Beware of Discount Rate Risks: The Mechanism and Potential Hazards of PT Leverage Yield Strategy

Recently, a striking new strategy has emerged in the DeFi space, utilizing Ethena's sUSDe staking yield certificates to generate PT-sUSDe fixed income certificates in Pendle as a source of income, and leveraging funds through AAVE lending for interest rate arbitrage. Although this strategy has garnered widespread attention and positive reviews, the underlying risks seem to be overlooked by the market. This article will provide an in-depth analysis of the mechanism and risks of this strategy.

Analysis of PT Leverage Yield Strategy

This strategy integrates three DeFi protocols:

1. Ethena: A yield-generating stablecoin protocol that captures the short selling fees in the perpetual contract market through hedging strategies.

2. Pendle: Fixed Rate Agreement, which splits the floating yield token into Principal Token ( PT ) and Yield Token ( YT ).

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

The specific process is as follows:

1. Get sUSDe on Ethena
2. Exchange all sUSDe for 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 multiple, and the AAVE interest rate spread.

Market Status and User Participation

After AAVE started supporting PT assets as collateral, the strategy quickly gained popularity. Currently, AAVE supports two types of PT assets: PTsUSDe July and PTeUSDe May, with a total supply of approximately 1 billion USD.

Taking PT sUSDe July as an example, the maximum leverage can reach approximately 9 times under E-Mode. Theoretical strategy return can reach 60.79%( excluding Ethena points rewards).

From the PT-sUSDe liquidity pool data on AAVE, 78 investors provided a supply of $450 million, with a high proportion of whales and significant leverage. The top four addresses have leverage ratios ranging from 6.5 to 9 times, with principal amounts varying between $3 million and $10 million.

Discount Rate Risk Cannot Be Ignored

Although many analyses suggest that the risk of this strategy is extremely low, the risk of the discount rate should not be underestimated:

1. PT assets have a concept of duration, and early redemption needs to be done through Pendle AMM discount trading, with prices changing according to the transaction.

2. AAVE adopts an off-chain pricing scheme, and the Oracle prices will follow the structural changes in the PT interest rate.

3. If the PT interest rate rises, the price of PT assets will fall, and high-leverage strategies may face liquidation risk.

Key points to note:

• Over time, the Pendle AMM liquidity concentrates around the current interest rates, and the market impact diminishes.

• AAVE has set up a heartbeat mechanism, reducing the frequency of price updates as the expiration date approaches.

• A deviation of more than 1% between the market interest rate and the Oracle interest rate, exceeding the heartbeat time, will trigger a price update.

Therefore, when using this strategy, it is important to closely monitor interest rate changes and adjust the leverage in a timely manner to seek a balance between risk and return. Overall, this is not a risk-free arbitrage; participants need to objectively assess the risks and control the leverage to avoid liquidation.