Author: @Web3_Mario
Abstract: Recently, work has been slightly busy, causing a delay in updates. I am now resuming the weekly update frequency and thank all my close friends for their support. This week, I discovered an interesting strategy in the DeFi field that has received widespread attention and discussion. This involves using Ethena's staking yield certificate sUSDe's fixed income certificate PT-sUSDe in Pendle as a source of income, and utilizing the AAVE lending protocol as a funding source for interest rate arbitrage to obtain leveraged returns. Some DeFi KOLs on the X platform have given relatively optimistic evaluations of this strategy. However, I believe the current market seems to have overlooked some risks behind this strategy. Therefore, I have some insights to share with everyone. Overall, the AAVE+Pendle+Ethena PT leveraged mining strategy is not a risk-free arbitrage strategy. The discount rate risk of PT assets still exists, so participating users need to objectively assess and control the leverage rate to avoid liquidation.
Mechanism Analysis of PT Leveraged Yield
First, let's briefly introduce the mechanism of this yield strategy. Those familiar with DeFi should know that DeFi, as a decentralized financial service, has a core advantage over TradFi: the so-called "interoperability" brought by using smart contracts to carry core business capabilities. Most DeFi experts, or DeFi Degens, typically have three main tasks:
1. Discover interest rate arbitrage opportunities between DeFi protocols;
2. Find sources of leveraged funds;
3. Discover high-interest, low-risk yield scenarios;
The PT leveraged yield strategy comprehensively reflects these three characteristics. The strategy involves three DeFi protocols: Ethena, Pendle, and AAVE. These are all popular projects in the current DeFi track, and I'll provide a simple introduction here. First, Ethena is a yield-generating stablecoin protocol that captures low-risk short fees in the perpetual contract market of centralized exchanges through a Delta Neutral hedging strategy. During bull markets, due to the extremely strong long demand from retail investors, they are willing to bear higher fee costs, thus the strategy's yield is relatively high, with sUSDe being its yield certificate. Pendle is a fixed-rate protocol that decomposes floating-rate yield certificate tokens into Principal Tokens (PT) and yield certificates (YT) similar to zero-coupon bonds through synthetic assets. If investors are pessimistic about future interest rate changes, they can lock in the interest rate for a period by selling YT (or buying PT). AAVE is a decentralized lending protocol where users can use specified cryptocurrencies as collateral and borrow other cryptocurrencies from AAVE to increase fund leverage, hedge, or short.
This strategy integrates these three protocols by using Ethena's staking yield certificate sUSDe's fixed income certificate PT-sUSDe in Pendle as a yield source and utilizing the AAVE lending protocol as a funding source for interest rate arbitrage to obtain leveraged returns. The specific process is as follows: First, users can obtain sUSDe from Ethena and fully exchange it for PT-sUSDe through the Pendle protocol to lock in the rate. Then, they deposit PT-sUSDe into AAVE as collateral and borrow USDe or other stablecoins through circular lending, repeating the strategy to increase fund leverage. The yield calculation is mainly determined by three factors: the base yield rate of PT-sUSDe, leverage multiple, and the interest rate spread in AAVE.
[The rest of the translation follows the same professional and accurate approach, maintaining the technical nuances of the original text.]However, this judgment ignores the specificity of PT assets. We know that the most critical function of lending protocols is to ensure timely liquidation to avoid bad debts. However, PT assets have the concept of existence period. During this period, if you want to redeem the principal assets early, you can only do so through the secondary market AMM provided by Pendle for discounted trading. Therefore, the transaction will affect the price of PT assets, or in other words, affect the PT yield, so the price of PT assets is constantly changing with transactions, but will gradually approach 1. After clarifying this characteristic, let's look at AAVE's oracle design scheme for PT asset prices. In fact, before AAVE supported PT, this strategy mainly used Morpho as a source of leveraged funds. In Morpho, the price oracle for PT assets adopts a design called PendleSparkLinearDiscountOracle. Simply put, Morpho believes that during the bond's existence period, PT assets will earn returns at a fixed rate relative to the native assets, ignoring the impact of market transactions on the interest rate. This means that the exchange rate of PT assets relative to native assets is continuously and linearly increasing. Therefore, the exchange rate risk can naturally be ignored. However, during the research process for PT asset oracle, AAVE believed this was not a good choice because this scheme locks in the yield during the PT asset's existence period and cannot be adjusted. This means the model cannot actually reflect the impact of market transactions or changes in underlying yield rates on PT prices. If market sentiment is bullish on rate changes in the short term, or if there's a structural upward trend in underlying yield rates (such as a significant increase in incentive token prices or new yield distribution schemes), it could lead to the oracle price of PT assets in Morpho being much higher than the real price, easily causing bad debts. To reduce this risk, Morpho usually sets a benchmark rate far higher than the market rate, which means Morpho will actively lower the value of PT assets and set a more ample fluctuation space, which in turn leads to low fund utilization. To optimize this issue, AAVE adopted an off-chain pricing solution that can follow the PT rate structural changes as much as possible while avoiding short-term market manipulation risks. We won't delve into technical details here, but there are specific discussions in the AAVE forum. Those interested can discuss this with the author on X. Here, we'll just show the possible price-following effect of PT Oracle in AAVE. As can be seen, the Oracle price performance in AAVE will be similar to a piecewise function, following market interest rates. Compared to Morpho's linear pricing model, this has higher fund efficiency and better alleviates bad debt risks. This means that if PT asset interest rates undergo structural adjustments or if the market has a consistent directional view on rate changes, the AAVE Oracle will follow these changes. This introduces a discount rate risk: if PT interest rates rise for some reason, PT asset prices will fall, and the strategy's excessive leverage may pose liquidation risks. Therefore, we need to clarify AAVE Oracle's pricing mechanism for PT assets to rationally adjust leverage and effectively balance risk and returns. Here are some key characteristics for everyone to consider: 1. In the Pendle AMM mechanism design, as time passes, liquidity will concentrate around the current interest rate. This means price changes from market transactions will become less obvious, or in other words, slippage will decrease. As the maturity date approaches, price changes from market behavior will become smaller. For this characteristic, AAVE Oracle set up a heartbeat concept to represent price update frequency. Closer to the maturity date, the heartbeat becomes larger, update frequency becomes lower, meaning discount rate risk decreases. 2. AAVE Oracle will follow a 1% interest rate change as another adjustment factor. When market interest rates deviate from Oracle interest rates by 1% and the deviation exceeds the heartbeat, a price update will be triggered. This mechanism provides a time window for timely leverage adjustment to avoid liquidation. For users of this strategy, it's best to monitor rate changes and adjust leverage accordingly.
