Preface

Recently, Ethena's synthetic dollar known as USDe experienced a brief price drop to 65 cents on Binance, causing concerns about a potential de-pegging. However, this incident was not indicative of a global issue, but rather specific to Binance due to its structural and liquidity challenges. In this article, we'll explore the complexities behind the situation and clarify how USDe maintained its integrity on other platforms.

Lazy bag

Ethena's USDe experienced a localized drop on Binance, not a global de-peg. The synthetic dollar remained overcollateralized and functioned smoothly on other platforms, highlighting Binance-specific issues.

Main Body

During a volatile market session last Friday, Ethena's synthetic US dollar, or USDe, briefly lost its 1:1 peg on Binance, sinking to 65 cents. Despite this alarming drop, it was constrained to Binance. Contrary to widespread speculation, the incident was not a global de-pegging but a symptom of issues within Binance itself.

USDe, valued for its rigorous cash-and-carry arbitrage mechanism, largely trades on decentralized platforms like Fluid, Curve, and Uniswap. These platforms boast extensive liquidity—a stark contrast to Binance's more constrained environment. On Curve, price deviations were under 100 basis points, which aligns with typical fluctuations in other stablecoins like USDC and USDT. Furthermore, Bybit observed a modest decline of USDe to 92 cents, evidencing less severe volatility compared to Binance.

The core of Binance's issue lies in its lack of direct dealer relationships, a critical component in facilitating the minting and redemption of USDe. The absence of such a network impeded market makers’ ability to conduct peg arbitrage, especially as Binance's infrastructure faltered amidst heightened volatility. An internal failure also occurred in Binance's oracle, which relied on its own order book—illiquid by comparison—rather than tapping into more stable avenues like Curve, leading to forced liquidations that triggered significant price drops.

Haseeb Qureshi of Dragonfly emphasized that optimal liquidation mechanisms should bypass flash crashes, advocating for price references to be taken from primary venues—a viewpoint echoed by Guy Young of Ethena Labs. Young characterized the episode as an isolated Binance-centric event driven by infrastructure inadequacies, including withdrawal and deposit disruptions which inhibited swift market reactions.

Despite Binance's shortcomings, Ethena maintained the USDe’s robust redemption protocol, efficiently handling a supply decrease from $9 billion to $6 billion. This capability demonstrated the synthetic dollar's resilience, as verified by audits from independent bodies such as Chaos Labs and Chainlink.

In essence, while Binance struggled with overflow and inadequate oracle referencing, USDe's peg integrity held strong on global platforms, reflecting the importance of comprehensive exchange mechanisms and reliability for synthetic currencies.

Key Insights Table