The increase in the amount of USDe deposited into the Aave protocol poses a risk of reducing liquidity and threatening market stability.
Ethena has utilized a refinancing strategy (rehypothecation) with $580 million in collateral USDe on Aave, creating dual pressures between the roles of collateral and liquidity, potentially posing risks under bearish market conditions.
MAIN CONTENT
Holding and depositing large amounts of USDe into Aave increases liquidity risk.
Ethena applies rehypothecation with $580 million in collateral on Aave.
Chaos Labs develops risk forecasting tools to adjust interest rates and support an orderly withdrawal process.
Why can the amount of USDe deposited into Aave pose a risk to the protocol?
Chaos Labs, a risk consultancy for Aave, states that a large amount of USDe deposited into Aave could strain the liquidity tolerance of the protocol. When the collateral assets used to issue USDe are simultaneously lent on Aave, this creates dual pressure that increases the risk of liquidity shortages.
This is particularly risky when the market is declining, as investors may attempt to withdraw USDe on a large scale. The collateral assets being lent makes it difficult for Aave to meet withdrawal demands, increasing borrowing rates and potentially causing a chain reaction affecting the stability of the protocol and the market.
Chaos Labs warns that the interaction between the role of collateral assets and liquidity may exacerbate liquidity pressures during deleveraging events, affecting both USDe depositors and Aave.
How has Ethena applied the refinancing strategy (rehypothecation)?
Ethena has currently deposited $580 million in collateral backing USDe into Aave, using a refinancing strategy, meaning this collateral is utilized as collateral to borrow or lend back within the Aave protocol, aiming to optimize capital resources.
This strategy helps Ethena utilize assets more efficiently but carries risks when collateral assets are locked in borrowing positions. If the market fluctuates sharply and collateral assets need to be withdrawn to exchange for USDe, Aave's liquidity could be severely impacted.
Currently, Aave holds approximately $4.7 billion in collateral backing USDe, equivalent to over 55% of the total USDe supply, indicating significant reliance on this mechanism and the existing risks posed by rehypothecation.
The fact that collateral assets serve as both capital to exchange for USDe and liquidity on Aave creates a dual vulnerability, easily increasing pressure during deleveraging phases.
Chaos Labs, 2023
What measures does Chaos Labs take to mitigate this risk?
To address the risk of liquidity and market stability, Chaos Labs is developing new risk forecasting tools. These tools aim to appropriately adjust borrowing rates and support a smooth withdrawal process of USDe during periods of market stress.
Although there are currently no urgent signs, the increase of USDe or the expansion of rehypothecation could elevate risks. These forecasting models will help provide early warnings and suggest adjustments to strategies to protect the stability of both Aave and Ethena.
Tight control over the deposit and lending of collateral assets is essential to maintain a sustainable structure for this Stablecoin market.
How does the refinancing mechanism (rehypothecation) affect the stablecoin market?
The refinancing mechanism helps better utilize collateral capital, increasing operational yield, but also raises risks when collateral assets are not easily withdrawn when necessary. In the stablecoin market, this trade-off is extremely sensitive as it must ensure a 1:1 exchange capability between Tokens and collateral assets.
The process of lending backing assets shrinks liquidity on protocols like Aave, when withdrawal demand rises sharply, which could lead to increased borrowing fees and loss of investor confidence. This is particularly important in the context of a Bear market when stablecoins are under the most stress test.
What lessons can be learned from the case of USDe and Aave?
The case of USDe and Aave reflects the challenge of balancing capital efficiency and ensuring liquidity for Stablecoin. The refinancing of collateral assets must be strictly managed to avoid the risk of liquidity tightening when the market fluctuates.
At the same time, protocols need to build timely monitoring and risk prevention mechanisms, applying forecasting technology to quickly adjust interest rates and collateral requirements to maintain stability and investor confidence.
Frequently Asked Questions
What is USDe and what is its role on Aave?
USDe is a stablecoin with backing collateral. On Aave, USDe is deposited and lent, helping to increase liquidity but also creating risks when backing assets are over-rehypothecated.
How does rehypothecation affect the safety of Aave?
Rehypothecation helps optimize capital but reduces the liquidity of collateral assets, increasing the risk of shortages when users withdraw large amounts of assets.
What measures does Chaos Labs take to mitigate this risk?
Chaos Labs is developing risk forecasting tools to assist in adjusting interest rates and controlling capital flows to ensure that the withdrawal process occurs orderly, reducing liquidity pressure.
What are the potential risks when the market declines?
In a Bear market, sudden capital withdrawal can cause collateral assets to be locked in borrowing positions, leading to liquidity shortages and increased borrowing fees on Aave.
Could a liquidity crisis occur with USDe on Aave?
Currently, there are no short-term signs, but risks may increase with the growth rate of USDe and the refinancing process, requiring close monitoring.
Source: https://tintucbitcoin.com/aave-gap-rui-ro-thanh-khoan-ethena/
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