Ethena, Pendle and Aave: The Operation and Risks of DeFi Arbitrage Chains

As the popularity of Ethena rises, a complex arbitrage chain is operating at high speed: collateralizing (e/s)USDe to lend stablecoins on a lending platform, purchasing YT/PT from a certain DEX for profit, and then supplying part of the position back to the lending platform to leverage, thereby obtaining Ethena points and other external incentives. The result is evident: the collateral exposure of PT on the lending platform has sharply increased, the utilization rate of mainstream stablecoins has been pushed to over 80%, and the entire system has become more sensitive to any fluctuations.

This article will delve into the operation of this capital chain, the exit mechanism, and the risk control design of the relevant platforms. However, understanding the mechanism is just the first step; true expertise lies in analyzing the upgrade of the framework. We often habitually use data analysis tools to review the "past," while what is missing is precisely how to clearly see the various possibilities of the "future" and truly achieve - first defining the risk boundaries, then discussing the returns.

Arbitrage How It Works: From the "Yield Side" to the "System Side"

The arbitrage path is: deposit eUSDe or sUSDe( into the lending platform as collateral for eUSDe, bringing native yields), borrow stablecoins, and then buy YT/PT on a certain DEX. YT corresponds to future yields, while PT can always be bought at a discount because it has been stripped of yields, held until maturity to be redeemed at a 1:1 ratio, earning the price difference. Of course, the real "big deal" is external incentives like Ethena points.

The obtained PT, due to its ability to serve as collateral on lending platforms, becomes the perfect starting point for a circular loan: "Pledge PT → Borrow stablecoins → Buy PT/YT → Pledge again." The purpose of this is to use leverage to seek high-elasticity returns like Ethena points on relatively certain earnings.

How has this funding chain rewritten the lending market?

• Exposure and second-order effects of lending platforms: Assets supported by USDe have gradually become mainstream collateral, with a share rising to approximately 43.5%, directly boosting the usage rates of mainstream stablecoins USDT/USDC.

• Crowding on the borrowing side: After introducing USDe eMode for PT collateral, the borrowing scale of USDe is about 370 million USD, of which about 220 million (≈60%) serves leveraged PT strategies, with the utilization rate soaring from about 50% to about 80%.

• Concentration and Rehypothecation: The supply of USDe on lending platforms is highly concentrated, with the top two entities accounting for over 61%. This concentration, combined with cyclical leverage, amplifies returns and exacerbates the system's fragility.

The rule is simple: the more attractive the yield, the more crowded the cycle becomes, and the entire system becomes more sensitive. Any small fluctuations in price, interest rates, or liquidity will be ruthlessly amplified by this leverage chain.

Why 'Exit' Becomes Difficult: Structural Constraints

There are two main ways to exit:

• Market Exit: Sell PT / YT before maturity to exchange for stablecoins for repayment and release.

• Hold until maturity to exit: Hold PT until maturity, redeem 1:1 for the underlying asset and then repay. This route is slower, but more stable during market fluctuations.

The difficulty in exiting mainly comes from two structural constraints:

• Fixed term: PT cannot be directly redeemed before maturity and can only be sold in the secondary market. If you want to "quickly reduce leverage," you have to pay attention to the secondary market and endure the dual test of depth and price fluctuations.

• The "implied yield range" of AMM: The AMM of a certain DEX is most efficient within the preset implied yield range. Once market sentiment changes and causes the yield pricing to exceed this range, the AMM may "deactivate," and trades can only be executed on a thinner order book, leading to a sharp increase in slippage and liquidation risk. To prevent risk spillover, lending platforms have deployed PT risk oracles: when the PT price falls to a certain floor price, the market is directly frozen. This can avoid bad debts, but it also means that PT cannot be sold in the short term and must wait for the market to recover or hold until maturity.

Therefore, exiting during stable market conditions is usually not difficult, but when the market begins to reprice and liquidity becomes congested, exiting becomes a major friction point that requires advance preparation.

The "Brakes and Buffers" of Lending Platforms: Making Deleveraging Orderly and Controllable

In the face of this structural friction, how do lending platforms manage risk control? It has a built-in "brake and buffer" mechanism:

• Freezing and Floor Price Mechanism: If the PT price reaches the oracle floor price and maintains it, the relevant market can be frozen until expiration; after expiration, PT naturally decomposes into the underlying asset, followed by safe liquidation/unfreezing, aiming to avoid liquidity misalignment overflow caused by fixed-term structures.

• Internal Settlement: In extreme cases, the liquidation reward is set to 0, forming a buffer first and then segmenting the disposal of collateral: USDe will be sold in the secondary market after liquidity is restored, while PT will be held until maturity to avoid passive selling on a thin order book in the secondary market, which would amplify slippage.

• Whitelist redemption: If the lending platform obtains the Ethena whitelist, it can bypass the secondary market and directly redeem the underlying stablecoin with USDe, reducing impact and enhancing recovery.

• Boundary of supporting tools: During the liquidity tightness phase of USDe, Debt Swap can convert USDe denominated debts into USDT/USDC; however, due to the constraints of E-mode configuration, migration has thresholds and steps, requiring more sufficient margin.

Ethena's "Adaptive Base": Supporting Structure and Custody Isolation

The lending platform has a "brake", while the asset support side requires Ethena's "automatic transmission" to absorb the impact.

• In terms of support structure and funding rate status: when the funding rate declines or turns negative, Ethena reduces its hedging exposure and increases support for stablecoins; in mid-May 2024, the proportion of stablecoins reached ~76.3%, then fell back to around ~50%, which is still high compared to previous years, allowing for proactive pressure reduction during negative funding periods.

• Furthermore, from the perspective of buffer capacity: in extreme LST confiscation scenarios, the net impact on the overall support for USDe is estimated to be approximately 0.304%; a reserve of 60 million USD is sufficient to absorb such shocks, accounting for only about 27% of it, thus the substantive impact on anchoring and repayment is manageable.

• The custody and isolation of assets is a key link: Ethena's assets are not stored directly within the exchange, but are settled off-exchange and isolated through a third-party custodian. This means that even if the exchange itself encounters operational or repayment issues, these assets serving as collateral remain independent and protected in ownership. Under this isolation framework, efficient emergency processes can be achieved: for instance, if the exchange is interrupted, the custodian can invalidate open positions after missing a certain number of settlement rounds, releasing collateral and helping Ethena quickly migrate hedged positions to other exchanges, thereby significantly shortening the risk exposure window.

When the misalignment mainly comes from "implied yield re-pricing" rather than the impairment of USDe support, under the protection of oracle freezing and layered disposal, the risk of bad debts is controllable; the real focus should be on preventing tail events where the support end is impaired.

What You Should Pay Attention To: 6 Risk Signals

The following 6 signals are highly correlated with lending platforms, a certain DEX, and Ethena, and can be used as a daily dashboard for monitoring.

• USDe borrowing and utilization rate: Continuously track the total borrowing amount of USDe, the proportion of leveraged PT strategies, and the utilization rate curve. The utilization rate has been consistently above ~80%, and the system sensitivity has significantly increased from ~50% to ~80% during the reporting period.

• Lending platform exposure and stablecoin second-order effects: Focus on the proportion of USDe supported assets in total collateral of ( at approximately 43.5%), as well as the transmission effect on the utilization rates of core stablecoins such as USDT/USDC.

• Concentration and Re-mortgaging: Monitor the deposit proportion of top addresses; when the concentration of top addresses ( exceeds 50-60% as in the sum of the top two addresses ), be cautious of the liquidity shocks that their synchronized operations may trigger. Report period peak value >61% (.

• Proximity of implied yield range: Check if the implied yield of the target PT/YT pool is close to the AMM preset range boundaries; proximity to or exceeding the range means decreased matching efficiency and increased exit friction.

• PT Risk Oracle Status: Pay attention to the distance between the PT market price and the minimum price threshold of the lending platform risk oracle; approaching the threshold is a strong signal that the leverage chain needs to "decelerate in an orderly manner."

• Ethena support status: Regularly check the reserve composition announced by Ethena. The change in the proportion of stablecoins from ~76.3% to ~50% reflects its adaptation strategy to funding rates and system buffer capacity.

Furthermore, you can set trigger thresholds for each signal and plan response actions in advance ), for example: utilization ≥ 80% → lower the loop multiplier (.

From Observation to Boundaries: Risk and Liquidity Management

These signals ultimately serve risk control. We can solidify them into 4 clear "boundaries" and operate around the closed loop of "risk limit → trigger threshold → disposal action."

) Boundary 1: Loop Multiplier

Cyclical leverage amplifies sensitivity to price, interest rates, and liquidity while enhancing returns ( and stacking external incentives; the higher the multiple, the smaller the exit room.

Limit: Set the maximum cycle multiplier and minimum margin redundancy ) such as LTV/Health Factor lower limit (.

Trigger: Utilization Rate ≥ 80% / Stablecoin Borrowing Rates Rise Rapidly / Interval Proximity Increases.

Action: Reduce multiplier, add margin, pause new cycles; switch to "Hold until maturity" if necessary.

) Boundary 2: Deadline constraint ( PT )

PT cannot be redeemed before maturity, and "Hold to Maturity" should be regarded as a regular path rather than a temporary expedient.

Limit: Set a size limit for positions that rely on "selling before expiration."

Trigger: Implied yield exceeds range / Market depth plummets / Oracle bottom price approaches.

Action: Adjust the proportion of cash and margin, adjust the exit priority; set a "reduce only" freeze period if necessary.

Boundary 3: Oracle Status

When the price approaches the minimum price threshold or triggers a freeze, it means that the link enters an orderly deceleration deleveraging phase.

Limit: minimum price difference from the oracle base price ( buffer ) and the shortest observation window.

Trigger: Price difference ≤ preset threshold / Freeze signal triggered.

Action: Reduce positions in segments, increase liquidation warning, execute Debt Swap / leverage reduction SOP, and increase data polling frequency.

( Boundary 4: Tool Friction

Debt Swap, eMode migration, etc. are effective during tight periods, but there are frictions such as thresholds, waiting times, additional margins, and slippage.

Limit: Tool available quota/time window and maximum tolerable slippage and cost.

Trigger: Borrowing rate or waiting time exceeds threshold / Trading depth falls below lower limit.

Action: Reserve funds redundancy, switch alternative channel ) to gradually close positions/hold until expiration/whitelist redemption ###, and suspend strategy expansion.

Conclusion and Future Directions

In general, the arbitrage between Ethena and a certain DEX has connected the lending platform, a certain DEX, and Ethena into a transmission chain from "revenue magnetism" to "system elasticity." The circulation on the funding side has heightened sensitivity, the structural constraints on the market side have raised the exit threshold, and the protocol provides a buffer through their respective risk control designs.

In the field of DeFi, the advancement of analytical capabilities is reflected in how we view and use data. We are accustomed to using data analysis tools to review the "past", such as tracking the position changes of leading addresses or the trends in protocol utilization rates. This is important as it helps us identify system vulnerabilities like high leverage and concentration. However, its limitations are also clear: historical data presents a "static snapshot" of risk but cannot tell us how these static risks will evolve into dynamic system collapses when market storms arrive.

To clearly see these hidden tail risks and deduce their transmission path, it is necessary to introduce forward-looking "stress tests".