A significant boost for the decentralized finance lending landscape has just occurred with Ethena Protocol’s Principal Tokens rapidly emerging as a powerhouse on Aave.

Just one month after their integration, the total collateralized supply of Ethena PTs on Aave has exceeded $1 billion.

Aave is adding three new collateral types today—July USDe PT, August eUSDe PT, and eUSDe from etherealdex—to its protocol. This new addition brings in a net aggregate market cap of around $700 million and highlights the newly-increased potential of Ethena as an entity for reshaping collateral markets in DeFi lending protocols.

Before this day, Wednesday, February 15, 2023, Aave and its assets functioned without the presence of Ethena.

Rapid Growth: Over $1 Billion Collateralized in One Month

Aave added Ethena PTs, which are tokenized fixed-term yield products tied to the USDe and eUSDe stablecoins, and adoption has exploded. In just four weeks, Value of the PTs being used as collateral has surpassed $1 billion. This recent interest in the products points to a rising preference for fixed-rate yield instruments.

Users are using Ethena PTs to secure larger fixed returns while they continue to engage in Aave’s borrowing and lending markets. This emerging trend represents a change in collateral use within Aave’s ecosystem, as a growing number of users seem to want to vault illiquid, high-yield stablecoins and then pair these newer stablecoin strategies with Aave’s more conservative borrowing rates.

$700 Million in New Collateral Options Added Today

Today, Aave is introducing three new types of collateral based on Ethena. These collectively contribute approximately $700 million to the marketplace.

The platform’s initial capital arrives in July, in the form of USDe PT. The starting amount is set at $40 million, with significant prospects for uptick. The limit is expected to increase soon, depending on user demand and protocol performance.

The forward-looking yield option, eUSDe PT, begins with a $100 million cap, and has the potential for near-term expansion. It is based on Ethena’s enhanced stablecoin product.

EtherealDex’s eUSDe, a more dynamic and synthetic stablecoin variant, launches with a robust $550 million cap, signaling a strong confidence in the token’s liquidity and integration prospects.

These newly added collateral types indicate that the stablecoin-backed asset portfolios have become much more diverse since the last time we checked. These portfolios have obviously also grown, and they are now using a set of assets that is a lot more varying and larger in number than before. We obviously didn’t use those assets when we did the last work on Aave. So, I see this as a very positive step in the direction toward broader PToken adoption. And in a second here, I’m going to talk about why that’s so.

Also, the July sUSDe PT—one of the earliest PTs on Aave—is set to have its cap raised in the coming days to welcome growing inflows, a move that’s going to increase the total value locked in PTs across the ecosystem.

Yield Premiums Drive Adoption as Aave Rates Remain Low

A primary reason for Ethena PTs’ increasing appeal is the significant yield bias in their favor compared to Aave borrow rates. For instance, over the past month, Aave’s average USDT borrowing rate has been approximately 4.16%. By contrast, borrowing against Aave PTs and putting the proceeds to work in Aave’s borrowing market can yield upwards of 10% (or even more) with concerning PTs, which are presently some of the most risk-of-liquidity event solutions imaginable.

This substantial yield premium presents an appealing opportunity for DeFi users to capitalize on arbitrage strategies and maximize capital efficiency. By borrowing at lower variable rates on Aave and simultaneously deploying capital into higher-yielding PTs, sophisticated users and institutional investors can secure meaningful gains in an increasingly competitive stablecoin market.

A solid demand for PTs also indicates a decisive change in risk appetite. The people who use PTs are becoming more and more at ease with fixed-income products, something we almost never saw in DeFi until last year. This PT development is more akin to what we’ve seen in TradFi, where bond-like products offer diversification and yield right alongside equities and other riskier assets. In fact, at the end of the day, offering portfolio diversification is almost a minimum requirement for any service in either finance or DeFi.

Conclusion

What constitutes a “moment” is different for each person. These are pivotal in your life, turning points when you make a decision to do something differently. When it comes to Aave and Ethena, these decisions are likely to lead to new forms of decentralized finance. You could say they constitute a “yield landscape,” though I suspect that’s not a phrase Ethena would use in marketing materials.

Aave’s borrowing rates are low, and Ethena payoff tokens are performing in a way that might offer a new frontier for users in decentralized finance (DeFi). Integration of these two protocols could lead to the opportunity to take out loans at a low rate, while at the same time, use those borrowed funds to buy Ethena tokens then lock them up to earn fixed yields that, right now, look to be in the double digits. Over just the next few weeks, this opportunity space could see further integration, much higher caps, and maybe even more innovative options for using collateral.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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