Really interesting debate around this proposal, which has certainly provided us with a lot of information to refine our stance regarding our position. In this post , we have tried to remain objective and present how we view the different scenarios and the potential impact of each measure
Summary of Recommendations
Protocolo Revenue Distribution
20% of all protocol revenue routed to the MegaVault and 20% routed to a Vault with a negative correlation to the traders’ P&L
20% of all protocol revenue routed to the Treasury subDAO
Above an $80M level of annual protocol revenue, the Treasury subDAO could consider a buy & stake program
Setting conditions for Validators
Validators with poor efficiency should be encouraged to delegate validation to top node professionals.
ETH Collateral and Stablecoin product
Enabling ETH as collateral would allow for better funding rates within the protocol
We are reintroducing this proposal, which we put forward months ago, because we believe it should be a strategic element in the Tokenomics redesign. Additionally, we think it could be a significant driver for creating long-tail markets.
ETH Collateral and Stablecoin product like Ethena
The opportunity to create a Cash & Carry product, as demonstrated by Ethena, is truly profitable. I believe the project can currently launch a similar product that could generate significant revenue and make long-term leverage much more efficient. If we’re late, it will be Ethena launching a derivatives exchange that will compete with dYdX.
Interesting idea, I had already thought about the same product (delta neutral stablecoin like ETHENA), but I didn’t know it was possible. Is this possible? Given the launch of Babylon is it also possible with BTC?
This is confusing, Ethena: ‘Ethena’s USDe is not the same as a fiat stablecoin like USDC or USDT. USDe is a synthetic dollar, backed with crypto assets and corresponding short futures positions.’ and ‘Ethena’s synthetic dollar, USDe, provides the crypto-native, scalable solution for money achieved by delta-hedging Ethereum and Bitcoin collateral.’
Are you suggesting to use Ethena’s USDe as the second collateral of dYdX? I didn’t research in depth but seems that Ethena offers a crypto overcollateralized stablecoin and uses some hedging for the BTC/ETH crypto collateral of the stablecoin, I don’t think Ethena is offering a Perps DEX like dYdX? I’m not sure about what you are suggesting exactly, but if it is to add USDe honestly we have seen the risks of innovative stablecoins and currently the largest and safest stablecoin is USDC and any other stablecoin has more risks than USDC
Once it becomes possible to deposit ETH within dYdX, implementing a Cash & Carry strategy similar to Ethena’s would be quite straightforward. The way to do it would be by depositing ETH and opening a short position of the same amount of ETH. This would allow earning the Funding Rate without the risk of liquidation. By holding the collateral in ETH, the short position would be offset, keeping the position neutral. If ETH’s price rises, the short would lose money, but the collateral would compensate for those losses. Additionally, the protocol could offer investors the option to deposit a stablecoin, with the smart contract directly performing a SWAP for ETH and opening the short position. It could also have a pool to handle all these positions. This dYdX-made product would offer returns in stablecoins. Ethena currently offers 13%, and this dYdX product would have offered 17% this year. If other collaterals were allowed, it could even reach up to 20%
Ethena currently has a TVL of 2.6 billion and the project has a Fully Diluted Valuation (FDV) of 5 billion. dYdX could charge a fee for this operation in addition to transaction fees, which would lead to improved funding rates.
In long-tail markets, returns can even reach astronomical levels.
Higher reward means higher risk. Another stablecoin also offered a savings ‘risk free’ 20% return. Whenever you see a high return risk free, you can be sure it is not risk free but a high risk somewhere to be able to offer such returns. There are professional trading firms barely making 5-10% and unqualified people could beat those professional trading firms with some risk free 15-20% return? No. May 22 was a big reminder to everybody that there are no high returns risk free, a reminder of the basic law of finance, higher risk, higher returns
Your statement is generally true; higher returns typically require exposure to greater risk. However, in some cases, high returns are achievable because the market isn’t transparent enough for effective arbitrage. With Ethena, there’s certainly more risk involved than with other protocols, given the variety of risks that could materialize, but it’s not comparable to Terra/Luna, which was not simply risky but rather structured around a highly likely failure scenario typical of uncollateralized stablecoin designs.
Ethena’s interest rate isn’t fixed like Terra/Luna’s; it depends on supply and demand, so there have been periods of high rates and others with lower rates. This is similar to lending protocols, where interest rates have fluctuated from high to low, though the underlying risk remains unchanged. In platforms like Compound or AAVE, for example, the risk doesn’t depend on the interest rate, as the protocol itself does not experience any variation based on these rate changes.
But what you are suggesting is not adding Ethena’s stablecoin as collateral, but ETH using the hedging mechanism of ethena. However, ethena is delta hedging ETH and BTC, you are suggesting only delta hedging ETH. Speculating with leverage is already risky enough, with the collateral in a trusted stablecoin, not sure having the collateral also as a volatile asset using a partly similar mechanism as a recently launched stablecoin would be interesting for many traders
The largest centralized derivatives exchange, Deribit, has allowed ETH and BTC as collateral from the beginning. It currently leads in liquidity, partly because enabling these assets as collateral makes it easier for many investors to deposit them. As you correctly pointed out, having collateral in the same asset may increase risk, but it could also reduce it completely, as I previously mentioned. My view is that the impact would be so positive that the next logical steps would involve adding more collateral types. For example, Kraken also allows different assets to be used as collateral. I see this as one of the major innovations in this segment, without, of course, removing the option to hold stablecoin-only collateral. In essence, we’re expanding options and flexibility, and more importantly, we’re enabling short strategies with less risk. High funding rates are an indirect effect of not being able to use the underlying asset. In any case, I would also suggest changing the stablecoin, as it doesn’t really make sense to forgo earning interest. Even dYdX could consider developing its own stablecoin, similar to Ethena to change USDC or adopt other with remuneration associated.
It’s a proposal we made months ago, which we haven’t seen included in the roadmap, and I believe we should take advantage of these changes in the tokenomics to introduce it. We believe this could also generate significant expectations for the project and strengthen the value proposition of long-tail markets.
