Revealing the LEGO game DeFi: Ethena. Pendle and Aave’s 10 billion growth flywheel

Ethena's decentralized stablecoin USDe has increased by about $3.7 billion in the past 20 days, driven mainly by the Pendle-Aave PT-USDe cycle strategy. This article will conduct in-depth analysis of the evolution of this strategy, its internal mechanism and its far-reaching impact on the entire DeFi ecosystem. USDe's core mechanism and return volatility USDe is a decentralized stablecoin pegged to the US dollar. Its price anchoring does not rely on traditional fiat currency or crypto assets to collateral, but is achieved through Delta neutral hedging in the perpetual contract market. The agreement hedges the risk of ETH price fluctuations by holding spot ETH longs and shorting equal amounts of ETH perpetual contracts. This mechanism allows USDe to stabilize its price through algorithms and capture gains from two sources: pledge returns from spot ETH and funding rates in the futures market. However, the strategy has higher returns volatility because returns depend on funding rates. The funding rate is determined by the premium or discount between the price of the perpetual contract and the spot price of the underlying ETH. When market sentiment is bullish, traders will focus on opening high-leverage long orders, pushing the price of perpetual contracts above the marked price, resulting in a positive capital rate. This will attract market makers to hedge by shorting perpetual contracts and longing spot. However, the funding rate is not always the right one. When market sentiment is bearish, the increase in short positions will cause the ETH perpetual contract price to be lower than the marked price, causing the capital rate to turn negative. Pendle's Fixed Income Conversion and Limitations Pendle is an AMM protocol that splits income assets into two tokens: principal token (PT - Principal Token) and income token (YT - Yield Token). PT tokens are usually traded at prices below the maturity face value, similar to zero-interest bonds. This structure provides USDe holders with the opportunity to hedge returns fluctuations while locking in fixed APY. Aave architecture adjustment: Clearing the obstacles for USDe loop strategy. Two recent architectural adjustments have enabled the USDe loop strategy to develop rapidly. First, Aave DAO decided to anchor the USDe price directly to the USDT exchange rate, almost eliminating the risk of liquidation. Secondly, Aave began to directly accept Pendle's PT-USDe as collateral, solving the problems of insufficient capital efficiency and return fluctuations. Strategy Formation: High-leverage PT cyclic arbitrage market participants have begun to adopt a leverage cycle strategy to increase returns through repeated borrowing and deposit rebates. The operation process is usually as follows: 1. Save sUSDe. 2. Borrow USDC at a loan-to-value ratio (LTV). 3. Redeem the borrowed USDC back to sUSDe. 4. Repeat the above steps to obtain about 10 times effective leverage. Risk, linkage and future outlook From the historical perspective, Pendle's returns have been significantly higher than borrowing costs in the long run, with the average interest rate spread not leveraged at about 8.8%. Under Aave's PT oracle mechanism, the liquidation risk is further reduced. This mechanism has a base price and a fuse switch to prevent bad debts from accumulating. Interrelated ecosystems Because Aave underwritten USDe and its derivatives at equivalent values to USDT, market participants can implement circular strategies on a large scale, but this also makes Aave more closely connected with the risks of Pendle and Ethena. Scalability and ecological income distribution Whether this strategy can continue to expand in the future depends on whether Aave is willing to continue to increase the collateral limit of PT-USDe. From an ecological perspective, this circular strategy brings benefits to multiple participants: Pendle, Aave, and Ethena.