Original title: "Beware of Discount Rate Risk: The Mechanism and Risk of AAVE, Pendle, Ethena's PT Leveraged Income Flywheel"

Original author: @Web3_Mario

Abstract: Recently, the work has been a little busy, so the update has been delayed for a period of time, and now the frequency of weekly updates is resumed, and I would like to thank you for your support. This week, we found that there is an interesting strategy in the DeFi space that has received a lot of attention and discussion, that is, using Ethena's staking yield certificate sUSDe and PT-sUSDe in Pendle as the source of income, and using the AAVE lending protocol as the source of funds to carry out interest rate arbitrage and obtain leveraged income. Some DeFi Kols on the X platform have made more optimistic comments about this strategy, but I think the current market seems to ignore some of the risks behind this strategy. Therefore, I have some experience to share with you. In general, AAVE+Pendle+Ethena's PT leveraged mining strategy is not a risk-free arbitrage strategy, in which the discount rate risk of PT assets still exists, so participating users need to objectively evaluate, control the leverage ratio, and avoid liquidation.

Friends who are familiar with DeFi should know that DeFi, as a decentralized financial service, compared with TradFi, the core advantage is the so-called "interoperability" advantage brought by the use of smart contracts to carry core business capabilities, and most DeFi proficient, or DeFi Degen's work typically consists of three things:

· Identify arbitrage opportunities between DeFi protocols;

· Finding sources of leveraged funds;

· Explore high-interest rate and low-risk-return scenarios;

The PT leveraged income strategy reflects these three characteristics more comprehensively. The strategy involves three DeFi protocols, Ethena, Pendle, and AAVE. All three of them are popular projects in the current DeFi track, and they are just a brief introduction here. First of all, Ethena is a yield-based stablecoin protocol that captures short interest rates in the perpetual contract market on centralized exchanges with low risk through Delta Neutral's hedging strategy. In a bull market, the strategy has a higher yield due to the extremely strong demand for long positions by retail investors and their willingness to bear higher fee costs, with sUSDe being its income certificate. Pendle is a fixed-rate protocol that decomposes the floating yield certificate token into Principal Token (PT) and income certificate (YT) similar to zero-coupon bonds by synthesizing assets. AAVE, on the other hand, is a decentralized lending protocol that allows users to use specified cryptocurrencies as collateral and lend other cryptocurrencies from AAVE to increase leverage, hedge, or short.

This strategy is the integration of the three protocols, that is, using Ethena's staking income certificate sUSDe and the fixed income certificate PT-sUSDe in Pendle as the source of income, and using the AAVE lending protocol as the source of funds to carry out interest rate arbitrage and obtain leveraged income. The specific process is as follows, first, users can obtain sUSDe at Ethena and fully convert it to PT-sUSDe through the Pendle protocol to lock in the interest rate, and then deposit PT-sUSDe into AAVE as collateral, and lend USDe or other stablecoins through revolving loans, repeating the above strategy to increase capital leverage. The calculation of the return is mainly determined by three factors, the base yield of PT-sUSDe, the leverage multiplier, and the spread in AAVE.