Since first being listed in Euler Yield a week ago, eUSDe supply has increased rapidly to fill the supply cap, first at 5M, and today at 10M within just a few hours of increasing the cap. We recognize the utility for users as well as the growth benefit to Euler this asset entails, and recommend a new update to the supply cap to enhance usage of eUSDe in the Euler Yield market while continuing to control for market risk.
Our recommendation is as follows:
| Asset | Current Supply Cap | New Supply Cap |
|---|---|---|
| eUSDe | 10M | 40M |
As before, our analysis assumes that atomic redemption capability to USDe will persist through Ethereal, as DeFi liquidity is otherwise presently nil. Given Ethereal is directly supported by Ethena through the Ethena Network, we believe this is reasonable.
The most likely risk event is local liquidation, due to accrued borrow interest for an individual account. Presently 8M swap of USDe to stablecoin incurs < 0.1% price impact, so we can expect at least partial liquidation to occur quickly in this case and restore offenders back to >= 1 health, given Euler’s robust liquidation penalty mechanism. These liquidation events, therefore, present low risk to users and the protocol.
The remaining consideration is to long tail risk events, particularly eUSDe/USDe fundamental rate slash (unexpected, given 1:1 backing to underlying), and USDe/USD depeg. In both of these cases, we expect the collateral value of eUSDe-backed positions to decrease relative to their borrow value (with the exception of eUSDe/USDe positions in the case of USDe/USD depeg). These global tail events will cause selloff and liquidations in the broader ecosystem. Insolvency for eUSDe-backed positions in Euler Yield will generally start around 12%-16% price downturn given the LTVs, and we expect active liquidations until the price impact of swapping out USDe approaches the 15% max liquidation penalty.
Currently instant 15% price impact is incurred when swapping ~26M USDe to stablecoin. Global 15% price impact capacity will be greater than or equal to the instant 15% price impact capacity in the presence of arbitrageurs. Applying 1.5 as a heuristic multiplier for approximating the global price impact capacity given the instant capacity, we calculate ~40M as a sensible bound on the eUSDe supply.
Next Steps
- We welcome community feedback