Beware of Discount Rate Risks: Analysis of Leveraged Yield Strategies of a Certain Trading Platform, a Certain DEX, and Ethena's PT

Recently, a notable strategy has emerged in the DeFi space, which involves using Ethena's staking yield certificate sUSDe as a source of income in a certain DEX's fixed income certificate PT-sUSDe, and leveraging a certain lending protocol as a source of funds to engage in interest rate arbitrage and obtain leveraged returns. Although many DeFi experts are optimistic about this strategy, the author believes that the market may overlook the potential risks involved. This article aims to share some insights to help readers gain a more comprehensive understanding of this strategy.

Overall, this PT leveraged mining strategy is not a risk-free arbitrage. The discount rate risk of PT assets still exists, and participants need to objectively assess the risks and reasonably control the leverage to avoid liquidation.

Analysis of the Mechanism of PT Leverage Profit

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

This strategy integrates the functions of three protocols: using Ethena's sUSDe to create a PT-sUSDe locked interest rate on a certain DEX, then depositing the PT-sUSDe into a certain lending protocol as collateral, borrowing USDe or other stablecoins, and repeatedly cycling through this process to increase leverage. The returns are mainly determined by the underlying yield of PT-sUSDe, the leverage multiple, and the lending spread.

Current Market Situation of Strategies and User Participation

After a certain lending protocol started supporting PT assets as collateral, the strategy quickly became popular. Currently, this protocol supports two types of PT assets: PTsUSDe July and PTeUSDe May, with a total supply of approximately 1 billion USD.

Theoretically, through circular loans, the leverage ratio can be increased to about 9 times. Taking the sUSDe strategy as an example, the theoretical return at maximum leverage can reach 60.79%, excluding Gas fees and other costs, and does not include Ethena points rewards.

Analyzing the PT-sUSDe liquidity pool data on a certain lending protocol shows that 78 investors provided a total supply of $450 million, with a significant proportion coming from large holders, who generally adopted higher leverage ratios. For example, the leverage ratios of the top four addresses are 9x, 6.6x, 6.5x, and 8.35x, with principal amounts ranging from $3.29 million to $10 million.

The risk of discount rate should not be ignored

Although many analyses emphasize the low-risk characteristics of this strategy, even calling it a risk-free arbitrage, the reality is not so. The leveraged mining strategy mainly faces two types of risks: exchange rate risk and interest rate risk.

Although USDe has a lower exchange rate risk as a mature stablecoin, the uniqueness of PT assets introduces additional risk factors. The price of PT assets will fluctuate with market trading during their existence, although the long-term trend is gradually approaching 1.

A certain lending protocol has adopted an off-chain pricing scheme for PT assets, attempting to strike a balance between reflecting structural changes in interest rates and avoiding short-term market manipulation. This means that when there are structural adjustments in the interest rates of PT assets or when the market has a consistent expectation of interest rate changes, the Oracle price will fluctuate accordingly, thereby introducing discount rate risk into the strategy.

It is worth noting that the Oracle mechanism of a certain lending protocol has the following characteristics:

1. As the expiration date approaches, the frequency of price updates decreases, and the discount rate risk correspondingly diminishes.

2. When the deviation between the market interest rate and the Oracle interest rate exceeds 1% and lasts longer than the set threshold, a price update will be triggered.

Therefore, strategy participants should closely monitor interest rate changes and adjust leverage in a timely manner to reduce liquidation risks. Overall, while this strategy has the potential to yield considerable returns, participants need to be fully aware of the associated risks and operate with caution.