Analyzing the PT Leveraged Yield Strategy: Mechanism, Current Status, and Potential Risks

Recently, a striking strategy has emerged in the DeFi space, sparking widespread discussion. This strategy utilizes Ethena's staking yield certificate sUSDe as a source of income via Pendle's fixed-income certificate PT-sUSDe, and acquires funds through the AAVE lending protocol to conduct interest rate arbitrage for leveraged gains. While some DeFi opinion leaders are optimistic about this strategy, they seem to overlook certain risks involved. This article will share some insights on this strategy. Overall, the AAVE+Pendle+Ethena PT leveraged mining strategy is not a risk-free arbitrage; the discount rate risk of PT assets still exists, and participants need to objectively assess risks and control leverage to avoid liquidation.

Analysis of the Mechanism of PT Leverage Earnings

This yield strategy involves three DeFi protocols: Ethena, Pendle, and AAVE. Ethena is a yield-generating stablecoin protocol that captures the short rate of the perpetual contract market through hedging strategies. Pendle is a fixed-rate protocol that breaks down floating yield tokens into zero-coupon bond-like PTs and yield tokens YTs. AAVE is a decentralized lending protocol that allows users to collateralize assets to borrow other cryptocurrencies.

This strategy integrates these three protocols: using Ethena's sUSDe as the source of income for the fixed income certificate PT-sUSDe in Pendle, leveraging AAVE to acquire funds, and engaging in interest rate arbitrage to achieve leveraged returns. The specific process is:

1. Obtain sUSDe on Ethena
2. Completely exchange sUSDe for PT-sUSDe locked rate through Pendle
3. Deposit PT-sUSDe into AAVE as collateral
4. Borrow USDe or other stablecoins through circular lending.
5. Repeat the above steps to increase leverage.

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

Current Market Status and Participation of Strategies

AAVE's recognition of PT assets as collateral has released the financing capacity of PT assets, promoting the popularity of this strategy. With ample borrowable funds and lower borrowing rates, AAVE has amplified the strategy's returns, and its decision is also of significant symbolic meaning.

Currently, AAVE supports two types of PT assets: PTsUSDe July and PTeUSDe May, with a total supply of approximately 1 billion USD. Taking PTsUSDe July as an example, the maximum leverage can reach 8.9 times in E-Mode. Theoretically, ignoring costs such as Gas, the maximum yield of the sUSDe strategy can reach 60.79%( excluding Ethena points rewards).

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

The risk of discount rate should not be ignored

Although many analyses describe this strategy as low-risk or even risk-free, there are still risks involved, mainly including:

1. Exchange rate risk: A decline in the exchange rate of the collateral and the loan target may lead to liquidation.
2. Interest rate risk: An increase in borrowing rates may lead to an overall negative return on the strategy.

Although the exchange rate risk of USDe, as a mature stablecoin, is relatively low, the uniqueness of PT assets is often overlooked. If PT assets are redeemed early during their duration, they need to be discounted through Pendle's AMM, which will affect the price of PT assets.

AAVE has adopted an off-chain pricing solution for PT assets, allowing the oracle prices to follow the 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 short-term market sentiment is consistent, the AAVE Oracle will follow the changes, introducing discount rate risks.

Please pay attention to the following points when using this strategy:

1. As the expiration date approaches, the impact of market trading on prices decreases, the update frequency of AAVE Oracle decreases, and the discount rate risk decreases.

2. The AAVE Oracle uses a 1% interest rate change as the price update factor. When the market interest rate deviates from the Oracle rate by more than 1% and lasts longer than the heartbeat, a price update will be triggered.

3. Strategy users should monitor interest rate changes and adjust leverage in a timely manner to avoid liquidation risks.