Summary
This proposal seeks to bring about strategic changes to the sUSDe FiRM market by increasing the market ceiling from 5,000,000 DOLA to 20,000,000 DOLA and the daily borrow limit from 1,000,000 DOLA to 2,000,000 DOLA. These adjustments are intended to accommodate growing user demand, support larger borrowing activities, and improve the overall competitiveness of our lending platform.
Background
As of November 11th, 2024, the market snapshot reveals that TVL in the sUSDe market stands at $5.81MM, with total borrows reaching 5.00MM DOLA. This activity is driven by nine active users who have demonstrated a strong risk appetite, as evidenced by the high average borrow limit of 95.6%.
The market has effectively hit its DOLA supply limit, indicating that the current parameters are constraining further growth. All recent activity in the sUSDe market has occurred during this period of heightened interest, which correlates with a substantial increase in the underlying yield of sUSDe. This increase has made sUSDe more attractive for users to deposit and borrow against. Additionally, our integration with Ethena’s SATs program has also played a role in stimulating market activity.
Risk Assessment
While USDe is a stablecoin with a robust liquidity profile, sUSDe carries unique risks due to its redemption mechanism. Unlike sDAI and sFRAX, where redemptions are instant, sUSDe features a 7-day lockup period for redemptions. This characteristic introduces liquidity and timing risks that must be carefully managed. For FiRM, the primary concern arises if the price of sUSDe were to drop rapidly, potentially outpacing our liquidators’ ability to execute necessary liquidations. Such a scenario could be triggered by a significant loss in the backing of USDe, where the full extent of the issue is not immediately apparent. In this situation, the market could become highly speculative about the true value of USDe, leading to a substantial disconnect between sUSDe and USDe prices. Moreover, these risks are compounded for FiRM given our greater exposure to USDe through the PT-sUSDe-MAR272025 market. These markets (sUSDe and sUSDe PT) represent a significant position in DOLA’s backing, and any adverse movements in the price of USDe could have amplified effects on the protocol’s overall risk profile.
However, in the case of the sUSDe market, FiRM is better positioned than most other protocols to mitigate these risks. We utilize a Chainlink price feed specifically for sUSDe, which provides accurate and timely pricing information. In contrast, other platforms may hardcode USDe to $1.00 and rely solely on the on-chain exchange rate to sUSDe, which could delay their response to price volatility. Our approach allows us to detect price discrepancies more quickly, enabling us to be first in line to execute liquidations in the event of a severe market dislocation. This proactive capability increases the likelihood that we can exit positions before the full extent of a price drop materializes, thereby mitigating potential losses.
Importantly, these proposed increases are supported by the findings from our latest simulations and analyses, which takes into account the liquidity profile of USDe. The assessments indicate that, while there is an elevated level of risk due to the greater exposure, it remains within manageable levels for the protocol. The adjustments are designed to maintain the health of the platform while offering users greater flexibility in their borrowing activities.
Given the strong liquidity profile of USDe, increasing the supply ceiling and daily borrow limit is a prudent step that aligns with user demand while maintaining a manageable risk level for the protocol.
Conclusion
In conclusion, while there are inherent risks associated with sUSDe’s redemption mechanism and our increased exposure to USDe, the RWG believes FiRM’s strategic use of accurate pricing feeds and proactive risk management positions us to effectively mitigate these concerns. The proposed increases in the market ceiling and daily borrow limit are balanced measures that support user demand and platform growth without compromising the protocol’s stability.
On-Chain Actions
- Set the market ceiling for the sUSDe market to 20,000,000 DOLA
- Set the daily borrow limit for the sUSDe market to 2,000,000 DOLA