AAVE, Pendle and Ethena's PT Leverage Yield Strategies: Mechanism Analysis and Risk Alerts

Recently, a highly regarded yield strategy has emerged in the DeFi space, which utilizes Ethena's sUSDe staking yield certificates in Pendle's fixed yield certificates PT-sUSDe as a source of yield, and acquires funds through the AAVE lending protocol to perform interest rate arbitrage to achieve leveraged returns. Although this strategy has received considerable praise within the DeFi community, there are indeed some overlooked risk factors. This article will conduct an in-depth analysis of the mechanism, current status, and potential risks of this strategy.

PT Leverage Profit Strategy Operating Mechanism

This strategy integrates three major DeFi protocols:

1. Ethena: A yield-generating stablecoin protocol that captures the short fee rates in the perpetual contract market through a Delta Neutral hedging strategy. Its yield certificate is sUSDe.

2. Pendle: A fixed-rate protocol that can decompose floating yield rate tokens into Principal Tokens(PT) and Yield Tokens(YT) similar to zero-coupon bonds.

3. AAVE: A decentralized lending protocol that allows users to collateralize cryptocurrencies to borrow other tokens.

The strategy process is as follows:

1. Get sUSDe on Ethena
2. Completely convert sUSDe to PT-sUSDe locked interest rate through Pendle
3. Deposit PT-sUSDe into AAVE as collateral
4. Borrow USDe or other stablecoins from AAVE
5. Repeat the above steps to increase leverage.

The yield is mainly determined by the base yield rate of PT-sUSDe, the leverage multiplier, and the interest rate spread of AAVE.

Market Status and User Participation

The support of AAVE for PT assets has greatly enhanced the attractiveness of this strategy. Currently, AAVE supports two types of PT assets: PTsUSDe July and PTeUSDe May, with a total supply of approximately $1 billion.

Taking PT sUSDe July as an example, its maximum LTV under AAVE's E-Mode is 88.9%, theoretically achieving about 9 times leverage. At maximum leverage, excluding other costs, the theoretical yield of this strategy can reach 60.79%( excluding Ethena points rewards).

From the PT-sUSDe liquidity pool on AAVE, a total supply of 450M is provided by 78 investors, with a high proportion of whales who generally adopt high leverage. The leverage ratios of the top four accounts are 9x, 6.6x, 6.5x, and 8.35x, with principal amounts ranging from 3.3 million to 10 million USD.

Strategy Risk Analysis: Discount Rate Risk Cannot Be Ignored

Although many analyses describe this strategy as low risk or even risk-free, there are actually significant risks that cannot be ignored, especially discount rate risk.

Leveraged mining strategies typically face two main risks:

1. Exchange rate risk: A decrease in the exchange rate of collateral against the loan target leads to liquidation risk.
2. Interest Rate Risk: An increase in borrowing rates may lead to negative overall returns for the strategy.

For this strategy, due to the characteristics of USDe as a mature stablecoin, the exchange rate risk is considered to be lower. However, the particularity of PT assets introduces additional discount rate risk.

PT assets have a concept of maturity; early redemption needs to be conducted through Pendle's AMM for discount trading, which will affect the price of PT assets. AAVE adopts an off-chain pricing solution, allowing oracle prices to follow structural changes in PT interest rates while avoiding short-term market manipulation risks.

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

Risk Management Recommendations

1. Understand the pricing mechanism of AAVE Oracle for PT assets and reasonably adjust leverage to balance risk and return.

2. Note that as PT assets approach their maturity date, market behavior has less impact on prices, and the discount rate risk decreases.

3. Pay attention to the heartbeat mechanism of AAVE Oracle and the 1% interest rate change threshold, and adjust the leverage in a timely manner to avoid liquidation.

4. Continuously monitor interest rate changes and dynamically adjust strategies based on market conditions.

In conclusion, the PT leveraged mining strategy of AAVE + Pendle + Ethena is not a risk-free arbitrage. Participants need to objectively assess the risks and reasonably control the leverage ratio to avoid potential liquidation risks.