In the last week, Prisma Finance was exploited for $11m; MakerDAO evaluated a shift to move DAI up the risk curve with a projected allocation of 600m DAI to their Morpho market with USDe over the coming months; Aave launched more incentives for GHO across DeFi; and ETH droped 8.7% since last week's issue.
Let's check on DeFi yields this week.
DeFi's Base Rate, Courtesy of Vaults FYI (2 April 2024)
While ETH funding rates saw a bump late last week, they've since dropped to ~15% across major centralized exchanges. With a slump in this bullish sentiment, we've seen BTC drop 6.9% and ETH drop ~9% in the last week. In the last day, there's been $532.34m in liquidations according to CoinGlass. Q2 is off to a cooler start than Q1 but yields remain high across DeFi.
Rates have held relatively steady with a noticeable shift in the top end of the yield spectrum, while risk appears to be increasing across DeFi markets. Last week, we saw Prisma Finance, a Liquity fork, hit by an exploit for $11m. Hopefully no State of DeFi Yields readers were impacted. Be sure to keep smart contract risk in mind when you're evaluating yield strategies, and I'll do my best to share strategies to protect against smart contract risks.
We've also seen a major DeFi lending protocol take a more aggressive approach to revenue generation, which will likely increase yields across lending markets and shift capital in DeFi further up the risk curve.
SparkDAO, the Maker subDAO, made waves by launching Morpho Blue markets where an initial $100m in DAI was added as lending liquidity for Ethena's USDe and sUSDe. This allocation from the Direct Deposit Module (DDM) is generating ~40% in annualized revenue for MakerDAO. Block Analitica (BA) Labs has a proposal on the MakerDAO forum to increase the DDM for Morpho to 600m DAI over time, with a total potential allocation of up to 1b DAI through the Morpho Blue markets.
For context, Ethena launched their public mainnet in mid February and has since grown their TVL to $1.79b. Ethena is a CeFi product that runs a delta-neutral strategy on centralized exchanges, which earns sUSDe holders yield from funding rate fees. Many have simplified this by saying Ethena has tokenized ETH funding rates on CEXes and integrated this tokenized funding rate throughout DeFi. All the capital used to mint USDe is used to run the delta-neutral strategy across CEXes, but only sUSDe holders earn yield. Currently, 26% of all USDe is staked according to the hashed_official Ethena Dune dashboard. The rest of the USDe holders are farming Shards, or Ethena's version of points that translate to their recently launched ENA token.
The reaction across DeFi to SparkDAO's allocation to USDe and sUSDe through Morpho Blue has been mixed. Marc Zeller of the AaveChan Initiative (ACI), on behalf of the ACI, proposed a loan-to-value (LTV) reduction for DAI to 0% through Aave governance and calls the move to significantly increase DAI exposure to USDe "reckless." Sam MacPherson of Phoenix Labs, the development arm behind SparkDAO, has countered some of these comments, a sampling of which you can read here, here, and here. The last one, I believe, best highlights the reason for unease:
"LTVs are fairly conservative. Maker will be fine even in the unlikely scenario of 30-40% losses. People are uncomfortable with the speed maybe, but the construct is relatively safe." (Emphasis mine)
PaperImperium also highlighted the change in risk management within Maker, which is another good summary of the concern this move has caused. From my perspective, this move is in line with MakerDAO's Endgame Plan and isn't wholly unexpected. It does increase the risk to hold DAI and I agree with Nour's take that DAI holders will look for higher yields to offset the added risk of holding DAI. More than 50% of DAI's backing is now centralized assets, so I have a hard time classifying DAI as a decentralized stablecoin going forward.
I share this at the outset of Issue 5 because I have no doubt this will have a direct impact on yields across DeFi and it's likely the most significant development in this market cycle. If you want a more in-depth summary, you'll find it at the end of Issue 5.
Outside of changes within Maker, we've seen utilization across lending markets stabilize; Aave ramp up incentives for GHO across DeFi; and continued yields above 20% for stablecoins. Pendle and Gearbox v3 still provide the best yields for ETH and LRT holders in DeFi, but there are emerging ETH-based strategies that may grow in size as well.
Let’s take a look at the stablecoin and ETH base rates for this week.
Stablecoin Yields
Stablecoin Base Rate: 15–23%
With the exception of two outliers, lending market yields have maintained roughly the same spread, with a 2% decrease on the lower bound and 6% decrease on the upper bound. The largest yield opportunities have increased by a large margin since last week. Demand for DAI within SparkDAO's Morpho Blue markets; USDC and crvUSD in Aave v3 markets; and USDT in Re7's Morpho Blue market are the largest drivers for stablecoin yields this week.
In response to SparkDAO's proposed DDM update for the Morpho Blue markets, the ACI has proposed setting DAI's LTV within Aave markets to 0%. In the next week, I expect to see a risk re-rating for DAI across DeFi, which will likely increase DAI yields. Otherwise, lending market dynamics at large remain unchanged since last week's issue.
The decline in Aave's outstanding debt has reversed and we've seen another ~$0.6b increase in debt across Aave markets. While funding rates are lower and the market has cooled somewhat, DeFi users may be borrowing more WETH and stables to farm LRT strategies, Ethena Shards, and other high yield opportunities across DeFi. The growth in outstanding debt is a positive sign.
Lending Markets
Since we've already covered the largest development across lending markets and I’ve included a longer summary on the topic at the end of Issue 5, I'll dive into the stablecoin rates across DeFi's major and emerging lending markets.
Aave v3
Rates in Aave markets have dropped by an average of 2%, with the highest opportunity growing by 3%. One of the most attractive yield markets is the Aave v3 OP market for Native USDC, where there are currently OP incentives for USDC lenders. Chaos Labs is working to migrate USDC.e to Native USDC on Optimism. Chaos Labs has added the OP incentives as part of their migration campaign. The OP incentives in this market have led to 100% borrow utilization for Native USDC.
Currently, there are high rates for DAI on the Arbitrum (18.13% vAPY) and Optimism (22.18% vAPY) markets, which are likely in response to the ACI proposal to reduce LTV to 0%. While the current high APY for DAI and the weekly high APY for crvUSD are interesting, the biggest yield opportunities all revolve around GHO throughout DeFi.
GHO Yields
Aave's decentralized stablecoin GHO is a major source of revenue for AaveDAO. To increase adoption and deepen liquidity, there's been a noticeable increase in GHO incentives across DeFi protocols in the last two weeks. Earlier today, the GHO minting cap was increased from 42m to 46m and the cap was quickly reached. People love these GHO yield opportunities.
Below are some highlights.
Convex strategy for f(x) Protocol LP Incentives
Current APR: 69.70%
Aave has been voting on the FXN gauges to provide FXN incentives to the GHO/fxUSD pair on Curve, which you can stake through Convex for the added veFXN boost. This is currently the highest yield opportunity for GHO holders that I'm aware of.
Smart contract coverage available:
- fx Protocol + Curve + Convex Bundled Protocol Cover. Protection against smart contract risk across all three protocols bundled into one Cover NFT.
Current APY: 56.92%
GHO lenders within the Gearbox v3 Passive Earn market can earn interest from borrowers, GHO incentives, and GEAR incentives. Leverage traders can borrow GHO to margin trade on DEXes. This integration has further increased demand for GHO, while offering GHO holders significant yields.
Smart contract coverage available:
- Gearbox v3 Protocol Cover. Protection against smart contract risk within Gearbox v3's Passive Earn market.
Current APY: 35.11%
If you want to act as a liquidity provider through Balancer, receive the Aura boost for BAL rewards, and have your rewards auto-compounded, you can deposit into the GHO/UDSC/USDT Beefy vault.
Smart contract coverage available:
- Beefy + Balancer v2 + Aura Bundled Protocol Cover. Protection against smart contract risk across all three protocols bundled into one Cover NFT.
Current APR: 25.25%
You can stake GHO within Aave's Safety Module can earn 25.25% APR on your stkGHO in AAVE rewards, but this comes with the risk that your stkGHO could be slashed in the future if bad debt builds up in the Aave markets and AAVE holders vote to slash stkAAVE and stkGHO, with stkGHO eligible for up to 99% slashing.
Compound v3
Since last week, there's been an uptick in yields within Compound's markets. Gauntlet has fixed the issue in the Native USDC market on Arbitrum now that Proposal 231 has been executed onchain. Rates in Compound v2 markets are noticeably higher, but USDP and TUSD are not widely borrowable throughout DeFi.
We'll see where stablecoin rates in the Compound markets are next week, but I expect them to stay the same or see a slight increase to match other lending markets.
Gearbox v3
Gearbox v3's Passive Earn market is still one of the best places to lend stables for consistently high yields. As noted last week, GHO and DAI were both added to Gearbox v3 markets with added incentives.
USDC holders can still earn 32%, which is 9% above the high end of the stablecoin base rate. GHO and DAI holders can earn 34% and 19% above the base rate respectively.
Smart contract coverage available:
- Gearbox v3 Protocol Cover. Protection against smart contract risk within Gearbox v3's Passive Earn market.
Morpho Blue
Morpho Blue markets have seen a big increase in yields over the last week. This is largely driven by MakerDAO's 100m DAI deposit from the DDM into the DAI/USDe and DAI/sUSDe markets. The Re7 USDT market has also seen a yield spike, which, again, is driven by demand for leverage on sUSDe.
The demand for Ethena's USDe and sUSDe has boosted Morpho Blue's TVL by 104% over the last week. With more risk management firms building on top of Morpho Blue and MetaMorpho and new markets coming online every week, it's clear that Morpho Blue will be a growing source of yield within DeFi lending markets. However, this is still a new permissionless lending market, so be sure to read up on Morpho Blue before making any allocation decisions.
Stablecoin Yield Strategies
In the current environment, stablecoin yield strategies are on par with some of the lending market rates, but there are still some stablecoin yield strategies that provide outsized opportunities above the base rate.
f(x) Protocol Strategies
Currently, the best correlated stablecoin LP opportunity in DeFi is through f(x) Protocol's FXN incentives on fxUSD pairs. Users who LP can earn anywhere from 60–69% vAPY, which is at least 2.6x the base rate for stablecoins. If you deposit through Convex Finance, you can get their veFXN boost to maximize your yields.
In Issue 4, I provided some background on f(x) Protocol, which I'll share below as a refresher:
"In the last week, f(x) Protocol has launched a liquidity mining campaign that creates attractive incentives for stablecoins paired with fxUSD on Curve. If you're not familiar with f(x) Protocol, it's a DeFi protocol on Ethereum that offers a decentralised stablecoin enabled by an amplified ETH.
If you deposit ETH LST or LRT collateral into f(x), you can mint fxUSD (an LST-backed stablecoin), rUSD (an LRT-backed stablecoin), or fETH (an LST-backed token that provides holders with leveraged exposure on the underlying LST).
Right now, people who provide liquidity for stablecoin pairs such as GHO+fxUSD, crvUSD+fxUSD, PYUSD+fxUSD, FRAX+fxUSD, and others can earn double- and triple-digit yields in FXN rewards.”
Smart contract coverage available:
- fx Protocol + Curve + Convex Bundled Protocol Cover. Protection against smart contract risk across all three protocols bundled into one Cover NFT.
Yearn Juiced Vaults
Yields on Yearn's Juiced Vaults are lower this week but still well above the base rate. With the focus on Maker's risk management, we may see increased demand to borrow DAI across DeFi lending markets. If you're comfortable with that risk, the DAI Juiced Vault is currently offering 34.16% vAPR with the base yield plus the extra APR from AJNA tokens, which are liquidated on a weekly basis.
Yearn's USDC Juiced Vault offers 25.55% vAPR with the base yield plus the extra APR from AJNA tokens. This USDC Juiced Vault is on Polygon, so transaction fees are lower for this vault, as well.
Smart contract coverage available:
-
Yearn Juiced Vaults Bundled Protocol Cover. Protection against smart contract risk across the Yearn and Ajna protocols bundled into one Cover NFT.
-
OpenCover listing coming soon for Yearn Juiced Vaults, so people can buy cover on L2s, as well.
Yearn v3
Stablecoin rates in Yearn v3 on Polygon are above the stablecoin base rate and the USDC.e strategy on Polygon has a historical APR above the USDC Juiced Vault and an estimated APR just below the USDC Juiced Vault. DAI has and is projected to outperform the USDT and USDC vaults. The underlying strategies for all three of these vaults are primarily allocated to Aave v3 and Compound v3 on Polygon.
Smart contract coverage available:
ETH Yields
ETH Base Rate: 2.6–4.5%
No updates on the ETH base rate, as ETH staking yields remain unchanged. My synopsis from last week holds. Pendle and Gearbox continue to dominate the ETH yield landscape due to the LRT points craze. This week, I have some other ETH strategies that offer attractive yields in addition to my update on the two leaders.
Let's see where users like you can beat the base rate.
Lending Markets
Lending markets are largely within the base rate range. Compound v3's Base market for WETH has seen another week of high utilization. Aave's rates for WETH have increased since last week, though they're still below the base rate.
The Morpho Blue markets for WETH are above the ETH base rate, which is likely due in part to leverage strategies where borrowers are farming LRT yields plus points. Since Issue 1, we've seen yields in the Morpho Blue markets increase for WETH lenders. In time, I think yields will be consistently higher across Morpho Blue's WETH markets. However, this is still a new permissionless lending market, so be sure to read up on Morpho Blue before making any allocation decisions.
Gearbox v3
The ETHFI token launch (and its high valuation) has boosted the perceived value for Yield Tokens (YT) on Pendle. This has created more demand for leverage strategies within Gearbox v3 and that translates to high yields for ETH lenders in the Passive Earn market.
Over the last seven (7) days, the vAPY for ETH has been above 30% and currently stands at ~26.5%. This is the a simple strategy for ETH lenders: deposit and earn on your ETH.
Smart contract coverage available:
- Gearbox v3 Protocol Cover. Protection against smart contract risk within Gearbox v3's Passive Earn market.
Liquid Restaking
Pendle remains the king of ETH-based yields. From Pendle's Fixed Yield to their Liquidity Pools, DeFi users have a variety of choices when it comes to earning yield on their LRTs.
Pendle Ethereum Opportunities
If you're looking to deposit an LRT and sell your yield and points, you can earn:
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46.64% fixed APY on Ether.fi eETH | 85 days left in maturity
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43.21% fixed APY on KelpDAO rsETH | 85 days left in maturity
If you want to provide liquidity to earn yield and points, you can earn:
If you're depositing into Pendle to earn on your LRTs, you can buy Pendle Protocol Cover from Nexus Mutual to protect your deposits. Nexus Mutual even offers Bundled Protocol Cover to protect against the full-stack of risk across EigenLayer, the liquid restaking protocol, and Pendle for the following LRTs:
Pendle Arbitrum Opportunities
If you're looking to deposit an LRT and sell your yield and points, you can earn:
If you want to provide liquidity to earn yield and points, you can earn:
Ether.fi Liquid Vault
eETH and weETH holders can also opt to deposit in Etherfi's Liquid Vault. This vault runs an automated DeFi strategy across several protocols such as Morpho Blue's weETH / WETH market, Pendle Finance, Sommelier Finance and Uniswap V3. Liquid depositors also earn ETHFI tokens, Ether.fi points and EigenLayer points. Currently, this strategy is earning a 20% net APY plus points.
Smart contract coverage available:
- Etherfi Liquid Bundled Protocol Cover. Protection against smart contract risk across the EigenLayer, Ether.fi, Morpho Blue weETH / WETH market, Pendle Finance, Sommelier Finance, and Uniswap V3 protocols bundled into one Cover NFT.
On Wednesday (3 April) at 6pm UTC, Etherfi and Nexus Mutual are hosting a Twitter Spaces event to talk about the Liquid Vault and to discuss the role of Etherfi Liquid Bundled Protocol Cover within the Liquid strategy. Set a reminder if you're interested in learning more or listen to the recording if you're reading this after 3 April.
ETH Yield Strategies
Looking for correlated LP opportunities for ETH? Here are some options to outcompete the base rate, with some options that give you exposure to multiple LRT points.
ezETH-weETH-rswETH Beefy Vault
If you're looking to earn above the ETH base rate and maximize your exposure across multiple LRT points plus EigenLayer points, then the ezETH-weETH-rswETH vault on Beefy may be for you. The current APY is 25.55%, with an average APY of 21.42% since inception.
This vault has underlying exposure to Balancer v2 and Aura Finance. The vault takes any rewards or trading fees and auto-compounds them back into your LP. All you need to do is deposit and earn yield and points.
Smart contract coverage available:
- Beefy + Balancer v2 + Aura Bundled Protocol Cover. Protection against smart contract risk across the all three (3) protocols bundled into one Cover NFT.
ETH-bsdETH vLP Beefy Vault
The ETH-bsdETH vLP vault on Beefy has a lower APY this week but it's still well above the base rate and offers a high yielding strategy on Base. The current APY is 32.46%, with an average APY of 58.60% since inception.
This vault has underlying exposure to Aerodrome. The vault takes any rewards or trading fees and auto-compounds them back into your LP. All you need to do is deposit and earn yield.
Smart contract coverage available:
f(x) Protocol fETH+xETH+WETH LP on Convex
If you're interested in a correlated ETH LP strategy that earns FXN rewards, staking the fETH+xETH+WETH Curve LP on Convex Finance may be right for you. The current vAPR is 27.19% and will be updated after the next FXN gauge votes are submitted.
Smart contract coverage available:
- fx Protocol + Curve + Convex Bundled Protocol Cover. Protection against smart contract risk across all three protocols bundled into one Cover NFT.
Takeaways for this Week's DeFi Yields Report
Even though prices are down, yields are still holding strong. Decentralized stablecoins, LRTs, Ethena, the points craze, and demand to farm yields across all of the above are buoying rates across DeFi. We've seeing an increase in perceived risk within onchain markets due to some recent exploits.
The MakerDAO saga has unfolded in dramatic fashion today, and if you continue on to the end of this section, you can read my summary of the situation, which is not as long as reading through all the forum posts and Twitter threads yourself but still a good bedtime story to help your kids fall asleep and keep the risk averse onchain folks awake a little longer.
Despite the developments, there are still plenty of opportunities to earn on stablecoins and ETH.
As crypto yields hover in the mid-to-high double digits, and the market continues this sideways trend, it's highly likely we'll see an increase in exploits across DeFi, like we saw in the last week with Prisma Finance. IntoTheBlock published "Decoding DeFi Risks: Exploring the Data Behind $50B+ in DeFi Losses" in early February on The Defiant, where they highlight the different technical and economic risks DeFi users are exposed to.
Don't dismiss these risks. I'm a firm believer in Nexus Mutual's Protocol Cover, which protects against the major risks in DeFi: smart contract hacks/exploits; oracle manipulation/failure; liquidation failure; and governance takeovers. Protecting your productive crypto only costs a portion of your yield. Don't let a hack wipe you out in this bull run.
You can buy Protocol Cover from OpenCover on L2s or Nexus Mutual on Ethereum mainnet. The majority of the protocols I highlighted in this report are available on both OpenCover and Nexus Mutual.
Yield is everywhere around us. You just need to reach out and grab it without losing your balance and dropping your bag. I'll be back next week with an updated look at the state of DeFi yields.
Until next time, stay safe out there.
And if you're reading, you can find my summary of the MakerDAO changes below.
Maker <> Morpho <> Ethena <> Aave Summary
To expand on my summary above, I wanted to give a more in-depth look at the MakerDAO governance discussions around allocations to Ethena's USDe and uUSDe.
If you're reading this and didn't stop at the wrap up, then you're probably wondering "What’s this all about?" There's three core components to this summary:
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A TL;DR on MakerDAO's Endgame and how it impacts this strategic choice
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MakerDAO's decision to allocate to Ethena indirectly and (potentially) directly
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The potential impact for DAI holders
MakerDAO Endgame
In 2022, Rune first introduced the Endgame plan for MakerDAO, which proposed a massive shift in how Maker will operate going forward. In May 2023, Rune shared "The 5 phases of Endgame," where he summarized Endgame as:
“…a major update to MakerDAO designed to enhance efficiency, resilience, and participation by creating a strong governance equilibrium that acts as the bedrock for SubDAOs to parallelize growth and product innovation in an emergent, community-driven ecosystem.
The short term objective of Endgame is to grow the Dai supply to more than 100 billion within 3 years, and from there ensure that the ecosystem is anchored in an autonomous and vibrant DAO economy that continues to grow at an accelerating rate, while safely maintaining the governance equilibrium to ensure it can scale to any size.”
Maker is just about to enter Phase 1: Launch Season, according to the MakerDAO Endgame: Launch Season post. SubDAOs play a major role within Endgame, and SparkDAO was the first major subDAO to launch and introduce their own subDAO token. I've included a screenshot from the SparkLend section within this post that highlights the other business lines SparkDAO is intended to pursue.
MakerDAO, Ethena, MetaMorpho + Morpho Blue
The potential for an allocation to Ethena via SparkDAO was introduced in this post on 12 March, which was then followed by Rune's "Risks of perpetual yield strategy discussion" forum thread on 14 March. While this thread is quite informative, the questions GFXlabs asked went unanswered.
The only follow up was from Block Analitica Labs, where they shared a link to their Risk Assessment - USDe Morpho Lending Integration post. The BA Labs report covers risk factors in Morpho and Ethena and USDe.
This report is quite comprehensive and addresses some but not all of GFXlabs questions from the previous thread. There aren't specifics on the size of CEX insurance funds, nor is there much detail on what kind of insurance policies are in place. BA Labs does cover that legal rights for token holders are unclear if non-existent, which means trust and the reputation of VCs backing Ethena are the primary motivations for forthright behaviour when it comes to allocating yield to sUSDe holders.
The only clarity I can find on insurance is Ethena's own insurance fund (i.e., their Reserve Fund), which will grow over time by taking a cut of yields. From my perspective, it's not ideal that the insurance fund holds $27.5m in funds of which $11,267,774 in held in USDe/USDT Uniswap v3 LPs; 1,053,868.14 in held in USDe; and 15,168,157.76 is held in sDAI. At some level, all of the assets would be impacted by a loss borne by Ethena. In an ideal world, an insurance fund would hold uncorrelated assets.
Despite my own personal reservations with the Ethena insurance fund, the BA Labs report recommends overcollateralized lending exposure over a direct allocation to Ethena since the risk vs. reward is more promising. One note in the report stands out given the blowback we've seen today:
“Finally, Maker should limit the share of DAI collateralization from USDe to minimize likelihood of protocol failure from a severe tail risk event. This is also important to maintain a strong sense of product and risk differentiation from Ethena; we should diligently avoid characterization as “wrapped USDe” as this will drive negative PR and is misaligned with DAI users’ demonstrated risk preference for DAI to be boring and predictable.”
The initial recommendation for the total line (absolute maximum value of DAI supplied) was shared in the post and I've included it below as well:
In the comments, more community members asked about the DAI/USDe and DAI/sUSDe oracles, which MonetSupply clarified would be a fixed price oracle that assumed 1 USDe = 1 DAI and 1 sUSDe = 1 DAI * the sUSDe/USDe conversion rate.
BA Labs posted Introduction and Initial Parameters for DDM & Overcollateralized Spark MetaMorpho Ethena Vault in tandem with their risk analysis and this post cemented the recommendations outlined in the risk analysis post, which is included as a screenshot above.
On 1 April, the BA Labs team posted Morpho Spark DAI Vault Update - 1 April 2024 on the MakerDAO forum, where they summarized the significant demand they saw after the Morpho Spark DAI vault was launched. In this summary, BA Labs highlights the demand for USDe as users want to farm Shards and users' preferences for higher LTV markets. It's also noted that increased demand for USDe reduces liquidation risks, allow Ethena to bolster their insurance fund, and will likely contribute to higher revenues for Maker until the Shards campaign ends "...until the earlier of September or when USDe reaches $5 billion market capitalization."
BA Labs noted the degree of transparency Ethena provides but advocated for greater transparency into Ethena's strategies to better assess risk exposure. This lack of transparency can prevent members within MakerDAO from adequately adjusting parameters to adapt to increased or decreased risk within Ethena.
This update from BA Labs is comprehensive and it does denote important risk factors. If more people reviewed these reports, they may form more nuanced opinions about Maker's allocation here, but more on that in a bit. BA Labs adjusts their recommendation with the following note, which I've highlighted:
Many of the reports I've read today are operating under the assumption that Maker is going from 100m DAI to 1b DAI overnight. That's not the case. The gap, or the maximum increase in current exposure limit per period, is recommended to be set at 100 million DAI, while the ttl, or the minimum cooldown period between exposure limit increases, is set to 24 hours. This means the DAI allocated to the Morpho markets can only be increased by 100m DAI every 24 hours. At a maximum, it would take 9 days to reach 1b DAI in total exposure and without sufficient demand, that won't happen.
However, BA Labs advocates for a maximum allocation of 600m DAI for now. The 1b DAI limit is the max and it's included so they can adjust accordingly if demand is significant and risk remains reasonable, per their analysis. Of note, is this quote from the post:
“As a final note, the recently revealed Ethena points program for season 2 caps total USDe and sUSDe collateral eligible for incentives on Morpho at $500 million. If demand to borrow DAI through the vault drops off after this threshold, the multisig should be empowered to reduce allocations below $600 million until reaching a reasonable supply/demand balance and return profile that aligns with expected return on collateral (this can be roughly estimated by looking at Pendle YT vs PT pricing dynamics).”
Again GFXlabs raises good points in this thread about legal rights for USDe and sUSDe holders, which MonetSupply admits are "...admittedly a bit fuzzy at the moment…" but not a barrier to increasing the allocation and setting the line to 1b DAI. GFXlabs most important point remains:
“No legal or technical risk assessments on the collateral have been published, for instance, which has been standard operating procedure for Maker to date. We understand things like legal and smart contract risks are outside the scope of what BA Labs is charged to evaluate, but governance needs to be sure it doesn’t skip steps that have kept Maker safe so far. If a technical bug or legal failure resulted in lost or stuck funds, this is a potentially lethal amount of exposure.”
Other comments highlight that a 1.55% chance of catastrophic loss seems low. Overall, this is a solid overview with a rosy outlook, in my opinion. While I think the assessment is apt in many places, Ethena has been live for a short amount of time, MetaMorpho and Morpho Blue are also relatively new, the lack of legal clarity is troubling, and the estimate on potential loss seems quite low.
More than anything, this process has moved quickly, with the initial mention of allocating to Ethena in early March, an assessment in mid-to-late March, the initial deployment on Morpho on 29 March (4 days ago), and then the recommendation to move the line up from 100m to 1b DAI, with a suggested increase of up to 500m DAI to achieve a total of 600m DAI in Morpho.
However, I want to remind readers that Endgame's raison d'être is to aggressively grow the total supply of DAI by 20x in three (3) years' time. Adopting this level of risk can be a means to increase the DAI supply, while MonetSupply said on Twitter that "...higher revenue allows maker to build up reserves, increasing resilience over time and creating additional buffers of junior capital to secure subdao operations in endgame."
With this context, this direction isn't as surprising, though I personally feel uneasy with the speed at which things have progressed here. The backlash seems to have undermined the comment that DAI should appear to remain "boring and predictable."
This discussion about risk doesn't include a potential direct allocation to Ethena via BlockTower's Project Ethena - Proposal & Enacting DAO Resolutions post on the MakerDAO forum. However, this proposal is on hold until it receives approval from the Ecosystem team within the DAO.
Potential Impact for DAI Holders
It's been noted in the risk analysis reports and on Twitter that Ethena would have to incur sizable losses for this to impact DAI holders and Maker at large. However, we're in a market where people can still recall the impact that the UST depeg and FTX collapse had on crypto markets. Ethena isn't Terra/Luna, but it's still a new centralized platform that has become deeply integrated throughout DeFi within two (2) months.
The risks are well outlined in BA Labs' reports but there is still missing clarity on what legal rights MakerDAO and USDe/sUSDe token holders have in the event of a centralized exchange going under or regulatory action taken against Ethena's legal entities. I'll agree with GFXlabs that this clarity is important as the DDM sees a line increase to 1b DAI in max allocation. There are some valid concerns raised in this regard. The other risk that BA Labs noted was around limited transparency for custody balances and exposure across custodians:
“While Ethena discloses deposit addresses for off exchange custody providers, funds are currently not held in individual onchain addresses after being deposited. This limits transparency for custody balances after the point of initial deposit, and a breakdown of funds per custodian is currently not provided by either Ethena or the custodians themselves. We’d like to see improvement in transparency here as well, including live or near live data provided by Ethena and periodic (at least weekly) assertions from the custodians of AUC attributable to Ethena. Implementation of segregated onchain addresses to hold Ethena collateral would significantly improve transparency.”
Hopefully, some or all of these points are clarified in the near future. The custody risk hasn't been highlighted as a major concern and the Copper Clearloop has been cited as an example where Copper users were compensated within days of the Coinflex exchange's failure. However, Copper isn't the sole custodian being used and, as far as I'm aware, Binance still requires assets to be held on the exchange for active positions. I recall someone on the Maker or Ethena team previously saying this would change but I haven't seen that update come across. Happy to be corrected here.
While I believe Ethena has taken precautions and the MakerDAO community has conducted in-depth due diligence, it's still somewhat incomplete on legal risks, while other risks are assigned a low likelihood.
Should one of these risks materialize in a loss, it may not directly pass a loss onto DAI holders, but it would erode confidence in DAI. A lack of trust in DAI would contradict the stated Endgame goal, so slowly scaling exposure may be warranted. Of course, this is one turtle's opinion.
DAI Collateralization Changes Based on Increased Line to DDM
Current collateralization for DAI is 169%, according to MakerBurn. An additional 500m DAI allocated to the Morpho markets would bring DAI's collateralization to ~153%. If the max allocation is reached, then the added 900m DAI from today's figures would bring collateralization down to 143%. Even with scaling up DAI through the DDM, DAI would remain sufficiently overcollateralized.
Impact on DAI's Risk Rating Across DeFi
Again, I'll quote Nour at the outset of this section: "Aside from the obvious systemic risks, the medium-term effect of Maker being this risk-on will likely be higher cost of capital, meaning Dai holders will demand higher yield from Maker to offset the risk exposure."
We'll see an inherent demand for higher yields on DAI to offset any increase in perceived risk. If people are unsure about DAI's stability, we may see increased demand to borrow DAI, as a depeg would make for cheaper debt. However, lending markets outside of Spark's Morpho markets and MakerDAO itself may adjust parameters around DAI lending.
The AaveDAO community is evaluating whether to set DAI's LTV across Aave markets to 0%, which would prevent people from using DAI as collateral for loans. This would limit DAI as a borrow-only asset within Aave markets. Chaos Labs is currently conducting an analysis on the change and will share updates/recommendations in the near future ahead of a vote. Aave's founder Stani posted the following:
“Personally I am in full favour for offboarding DAI from all the Aave markets completely. At this point I see little value for the Aave DAO with the new risk direction MakerDAO is adopting. Would suggest a Temp Check for full offboarding. The offboarding process should start immediately in case of favorable outcome.”
There's speculation that Aave is taking a drastic step and is potentially taking these actions as a form of retaliation toward MakerDAO for removing the DAI DDM from Aave markets, forking the Aave v3 codebase, and moving their DAI lending to Morpho Blue, an Aave competitor. However, it's more likely that Aave is taking a conservative approach to risk management ahead. Again, the blowback on this proposal has primarily been around the speed at which the line amount has been increased and the lack of wider discussion within MakerDAO.
The outcome of this proposal isn't clear yet, but more lending markets could follow suit. Ultimately, this would push more people to the Morpho lending markets, Spark Lending, and Maker CDP vaults to borrow DAI. Borrowing DAI would still be available even with these changes in the Aave markets and in other lending markets.
Closing Thoughts on Maker <> Ethena
If you're curious, I've read through the following governance discussions and attempted to accurately summarize into a more digestible length:
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Risks of perpetual yield strategy discussion (14 March 2024)
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Stability Scope Parameter Changes #11; Under STA Article 3.3 (20 March 2024)
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Project Ethena - Proposal & Enacting DAO Resolutions (21 March 2024)
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Risk Assessment - USDe Morpho Lending Integration (21 March 2024)
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Spark - Aave Revenue Share Calculation & Payment #3 [Q1, 2024] (2 April 2024)
While this summary is still long, I believe it adequately covers the most important aspects and touches on the open questions. Hopefully this has been helpful for readers, so the time you took to read it and the time I took to write it weren’t in vain.