Beware of Discount Rate Risks: The Mechanism and Hidden Dangers of PT Leverage Income Strategies

Recently, an interesting strategy in the DeFi space has garnered widespread attention and discussion. This strategy utilizes Ethena's staking yield certificate sUSDe as a source of income in Pendle's fixed income certificate PT-sUSDe, and leverages lending protocols as a source of funds to conduct interest rate arbitrage for leveraged returns. While some DeFi opinion leaders have given positive evaluations of this strategy, the market seems to overlook the potential risks involved. This article will share some insights regarding this strategy. Overall, this PT leveraged mining strategy is not a risk-free arbitrage, as the discount rate risk of PT assets still exists. Participants need to objectively assess risks and control leverage to avoid potential liquidations.

Analysis of the Mechanism of PT Leverage Profit

This yield strategy involves three DeFi protocols: Ethena, Pendle, and a lending protocol. Ethena is a yield-generating stablecoin protocol that captures the short fee rates in the centralized exchange perpetual contract market with a low-risk Delta Neutral hedging strategy. Pendle is a fixed-rate protocol that breaks down the yield-bearing token of floating yield into a Principal Token (PT) and Yield Token (YT), similar to zero-coupon bonds. The lending protocol allows users to use specified cryptocurrencies as collateral to borrow other cryptocurrencies.

This strategy integrates these three protocols, using Ethena's sUSDe in Pendle's PT-sUSDe as the source of yield, and leveraging lending protocols as the source of funds to conduct interest rate arbitrage for leveraged returns. The specific process is as follows: users acquire sUSDe, fully exchange it for PT-sUSDe through Pendle to lock in the interest rate, then deposit PT-sUSDe into the lending protocol as collateral, borrowing USDe or other stablecoins through a looped loan approach, repeating the above steps to increase financial leverage. The returns are primarily determined by the base yield rate of PT-sUSDe, the leverage multiple, and the lending interest spread.

Current Market Status and User Participation of the Strategy

The lending agreement recognizes PT assets as collateral, unlocking the financing capabilities of PT assets and causing this strategy to heat up rapidly. Currently, a certain lending agreement supports two types of PT assets: PTsUSDe July and PTeUSDe May, with a total supply reaching approximately $1 billion.

Taking PT sUSDe July as an example, the maximum loan-to-value ratio (LTV) of this asset under specific conditions is 88.9%, which theoretically allows for a leverage ratio of approximately 9 times. Excluding Gas, flash loans from circular loans, or the cost of capital exchange, the yield of the strategy using sUSDe can theoretically reach 60.79%, not including Ethena points rewards.

The distribution of actual participants shows that whale users account for a high proportion and generally use a higher leverage ratio. Taking the PT-sUSDe liquidity pool on a certain lending platform as an example, a total supply of $450 million is provided by 78 investors. The leverage ratios of the top four addresses are 9x, 6.6x, 6.5x, and 8.35x, with principal amounts ranging from approximately $3.3 million to $10 million.

Discount Rate Risk Cannot Be Ignored

Although many DeFi analysis accounts emphasize the low-risk characteristics of this strategy and even refer to it as a risk-free arbitrage strategy, the reality is not so. Leverage mining strategies face two main risks: exchange rate risk and interest rate risk.

Although USDe, as a mature stablecoin protocol, has a lower risk of price decoupling, the uniqueness of PT assets has been overlooked. PT assets have the concept of a duration, and redeeming the principal early during this duration needs to be done through discounted trading on Pendle's AMM secondary market, which can affect the price and yield of PT assets.

Different lending protocols have varying design schemes for the price oracle of PT assets. One lending protocol has adopted an off-chain pricing solution, aiming to allow the oracle price to follow structural changes in PT interest rates while avoiding the risk of short-term market manipulation. This means that if there is a structural adjustment in PT asset interest rates or if the short-term market has a consistent expectation regarding interest rate changes, the oracle will follow this change, thereby introducing discount rate risk into the strategy.

Therefore, investors need to clearly understand the pricing mechanism of the lending agreement oracle for PT assets, rationally adjust leverage, and effectively balance risk and return. Here are some key features:

1. As the expiration date approaches, the impact of market trading on prices will become smaller. The lending protocol oracle has set up the concept of heartbeat, which indicates the frequency of price updates. The closer it gets to the expiration date, the larger the heartbeat, the lower the update frequency, and the lower the discount rate risk.

2. A lending protocol oracle uses a 1% interest rate change as another adjustment factor for price updates. When the market interest rate deviates from the oracle rate by 1%, and the deviation lasts longer than the heartbeat, a price update is triggered. This provides a time window for timely adjustment of leverage ratios and avoiding liquidation.

In summary, investors should closely monitor interest rate changes and adjust their leverage in a timely manner to manage potential discount rate risks.