MakerDAO Targets $600M DAI Investment in USDe, sUSDe

MakerDAO is considering investing $600M of DAI into USDe and staked USDe (sUSDe) through Morpho Labs’ DeFi lending protocol.

There have been reports that MakerDAO is contemplating making a significant investment of $600 million in DAI into USDe and staked USDe (sUSDe) through the DeFi lending protocol developed by Morpho Labs.

This step aims to broaden the company’s activities in the Bitcoin lending sector, following the growth strategy that MakerDAO has been implementing.

MakerDAO Proposed Allocation and its Rationale

MakerDAO is currently considering the allocation of a significant portion of its stablecoin, DAI, into two assets: USDe and the staked form of USDe, which is currently under development.

As a well-known stablecoin developer, Ethena Labs is responsible for the creation of both of these assets. This allocation is anticipated to significantly raise the total value locked in Ethena, exceeding the internal growth estimates of the company, as pointed out by Seraphim Czecker, the Head of Growth for Ethena.

If the MakerDAO community gives its approval, this allocation is likely to meet the expectations of the firm.Initial data from the Morpho Spark DAI vault indicates a robust demand.

When compared to USDe pools, the user preference for USDe pools is far more prominent, and this preference correlates more closely with pools that have a higher loan-to-value (LLTV) ratio.

This preference is likely due to the tempting point offerings and the ability to acquire ENA tokens through USDe, indicating a tactical allocation towards USDe.

Furthermore, additional money should be dedicated to USDe to offset the liquidity risk that it offers. This is due to the instant redemption of USDe, in contrast to sUSDe, which requires a one-week unstaking period.

Taking this action would also benefit Ethene’s income and the insurance funds, resulting in an overall improvement in the risk profile of the assets. MakerDAO’s submission takes into account several risk variables related to the vault.

These risk elements include the Morpho rate models, the transparency of custody and exchange, and the risks associated with collateral.

Claims suggest that Binance pledges a significant portion of the collateral, which Ceffu then stores. The maintenance of the collateral at Ceffu raises concerns about the potential for counterparty risk.

In addition, the vulnerability of Ethena to liquid staking tokens (LST) represents a significant systemic risk, however, this risk is mitigated by the fact that LSTs only constitute a small portion of the company’s primary collateral pool.

The recommendation is to define the DDM (Dynamic Debt Mechanism) line parameter at 1 billion DAI and to cap the first total allocation at 600 million DAI.

The conducted risk assessment aligns with this advice. Taking this cautious approach makes it possible to scale in the future in a manner that is effective for risk exposure. We recommend focusing on the 86% and 91.5% LLTV pools due to their favorable risk-reward effectiveness.

Despite this, we recommend a slight increase in the allocations of the 77% and 94.5% LLTV pools to ensure the quality of the data and calibrate the interest rate model.