Ethena stablecoin USD supply surges, PT cycle strategy becomes the main driving force

Recently, the supply of the decentralized stablecoin USDe has seen significant growth, increasing by $3.7 billion in about 20 days. This increase is primarily attributed to the application of the Pendle-Aave PT-USDe cycling strategy. Currently, Pendle has locked approximately $4.3 billion USDe, accounting for 60% of the total, while the funds deposited on the Aave platform have reached around $3 billion. This article will delve into the PT cycling mechanism, growth drivers, and potential risks.

The Core Mechanism and Yield Characteristics of USDe

USDe is an innovative decentralized stablecoin, and its price stability mechanism is different from traditional fiat currency or crypto asset collateral methods. USDe maintains price stability by conducting delta-neutral hedging in the perpetual contract market. Specifically, the protocol holds a long position in spot ETH while shorting an equivalent amount of ETH perpetual contracts to hedge against ETH price volatility risk. This mechanism allows USDe to maintain price stability algorithmically and obtain revenue from two channels: staking rewards from spot ETH and funding rates from the futures market.

However, the returns of this strategy are highly volatile, primarily affected by the funding rate. The funding rate depends on the difference between the perpetual contract price and the spot price of ETH. When market sentiment is optimistic, the perpetual contract price is often higher than the spot price, resulting in a positive funding rate; conversely, when the market is bearish, a negative funding rate may occur.

Data shows that from 2025 to now, the annualized return of USDe is approximately 9.4%, but the standard deviation is as high as 4.4 percentage points. This dramatic volatility in returns has spurred the market demand for more stable and predictable return products.

Pendle’s Fixed Income Transformation Mechanism

Pendle, as an automated market maker protocol, can split yield-bearing assets into two types of tokens:

1. Principal Token (PT): Represents the principal that can be redeemed on a specific future date, traded at a discount, similar to a zero-coupon bond.
2. Yield Token (YT): Represents all future earnings generated by the underlying asset before the maturity date.

Taking PT-USDe, which expires on September 16, 2025, as an example, PT tokens typically trade at a price below the maturity par value (1 USDe). The difference between the current price of PT and the maturity par value (adjusted for remaining time to maturity) reflects the implied annualized yield.

This structure provides USDe holders with the opportunity to lock in a fixed APY while hedging against yield fluctuations. During periods of high funding rates, the APY can exceed 20%; currently, the yield is around 10.4%. Additionally, PT tokens can earn up to 25 times SAT bonuses from Pendle.

Pendle and Ethena have formed a highly complementary relationship. Currently, Pendle’s total TVL is $6.6 billion, of which approximately $4.01 billion (about 60%) comes from Ethena’s USDe market. Pendle addresses the yield volatility issue of USDe, but capital efficiency still needs improvement.

Aave’s architecture adjustment supports USDe circular strategy

Recent important architectural adjustments by Aave have paved the way for the rapid development of the USDe circulation strategy:

1. Aave DAO has decided to directly peg the price of USDe to the USDT exchange rate, which almost eliminates the main risk of large-scale liquidations caused by previous price decoupling.
2. Aave has started to directly accept Pendle’s PT-USDe as collateral, while addressing two major issues: insufficient capital efficiency and yield volatility.

These adjustments allow users to leverage PT tokens to establish fixed-rate leveraged positions, significantly enhancing the feasibility and stability of circular strategies.

High Leverage PT Cycle Arbitrage Strategy

To improve capital efficiency, market participants have begun to adopt leveraged loop strategies, which are a common form of arbitrage trading. The operational process typically includes:

1. Deposit sUSDe
2. Borrow USDC at a loan-to-value ratio (LTV) of 93%.
3. Convert the borrowed USDC back to sUSDe
4. Repeat the above steps to achieve approximately 10 times effective leverage.

As long as the annualized yield of USDe is higher than the borrowing cost of USDC, the transaction can maintain high profits. However, once the yield suddenly drops or the borrowing rate skyrockets, profits will be quickly eroded.

PT Collateral Pricing and Arbitrage Opportunities

Aave adopts a linear discounting method based on the implied APY of PT for pricing collateral, and it is anchored in USDT pricing. Similar to traditional zero-coupon bonds, Pendle’s PT tokens will gradually approach par value as the maturity date approaches.

Historical data shows that the appreciation of PT token prices relative to the borrowing costs of USDC has created a significant arbitrage opportunity. Since September last year, each deposit of 1 USD can yield approximately 0.374 USD in returns, with an annualized yield of about 40%.

Risks and Future Outlook

Although Pendle’s returns are significantly higher than borrowing costs in the long term, this cyclical strategy is not entirely risk-free. Aave’s PT oracle mechanism has a floor price and a circuit breaker; once triggered, the LTV will immediately drop to 0 and freeze the market to prevent bad debt accumulation.

Due to Aave underwritting USDe and its derivatives at parity with USDT, the risks of Aave, Pendle, and Ethena are becoming more closely interconnected. Currently, Aave’s USDC supply is increasingly supported by PT-USDe collateral, structurally similar to senior debt.

The future expansion of this strategy depends on whether Aave is willing to continuously raise the collateral cap for PT-USDe. From an ecological perspective, this cyclical strategy brings benefits to multiple participants, including Pendle, Aave, and Ethena.

Overall, Aave enables the efficient operation and high profitability of the PT-USDe circular strategy through innovative underwriting support methods. However, this high leverage structure also brings systemic risks, and any issues on one side could have a ripple effect throughout the entire ecosystem.