Ethena, Pendle and Aave: The Operation of the Arbitrage Chain and Risk Boundaries

As the popularity of Ethena rises, a crowded arbitrage chain is operating at high speed: collateralizing USDe to lend stablecoins on lending platforms, purchasing YT/PT on a certain DEX for profits, and then cycling some positions back by supplying PT to the lending platform to leverage, thereby aiming for Ethena points and other external incentives. The results are obvious; the collateral exposure of PT on the lending platform has sharply increased, and the utilization rate of mainstream stablecoins has been pushed to over 80%, making the entire system more sensitive to any fluctuations.

This article will deeply analyze the operation of this capital chain, the exit mechanism, and the risk control design of the related platforms. However, understanding the mechanism is just the first step; true experts advance by upgrading their analytical frameworks. We often habitually use data analysis tools to review the "past," while what is often missing is how to clearly see the various possibilities of the "future" and truly achieve --- first delineating the risk boundaries, then discussing the returns.

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

Let's first take a look at this arbitrage path: deposit USDe in the lending platform, borrow stablecoins, and then buy YT/PT in a certain DEX. YT corresponds to future earnings, while PT can always be bought at a discount because it has been stripped of earnings, held until maturity and converted back at a 1:1 ratio, earning the price difference. Of course, the real "big gain" comes from external incentives like Ethena points.

The PT obtained in this way can serve as collateral on lending platforms, making it a perfect starting point for a cycle loan: "Collateralize PT → Borrow stablecoins → Buy PT/YT → Re-collateralize". The purpose of doing this is to use leverage to seek high elastic returns like Ethena points on relatively certain profits.

How has this funding chain rewritten the lending market?

• USDe supported assets have gradually become the mainstream collateral on lending platforms, with its share once rising to about 43.5%, directly boosting the utilization rates of mainstream stablecoins USDT/USDC.

• The scale of USDe loans is approximately 370 million USD, of which about 220 million (≈60%) serves leveraged PT strategies, with the utilization rate soaring from around 50% to about 80%.

• The supply of USDe on the lending platform is highly concentrated, with the top two entities accounting for over 61%. This concentration, combined with circular leverage, amplifies returns while also intensifying the system's vulnerability.

The rule here is simple: the more attractive the returns, the more crowded the cycle, and the entire system becomes more sensitive. Any slight fluctuation in price, interest rate, or liquidity will be ruthlessly amplified by this leverage chain.

Why "Withdrawal" Becomes Difficult: The Structural Constraints of a Certain DEX

So, how to exit? When reducing leverage or closing positions in the aforementioned loop, there are mainly two ways:

• Market Exit: Sell PT / YT before maturity, exchange for stablecoin to repay and unlock.

• Hold until maturity to exit: Hold PT until maturity, redeem the underlying asset at a 1:1 ratio for repayment. This route is slower, but more stable during market fluctuations.

Why will it become difficult to exit? The difficulties mainly come from two structural constraints of a certain DEX:

• Fixed term: PT cannot be directly redeemed before maturity, only sold on the secondary market. If you want to "quickly reduce leverage," you have to look at the secondary market's performance and endure the dual test of depth and price volatility.

• The "implied yield range" of AMM: An AMM of a certain DEX operates most efficiently within the preset implied yield range. Once market sentiment changes and causes yield pricing to exceed this range, the AMM may "deactivate," and trades can only occur on thinner order books, 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 you will find it difficult to sell PT in the short term, and can only wait for the market to recover or hold it until maturity.

Therefore, exiting is usually not difficult when the market is stable, but when the market starts to reprice and liquidity becomes crowded, exiting becomes a major friction point that requires preparation in advance.

The "Brakes and Buffers" of Lending Platforms: Making De-leveraging Orderly and Controllable

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

• Freezing and Floor Price Mechanism: If the PT price touches and maintains the oracle floor price, the related market can freeze until expiration; after expiration, PT naturally decomposes into the underlying asset, and then securely settles/unlocks to avoid liquidity misalignment overflow caused by fixed-term structures.

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

• Whitelist Redemption: If the lending agreement obtains the Ethena whitelist, it can bypass the secondary market and directly redeem the underlying stablecoin using USDe, reducing impact and improving recovery.

• Boundary of supporting tools: When USDe liquidity is temporarily tight, Debt Swap can convert USDe denominated debt into USDT/USDC; however, it is subject to E-mode configuration constraints, with thresholds and steps for migration, requiring more sufficient collateral.

Ethena's "Adaptive Base": Supports Structural and Custody Isolation

The lending agreement has a "brake", while the asset support side needs Ethena's "automatic transmission" to absorb shocks.

• On the status of supported structure and funding rates: When the funding rate decreases or turns negative, Ethena reduces hedge exposure and increases stablecoin support; in mid-May 2024, the proportion of stablecoins once reached ~76.3%, then fell back to the ~50% range, which is still higher than previous years, allowing for proactive pressure relief during negative funding rate periods.

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

• The custody and segregation of assets is a key link: Ethena's assets are not directly stored in 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 used as collateral remain independent and protected in terms of ownership. Under this segregation framework, efficient emergency processes can be implemented: for example, if the exchange is interrupted, the custodian can nullify unfulfilled positions after missing a certain settlement cycle, releasing the collateral and helping Ethena quickly transfer hedge positions to other exchanges, thereby significantly shortening the risk exposure window.

When the misalignment mainly comes from "implied yield revaluation" rather than damage to USDe support, under the protection of oracle freezing and layered disposal, the risk of bad debts is controllable; what truly needs to be prioritized is tail events caused by damage to the support side.

What You Should Pay Attention To: 6 Risk Signals

The theory is over, what specific indicators should we look at? The following 6 signals summarized 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%, significantly increasing the system's sensitivity (reporting period rose from ~50% to ~80%).

• The exposure of lending platforms and the second-order effect of stablecoins: pay attention to the proportion of USDe supported assets in the total collateral of lending platforms (e.g., ~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 (e.g., the sum of the top two) exceeds 50-60%, be wary of the liquidity shock that may be triggered by their synchronized operations (peak value during the reporting period >61%).

• Proximity of the implied yield range: Check whether the implied yield of the target PT/YT pool is close to the AMM preset range boundaries; proximity or exceeding the range indicates a decrease in matching efficiency and an increase in 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 (e.g., from ~76.3% back to ~50%) reflects its adaptive strategy to funding rates and system buffering capability.

Furthermore, you can set trigger thresholds for each signal and plan your response actions in advance (e.g.: utilization ≥ 80% → reduce 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 "risk limit → trigger threshold → disposal action" closed loop.

Boundary 1: Circulation Multiple

Cyclical leverage enhances returns (when combined with external incentives) while amplifying sensitivity to price, interest rates, and liquidity; the higher the multiple, the smaller the margin for exit.

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

Trigger: Utilization rate ≥ 80% / Stablecoin borrowing interest rates rising rapidly / Interval proximity increasing.

Action: Reduce multiplier, add margin, suspend 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 cap on positions that rely on "selling before expiration."

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

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

Boundary 3: Oracle Status

Price approaching the minimum price threshold or triggering a freeze means that the link enters the orderly deceleration and deleveraging phase.

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

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

Action: Gradually reduce positions, increase liquidation warnings, execute Debt Swap / De-leverage 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, additional margin, and slippage.

Limit: Available amount of the tool/time window and maximum acceptable slippage and cost.

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

Action: Reserve funds redundantly, switch to alternative channels (gradually close positions/hold until expiration/whitelist redemption), and pause strategy expansion.

Conclusion and Future Directions

Overall, the arbitrage between Ethena and a certain DEX connects the lending platform, a certain DEX, and Ethena into a transmission chain from "yield magnetism" to "system elasticity." The cyclical push on the funding side has heightened sensitivity, while 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 DeFi space, 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 changes in positions of leading addresses or the trends in protocol utilization. This is important as it helps us identify system vulnerabilities like high leverage and concentration. However, its limitations are also evident: 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 arise.

To clearly see these hidden tail risks and deduce their transmission paths, one must...