AAVE, Pendle and Ethena's PT Leverage Yield Strategy: Mechanism Analysis and Risk Warning

Recently, a highly discussed strategy has emerged in the DeFi space, utilizing the staking yield certificate sUSDe from Ethena as a source of income through the fixed income certificate PT-sUSDe in Pendle, and obtaining funds via the AAVE lending protocol to conduct interest rate arbitrage for leveraged gains. Although some DeFi opinion leaders are optimistic about this strategy, there may be some overlooked risks associated with it. This article will analyze this strategy and share some insights.

Overall, the PT leveraged mining strategy of AAVE+Pendle+Ethena is not a risk-free arbitrage. The discount rate risk of PT assets still exists, and participants need to objectively assess and control the leverage to avoid liquidation.

Analysis of the Mechanism of PT Leverage Returns

The strategy involves three DeFi protocols: Ethena, Pendle, and AAVE. Ethena is a yield-bearing stablecoin protocol that captures the short rate of perpetual contracts through hedging strategies. Pendle is a fixed rate protocol that breaks down floating yield tokens into Principal Token(PT) and Yield Token(YT). AAVE is a decentralized lending protocol that allows users to collateralize cryptocurrencies and borrow other cryptocurrencies.

The specific process of this strategy is: users obtain sUSDe from Ethena, exchange it for PT-sUSDe to lock in the interest rate through Pendle, then deposit PT-sUSDe into AAVE as collateral to borrow USDe or other stablecoins, and repeat the above steps to increase leverage. The returns are mainly determined by the underlying yield rate of PT-sUSDe, the leverage multiplier, and the interest rate spread of AAVE.

Current Market Status of Strategies and User Participation

AAVE's support for PT assets as collateral has brought more funds to this strategy. Currently, AAVE supports two PT assets: PTsUSDe July and PTeUSDe May, with a total supply of approximately $1 billion. The maximum leverage can reach around 9 times, and the theoretical highest yield can exceed 60%.

Among actual participants, whales account for a high proportion and generally use high leverage. Taking the PT-sUSDe liquidity pool on AAVE as an example, the leverage ratios of the top four users are 9 times, 6.6 times, 6.5 times, and 8.35 times, with principal amounts ranging from 3 million to 10 million USD. This aggressive use of leverage could lead to large-scale cascading liquidations.

The Discount Rate Risk That Cannot Be Ignored

Although many analyses describe this strategy as low risk or even risk-free, there is still the risk of discount rates. The prices of PT assets can change with trading, and AAVE adopts an off-chain pricing scheme, allowing oracle prices to follow the structural changes in PT interest rates.

This means that if there is a structural adjustment in the interest rate of PT assets or if the market has a consensus expectation of interest rate changes in the short term, the AAVE Oracle will follow this change. Therefore, if the rise in PT interest rates leads to a decline in PT asset prices, high-leverage strategies may face liquidation risks.

It is noteworthy that as the expiration date approaches, the impact of market trading on prices will diminish. The AAVE Oracle has established a frequency update mechanism, which reduces the update frequency as the expiration date nears, thereby lowering the discount rate risk. Furthermore, when the deviation between market interest rates and Oracle rates exceeds 1% and persists beyond a set threshold, a price update will be triggered.

Therefore, when using this strategy, it is important to closely monitor interest rate changes and adjust leverage in a timely manner, seeking a balance between returns and risks. Excessive optimism or neglecting risks may lead to serious losses, so prudent operations and risk management are crucial.