Ethena Labs proposed using reserve assets to buy back USDe should the secondary market price decouple.

Odaily Planet Daily reports that Ethena Labs recently proposed a new mechanism to support orderly market liquidity and stability by buying back and burning USDe when its price in the secondary market falls significantly below its pegged value. This proposal is a risk management response to the incident on October 10th on the Binance exchange where the price of USDe briefly and severely de-pegged to $0.65.

Core Mechanism

Buyback conditions: Only activated in the event of "severe market dislocations", with an initial price threshold set at USDe price trading at $0.99 or lower.

Funding Source: Buyback using stablecoins (such as USDT) available in USDe's existing reserves.

Funding Amount: It is proposed to use 1.2% of the total USDe reserve assets, which is approximately US$95 million based on the current USDe supply.

Operation method: The buyback will be executed by placing a buy order in the order book of a centralized exchange (CEX), using an off-chain solution, without depositing the reserve assets directly into the exchange.

Instant Burn: Purchased USDe will be burned immediately.

Agreement benefits

The net effect of this mechanism will be:

Increase collateral ratio: Buying USDe for less than $1 allows you to capture price differences, increase protocol reserves, and thus increase the collateral ratio of USDe.

Reduce supply: Destroy USDe to reduce its circulating supply.

Price Support: Provides direct buying support in the secondary market when the market is under pressure, stabilizing the USDe price.

Dealing with Gas Fees: Ethena can use the captured price spreads to cover high gas fees, ensuring arbitrage operations can continue even during network congestion, which is one of the reasons why market makers were restricted on October 10.

Background Review

During the market volatility of October 10th, although Ethena's core minting/redemption functions operated normally and processed over $2 billion in instant redemptions within 24 hours, the USDe/USDT spot price on Binance experienced significant de-pegging due to Binance's lack of direct USDe minting/redemption integration and traders encountering deposit and withdrawal issues on CEXs. This proposal aims to proactively intervene in the secondary market to avoid the **cyclical loop of USDe liquidations** effect caused by similar events and generate net benefits for the protocol.

The risk committee members have received this proposal and will provide further advice. (Ethena Labs Research)