Behind the Surge in Ethena's USDe Stablecoin Supply: Analysis of Pendle-Aave PT-USDe Circular Strategy

Recently, the supply of Ethena's decentralized stablecoin USDe has significantly increased, with an addition of $3.7 billion in about 20 days. This growth is mainly driven by the Pendle-Aave PT-USDe looping strategy. Currently, Pendle has locked up approximately $4.3 billion USDe, accounting for 60% of the total supply, while the amount deposited in Aave is around $3 billion. This article will delve into the PT looping mechanism, growth drivers, and potential risks.

The Core Mechanism and Yield Volatility of USDe

USDe is an innovative decentralized stablecoin, whose price anchoring mechanism differs from traditional fiat or crypto asset collateralization methods. It achieves price stability by performing 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 sources: staking rewards from spot ETH and funding rates in the futures market.

However, the returns from this strategy are highly volatile, primarily influenced by the funding rate. The funding rate is determined by the difference between the perpetual contract price and the ETH spot price. When the market is bullish, the perpetual contract price may be higher than the spot price, resulting in a positive funding rate; whereas in a bearish market, the situation may be reversed.

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

The Fixed Income Conversion and Limitations of Pendle

Pendle, as an automated market maker (AMM) 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.
2. Yield Token (YT): Represents all future earnings generated by the underlying asset before the maturity date.

This structure provides USDe holders with the opportunity to lock in a fixed yield while hedging against yield fluctuations. Currently, the annualized yield of PT-USDe is approximately 10.4%. In addition, 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 value locked (TVL) is $6.6 billion, of which approximately $4.01 billion (about 60%) comes from Ethena's USDe market. Although Pendle has addressed the yield volatility issue of USDe, capital efficiency remains constrained.

Aave Architecture Adjustment: Clearing Obstacles for USDe Circulation Strategy

Aave has recently made two key architectural adjustments that pave the way for the rapid development of the USDe circulation strategy:

1. Directly anchor the price of USDe to the USDT exchange rate, almost eliminating the risk of large-scale liquidation caused by price decoupling.
2. Start directly accepting Pendle's PT-USDe as collateral, while addressing the issues of insufficient capital efficiency and yield volatility.

These changes enable users to leverage PT tokens to establish fixed-rate leveraged positions, significantly enhancing the feasibility and stability of cyclical strategies.

High-Leverage PT Circular Arbitrage Strategy

To improve capital efficiency, market participants have begun to adopt leveraged looping strategies, which is a common arbitrage trading method. The operational process usually includes:

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

As long as the annualized yield of USDe is higher than the borrowing cost of USDC, the transaction remains highly profitable. However, once the yield plummets 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 collateral pricing, anchored to the price of USDT. This pricing model allows the price of PT tokens to gradually approach par value over time, similar to the characteristics of zero-coupon bonds.

Historical data shows that the appreciation of the PT token price relative to the lending cost of USDC has created a significant arbitrage opportunity. Since September last year, for every 1 USD deposited, approximately 0.374 USD in returns can be obtained, with an annualized yield of about 40%.

Risks, Linkage and Future Outlook

Although historical performance shows that Pendle's yield significantly exceeds borrowing costs over the long term, this strategy is not without risks. Aave's PT oracle mechanism has a floor price and a circuit breaker, which will immediately reduce the LTV and freeze the market once triggered, in order to prevent the accumulation of bad debts.

As Aave underwrites USDe and its derivatives at par with USDT, this makes the risks of Aave, Pendle, and Ethena more closely linked. Currently, Aave's USDC supply is increasingly supported by PT-USDe collateral, forming a structure similar to senior debt.

Whether this strategy can continue to expand in the future depends on whether Aave is willing to continuously increase the collateral cap for PT-USDe. From an ecological perspective, this circular strategy brings benefits to multiple parties, including Pendle, Aave, and Ethena.

Overall, Aave enables efficient operation and high profitability of cyclical strategies through innovative underwriting support. However, this high leverage structure also introduces systemic risks, as any party encountering issues could trigger a chain reaction throughout the entire ecosystem.