sUSDe Pool in Heding Contracts System?

🚀 Use Cases
1

Hello Everyone,

I want to make this post to encourage some reflection within the community. As we know, Metalswap offers Hedging Contracts as its product, which can be easily implemented with new assets by creating specific pools and with fairly quick modifications to the website.

Thus, it makes a lot of sense to imagine new use cases that bring volumes to our product and consequently generate interest and an appreciation process for the token through the buyback mechanism.

Recently in DeFi, there has been a lot of talk about the Ethena Protocol which introduced a USD stablecoin, USDe, with an interesting concept. This stablecoin is backed by Liquid Staked Tokens (LST), so to generate USDe, one must lock LSTs like stETH and many other such tokens.

USDe can be locked to generate sUSDe, which is a token with a variable APY, but since its release, the project has shown very high rates, fluctuating between 20% and 40%.

How is this gain possible?

Ethena’s strategy is to hold a portion of the stETH that people lock to generate the stablecoin and to go short on a pair like ETH/USD on a perpetual to hedge against this ETH. Thus, the gain is justified under two aspects:

  • Earning the % inherent in staking stETH.
  • Earning the Funding Rate from short operations.

What are the risks involved?

Mainly related to a market scenario where ETH prices are falling, and we imagine that the Funding Rate is negative, i.e., the shorts have to pay the longs. In this case, the USDe stablecoin peg could have problems, potentially leading to dangerous bank run phenomena for the ecosystem. Ethena has established an Insurance Fund for these scenarios.

What would be the advantages of implementing a token like sUSDe in Hedging Contracts?

Mainly related to Liquidity Providers who, instead of depositing a stable, could deposit sUSDe and earn XMT as liquidity rewards, finding a stable with an APY given by Ethena’s operation. If we think about Hedging Contracts on a pair like ETH - sUSDe, we can say that for operations with short timeframes, sUSDe would behave like a normal stablecoin, and for longer timeframes, we can say that one earns less with long operations if ETH appreciates, and a bit more from short operations if ETH depreciates, due to the operation of sUSDe.

So, for a potential operation to include sUSDe as a pool in our system, I would try to delve into some issues:

  • Opportunities for visibility thanks to this operation.
  • Explore the risks of the Ethena system.
  • Check if the sUSDe oracle is on the Optimism or Linea chain.
  • Study some creative use cases that could serve Ethena users.

What do you think?

6 Likes
2

Hi Lorenzo and hi everyone,

This post was very interesting and made me think about a specific use case that could be possible thanks to the MetalSwap Hedging Contracts.

As you were saying before, sUSDe benefits from the ETH staking rewards and the funding rate from their short positions.

This is a great mechanism for creating a stablecoin in a bull market, but in the next bear market, I think they could possibly encounter some problems. If there is a long period of inverse funding rate (short pays long), Ethena is at risk, and they are aware of that.

For this reason, the sUSDe team is accumulating a reserve fund to protect the system in this situation and it’s here that MetalSwap could create a very interesting use case.

From their docs: The reserve fund acts as an additional margin of safety behind USDe to provide a source of capital to pay for periods of negative funding, as well as a bidder of last resort for USDe in open markets.

Use Case Idea

Assumptions

  1. If sUSDe is struggling and not gaining any staking rewards, it is because we are in a period of inverse funding rate.
  2. There will be a long period of inverse funding rate where sUSDe will not gain anything and will remain a stablecoin. The Ethena team will use the reserve fund to pay this funding (instead of receiving it).

Thanks to MetalSwap, we could arrange an inverse strategy compared to that of Ethena.

In this case, a user could long ETH on a perpetual DEX/CEX and earn the inverse funding rate, covering the position with a short on the MetalSwap dapp.

In this way, the user is delta neutral on the ETH price and gains the funding rate from the long position.

So, even if sUSDe is stable, the user will earn some percentage (depending on the inverse funding rate).

Practical Example

The market jumps into another bear market, and the funding rate starts to be inverse.

A user could open a long position on a perpetual DEX or CEX on the pair ETH/USD and open a short position, with the same target size, on MetalSwap (that doesn’t have a funding rate) on the pairs ETH/sUSDe or wstETH/sUSDe.

As long as the funding rate remains inverse, the users will benefit from their long positions, all without being exposed to the ETH price!

I would like to note that this use case is possible only on MetalSwap as it offers the possibility to open a short position without paying the funding rate.

Extra

In this specific period, sUSDe must be stable and not gaining anything; for this reason, we could directly implement the ETH/sUSDe or wstETH/sUSDe pair, to take advantage of the benefits you mentioned earlier (LPs and protocol visibility).

Today, sUSDe is not available on Optimism and Linea, but we could start the pair on the Ethereum mainnet.

I hope you find this use case interesting.

I’m aware that there are some issues, like the hedging contracts commission that could take part of the profit from this strategy, but I would like to discuss with the community about this possible future implementation.

Thanks!

5 Likes
3

Hi there,

Your use case idea leveraging MetalSwap’s hedging contracts is interesting! It seems like a strategic way to navigate through potential challenges during bear markets and take advantage of the inverse funding rate situation. Integrating it with sUSDe on Ethereum mainnet could indeed offer benefits and open up new avenues for users.

Discussing the commission and other potential issues with the community sounds like a great step forward for refining this strategy.

Thanks for sharing!

1 Like
4

Hello everyone,

I also find the proposal to use MetalSwap’s hedging contracts to effectively navigate bear market periods through the exploitation of inverse funding rates very intriguing. The potential integration of sUSDe on the Ethereum mainnet truly opens up new horizons and can significantly enrich MetalSwap’s offerings.

Moreover, adopting new strategies that leverage current dynamics in the DeFi sector not only expands opportunities for users but also adds significant value to the entire MetalSwap ecosystem, positioning it as a proactive and innovative player in the decentralized finance landscape.

I agree that further discussing commissions and potential issues with the community is essential. This will help not only to refine the practical aspects of the strategy but also to strengthen the sense of collaboration and involvement within our community.

Thank you so much for sharing this vision, and I look forward to seeing how we can all move forward and realize it together!

Best regards to all!

2 Likes