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Highlights
- MakerDAO's $600M DAI move could boost Ethena's total value locked.
- Preference for USDe over sUSDe evident in Morpho DAI vault demand.
- Risk strategy focuses on 86% and 91.5% LLTV pools in DAI allocation.
MakerDAO is reportedly considering a substantial investment of $600 million in DAI into USDe and staked USDe (sUSDe) via Morpho Labs’ DeFi lending protocol. This move is in line with the growth strategies of MakerDAO and extends the company’s activity in the cryptocurrency lending sector.
MakerDAO Proposed Allocation and its Rationale
The proposal under consideration by MakerDAO involves allocating a significant portion of its stablecoin, DAI, into two assets: USDe and the staked version, sUSDe. Both these assets are products of Ethena Labs, a well-known stablecoin developer. As pointed out by Ethena’s Head of Growth, Seraphim Czecker, if approved by the MakerDAO community, this allocation is likely to substantially increase the total value locked in Ethena, reaching the internal growth forecasts of the company.
Not a joke: @MakerDAO considering allocating up to $600m DAI into sUSDe and USDe via @MorphoLabs with possibility to go up to $1 billion
Ethena TVL growth is on track with internal expectationshttps://t.co/kKEhPoDwQm pic.twitter.com/F1QP1xPBFW
— Seraphim (@MacroMate8) April 1, 2024
Early data from the Morpho Spark DAI vault indicates a robust demand. The user preference for USDe pools is pronounced compared to sUSDe, and the preference is more in line with higher loan-to-value (LLTV) ratio pools. This preference is probably because of the appealing point offerings and earning ENA tokens through USDe, indicating a tactical allocation move towards USDe.
Further, more funds should be allocated towards USDe to mitigate the liquidity risk it presented since USDe could be redeemed instantly, unlike sUSDe, which has a one-week unstaking period. This move would also have a positive effect on Ethene’s income and the insurance funds, improving the risk profile of the investments in general.
Risk Evaluation and Vault Strategy
The MakerDAO submission incorporates thorough consideration of multiple risk factors of the vault, such as the Morpho rate models, custody and exchange transparency, and counterparty risks. A significant portion of collateral is reported to be pledged to Binance and, by implication, held at Ceffu, raising concerns about counterparty risk due to common ownership.
Moreover, liquid staking tokens (LST) exposure is a critical systemic risk for Ethena, but it is reduced by the fact they only represent a small part of its collateral pool.
Allocation and Parameter Recommendations
Consistent with the risk assessment, the recommendation is to define the DDM (Dynamic Debt Mechanism) line parameter at 1 billion DAI and to cap the initial total allocation at 600 million DAI. This conservative way allows to scale in the future effectively in relation to risk exposure.
Concentration on the 86% and 91.5% LLTV pools is recommended because of their positive risk/reward effectiveness. Nevertheless, a small growth in allocations of the 77% and 94.5% LLTV pools is also recommended for data validity and interest rate model calibration.
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