Ethena Labs proposes to use reserve assets to buy back USDe when the secondary market price becomes unanchored

Ethena Labs recently proposed a new mechanism aimed at supporting orderly liquidity and stability in the market by repurchasing and burning USDe when secondary market prices are significantly below the pegged value.

This proposal is a risk management response to the event where the USDe price briefly decoupled to $0.65 during extreme market volatility on Binance. Core mechanism repurchase conditions: activated only during "severe market dislocations," with an initial price threshold set at when the USDe price trades at $0.99 or lower. Funding source: repurchases will use available stablecoins (such as USDT) from the existing USDe reserves. Amount: it is proposed to utilize 1.2% of the total USDe reserve assets, which is approximately $95 million based on the current USDe supply.

Operational method: repurchases will be executed by placing buy orders on the centralized exchange (CEX) order book, using an off-chain solution, without directly depositing reserve assets into the exchange. Immediate burn: the repurchased USDe will be immediately burned. Protocol benefits: the net impact of this mechanism will be: increased collateralization ratio: purchasing USDe below $1 can capture price discrepancies, increasing protocol reserves and thereby enhancing the collateralization ratio of USDe. Reduced supply: burning USDe will decrease its circulating supply. Price support: during market pressure, directly providing buy support in the secondary market to stabilize the USDe price.

Addressing gas fees: Ethena can utilize captured price discrepancies to cover high gas fees, ensuring that arbitrage operations can still be conducted during network congestion, which was one of the reasons market makers were restricted on October 10. Background review: during the market volatility on October 10, although Ethena's core minting/redeeming functions operated normally and processed over $2 billion in instant redemptions within 24 hours, the lack of direct USDe minting/redeeming integration on Binance and traders encountering withdrawal issues on CEX led to a severe decoupling of the USDe/USDT spot price on Binance.

This proposal aims to prevent the "cyclical loop of USDe liquidations" effect caused by similar events through proactive intervention in the secondary market, bringing net benefits to the protocol. Members of the risk committee have received this proposal and will provide recommendations in due course.