Original text: shaunda devens, Blockworks Research analyst
Translated by: Yuliya, PANews
In the past 20 days, the supply of Ethena's decentralized stablecoin USDe has increased by approximately $3.7 billion, primarily driven by the Pendle-Aave PT-USDe cycle strategy. Currently, Pendle has locked approximately $4.3 billion (60% of the total USDe supply), with Aave's deposit size being about $3 billion. This article will break down the PT cycle mechanism, growth drivers, and potential risks.
Core mechanism and yield volatility of USDe
USDe is a decentralized stablecoin pegged to the US dollar, with its price anchoring not relying on traditional fiat or crypto asset collateral, but achieved through Delta-neutral hedging in the perpetual contract market. In short, the protocol hedges ETH price volatility risk by holding spot long ETH while shorting an equivalent amount of ETH perpetual contracts. This mechanism allows USDe to algorithmically stabilize its price and capture yields from two sources: staking yields from spot ETH and funding rates from the futures market.
However, the yield volatility of this strategy is high because the yield depends on the funding rate, which is determined by the premium or discount between the price of perpetual contracts and the underlying ETH spot price (the 'mark price').
When market sentiment is bullish, traders will focus on opening high-leverage long positions, pushing the price of perpetual contracts above the mark price, thereby generating a positive funding rate. This will attract market makers to hedge by shorting perpetual contracts and going long on the spot.
However, the funding rate is not always positive.
When market sentiment is bearish, increased short positions can cause the price of ETH perpetual contracts to fall below the mark price, resulting in a negative funding rate.
For example, recent AUCTION-USDT saw a spot premium due to spot buying and perpetual contract selling, causing an 8-hour funding rate to reach -2% (annualized about 2195%).
Data shows that from 2025 to present, the annual yield of USDe is about 9.4%, but the standard deviation has also reached 4.4 percentage points. It is this extreme volatility in yields that has generated a pressing demand in the market for a product with more predictable and stable yields.
Pendle's fixed income conversion and limitations
Pendle is an AMM (Automated Market Maker) protocol that splits yield-bearing assets into two tokens:
Principal Token (PT): Represents the principal that can be redeemed on a specific date in the future. It trades at a discount, similar to a zero-coupon bond, with its price gradually returning to face value (e.g., 1 USDe) as time passes.
Yield Token (YT): Represents all future yields generated by the underlying asset before the maturity date.
Taking the PT-USDe maturing on September 16, 2025, as an example, PT tokens typically trade below their face value at maturity (1 USDe), similar to zero-coupon bonds. The difference between the current price of PT and its maturity face value (adjusted for remaining maturity time) reflects the implied annual yield (YT APY).
This structure provides USDe holders with the opportunity to hedge yield volatility while locking in a fixed APY. During periods of historically high funding rates, the APY of this approach can exceed 20%; currently, the yield is about 10.4%. Additionally, PT tokens can earn up to 25 times SAT bonuses from Pendle.
Pendle and Ethena thus form a highly complementary relationship. Currently, Pendle's total TVL is $6.6 billion, with about $4.01 billion (approximately 60%) coming from Ethena's USDe market. Pendle addresses the yield volatility issue of USDe, but capital efficiency remains constrained.
YT buyers can efficiently gain exposure to yields, while PT holders must lock $1 of collateral for each PT token when shorting floating yields, limiting returns to a smaller spread.
Aave architectural adjustment: Clearing obstacles for the USDe cycle strategy
Recent architectural adjustments by Aave have allowed for rapid development of the USDe cycle strategy.
First, after the risk assessment team pointed out the significant risk of large-scale liquidations due to price decoupling in sUSDe borrowing, the Aave DAO decided to directly anchor the price of USDe to the USDT exchange rate. This decision virtually eliminated the previous major liquidation risk, leaving only the inherent interest rate risk in arbitrage trading.
Secondly, Aave has begun to directly accept Pendle's PT-USDe as collateral. This change is more significant as it simultaneously addresses the previous two major limitations: insufficient capital efficiency and yield volatility issues. Users are able to use PT tokens to establish leveraged positions with fixed interest rates, significantly enhancing the feasibility and stability of cyclical strategies.
Strategy formation: High leverage PT cycle arbitrage
To improve capital efficiency, market participants have begun to adopt leveraged cycle strategies, a common arbitrage trading method that enhances yields through repeated borrowing and redepositing.
The operational process typically goes as follows:
Deposit sUSDe.
Borrow USDC at a loan-to-value (LTV) ratio of 93%.
Convert the borrowed USDC back to sUSDe.
Repeat the above steps to obtain approximately 10 times effective leverage.
This leveraged cycle strategy has become popular across multiple lending protocols, especially in the USDe market on Ethereum. As long as the annual yield of USDe exceeds the borrowing cost of USDC, the trade remains highly profitable. However, if yields suddenly drop or borrowing rates surge, profits will be quickly eroded.
Previously, a key risk was the design of the oracle. Positions worth billions of dollars often depend on AMM-based oracles, making them very vulnerable in the face of temporary price decoupling. Such events (as seen in the ezETH/ETH cycle strategy) can trigger chain liquidations, forcing lenders to sell collateral at huge discounts, even when the collateral itself is fully backed.
PT collateral pricing and arbitrage space
When pricing PT collateral, Aave employs a linear discounting method based on the implied APY of PT and anchors it to USDT pricing. Similar to traditional zero-coupon bonds, Pendle's PT tokens gradually approach par value as the maturity date approaches. For example, in the PT tokens maturing on July 30, this pricing model clearly reflects the process of its price approaching 1 USDe over time.
Although the price of PT does not completely correspond to the face value of 1:1, market discount fluctuations will still affect pricing, but its return rate becomes increasingly predictable as maturity approaches. This is highly similar to the stable value appreciation model of zero-coupon bonds before maturity.
Historical data shows that the appreciation of PT token prices relative to USDC borrowing costs creates a clear arbitrage opportunity. The introduction of leverage cycles further amplifies this profit space, allowing approximately $0.374 in yield for every $1 deposited since last September, with an annualized yield of about 40%.
This raises a key question: is this cycle strategy equivalent to risk-free yield?
Risk, linkage, and future outlook
Historically, the yield of Pendle has significantly exceeded borrowing costs, with an unleveraged average spread of about 8.8%. Under Aave's PT oracle mechanism, liquidation risk is further reduced. This mechanism includes a floor price and a kill switch. Once triggered, the LTV (loan-to-value ratio) will immediately drop to 0, freezing the market to prevent bad debts from accumulating.
Taking Pendle's PT-USDe September maturity products as an example, the risk team set an initial discount rate of 7.6% per year for its oracle, allowing for a maximum discount of 31.1% (circuit breaker threshold) under extreme market pressure.
The following chart shows various secure LTVs (calculated by the fact that once the discount reaches the lower limit of the termination switch, liquidation is virtually impossible, thus PT collateral always remains above the liquidation threshold).
Interconnection of ecosystems
Since Aave underwrites USDe and its derivatives at par with USDT, market participants can execute cycle strategies on a large scale, but this also makes the risks among Aave, Pendle, and Ethena more closely intertwined. Whenever the collateral supply ceiling is raised, the liquidity pool is quickly filled by cycle strategy users.
Currently, Aave's USDC supply is increasingly backed by PT-USDe collateral, while cycle strategy users borrow USDC to invest in PT tokens, making USDC structurally similar to senior tranches: its holders receive higher APRs due to high utilization and are generally insulated from bad debt risks unless extreme bad debt events occur.
Scalability and ecological yield distribution
Whether this strategy can continue to expand in the future depends on whether Aave is willing to continuously raise the collateral ceiling for PT-USDe. The risk team currently leans towards frequent ceiling increases, having already proposed an additional increase of $1.1 billion, but is constrained by policy regulations that limit each ceiling increase to no more than twice the previous ceiling and require an interval of more than three days.
From an ecological perspective, this cycle strategy brings benefits to multiple participants:
Pendle: Charges a 5% fee on the YT side.
Aave: Takes 10% of the interest from USDC lending as reserves.
Ethena: Plans to take about 10% of the share after launching the fee switch in the future.
Overall, Aave provides underwriting support for Pendle PT-USDe by anchoring to USDT and setting discount limits, allowing the cycle strategy to operate efficiently and maintain high profits. However, this high-leverage structure also brings systemic risks, as any problems on one side may produce linked effects among Aave, Pendle, and Ethena.
