Be wary of discount rate risk: the mechanism and risk of AAVE, Pendle, Ethena's PT leveraged return flywheel

Author: @Web3 _Mario

Abstract: Recently, the work has been a little busy, so the update has been delayed for a while, and now the frequency of weekly updates is resumed, and I would like to thank you for your support. This week, we found an interesting strategy in the DeFi space, which has received widespread attention and discussion, that is, using Ethena's staking yield certificate sUSDe in Pendle's fixed income certificate PT-sUSDe as the source of income, and using the AAVE lending protocol as the source of funds to carry out interest rate arbitrage and obtain leveraged income. Some DeFi KOLs on the X platform have made relatively optimistic comments on this strategy, but I think the current market seems to ignore some of the risks behind this strategy. Therefore, I have some experience to share with you. In general, AAVE+Pendle+Ethena's PT leveraged mining strategy is not a risk-free arbitrage strategy, in which the discount rate risk of PT assets still exists, so participating users need to objectively evaluate, control leverage, and avoid liquidation.

Friends

who are familiar with DeFi should know that DeFi, as a decentralized financial service, compared with TradFi, the core advantage is the so-called "interoperability" advantage brought by the use of smart contracts to carry core business capabilities, and most DeFi proficient people, or DeFi Degen's work typically consists of three things:

1. Identifying arbitrage opportunities between DeFi protocols;

2. Find sources of leveraged funds;

3. Explore high-interest rate and low-risk-return scenarios;

The PT leveraged income strategy comprehensively reflects these three characteristics. The strategy involves three DeFi protocols, Ethena, Pendle, and AAVE. All three of them are popular projects in the current DeFi track, and they are just briefly introduced here. First of all, Ethena is a yield-based stablecoin protocol that captures short interest rates in the perpetual contract market on centralized exchanges with low risk through Delta Neutral's hedging strategy. In a bull market, the strategy has a higher yield due to the extremely strong demand for long positions by retail investors, so they are willing to bear the higher cost of fees, where sUSDe is its income certificate. Pendle is a fixed-rate protocol that decomposes the floating yield income certificate token into Principal Token (PT) and Income Certificate (YT) with a zero-coupon bond similar to a zero-coupon bond by synthesizing assets, and if investors are pessimistic about future interest rate changes, they can lock in the interest rate level in advance by selling YT (or buying PT). AAVE, on the other hand, is a decentralized lending protocol where users can use designated cryptocurrencies as collateral and lend other cryptocurrencies from AAVE to increase leverage, hedge, or short.

This strategy is the integration of the three protocols, that is, using Ethena's staking income certificate sUSDe in Pendle's fixed income certificate PT-sUSDe as the source of income, and with the help of the AAVE lending protocol as the source of funds, interest rate arbitrage and leveraged income. The specific process is as follows, firstly, users can obtain sUSDe at Ethena, and fully exchange it for PT-sUSDe locked interest rate through the Pendle protocol, and then deposit PT-sUSDe into AAVE as collateral, and lend USDe or other stablecoins through revolving loans, repeating the above strategy to increase capital leverage. The calculation of the return is mainly determined by three factors, the base rate of return of PT-sUSDe, the leverage multiple, and the spread in AAVE.