October saw USDe briefly drop to $0.6567 on Binance. Ethena attributed this sharp deviation to a combination of exchange restrictions and increased Ethereum gas fees. These factors reportedly hindered market makers from executing arbitrage trades to restore the token’s $1 peg.
Ethena maintains that it holds $5 billion in stablecoin backing, primarily in liquid assets, available for redemptions. The protocol claimed it processed over $2 billion in redemption requests in 24 hours during the October event without interruption.
While Binance experienced a significant price drop, decentralized exchanges like Curve saw milder deviations. On Curve, USDe traded closer to $0.997.
The emergency mechanism is intended only for “abnormal dislocations,” specifically defined as prices below $0.99. It is not designed for continuous price maintenance.
Ethena pledges to publish ad hoc proof of reserves within 24 hours of any activation. This measure aims to ensure transparency. The team also noted the tool could absorb liquidity shocks caused by temporary market maker withdrawals during periods of high Ethereum transaction fees.
The proposal is currently under review by Ethena’s Risk Committee. The committee is expected to issue a recommendation before the plan’s potential approval.
USDe does not operate as a traditional centralized stablecoin. However, its rapid growth to become the third-largest stablecoin by market capitalization has increased market expectations for robust safeguards against significant price deviations.