Following the market crash on October 10, which resulted in significant losses for bitcoin and various other cryptocurrencies, close to $1 billion in DeFi positions involving Ethena’s staked USDe (sUSDe) are currently at risk, as noted in a recent report by Sentora Research.
In the wake of the crash, Sentora highlights that interest rates in the DeFi markets have fallen sharply, resulting in reduced yields for leverage strategies like the sUSDe loop trade. sUSDe is Ethena’s Staked USDe, a synthetic dollar stablecoin that earns yield through staking the underlying USDe token.
The Loop
This well-known strategy involves traders using sUSDe as collateral on DeFi platforms such as Aave and Pendle to borrow stablecoins like Tether and USD Coin (USDC). They subsequently employ the borrowed USDT to acquire more sUSDe, which is then redeposited as collateral to borrow further USDT and purchase even more sUSDe.
This process is repeated to enhance the yield obtained from the positive carry—the gap between the sUSDe staking rewards and the borrowing costs.
Negative Carry
Nevertheless, since the crash on October 10, the yield differential has changed to negative, diminishing the attractiveness of the loop trade.
“In the aftermath of the flash crash on October 10, funding rates across DeFi markets have significantly decreased, leading to lower yields for basis-trade strategies. On Aave v3 Core, USDT/USDC borrowing rates are currently ~2.0% / ~1.5% higher than the sUSDe yield, making the carry negative for users who borrow stablecoins to leverage sUSDe,” Sentora Research stated in an email to CoinDesk.
The firm clarified that, as the spread continues to be negative, looped positions that borrow stablecoins to acquire sUSDe begin to incur losses. If this trend continues, it could precipitate the unwinding of about $1 billion in positions already exposed to negative carry on Aave v3 Core.
This negative carry situation may necessitate collateral sales or deleveraging actions, compromising liquidity in the very platforms providing leverage and potentially triggering a cascading market effect.
What Next?
Sentora advised that traders should be vigilant about the spread between Aave’s borrowing annual percentage yield (APY) and the sUSDe yield, especially when it remains negative.
Utilization rates in USDT and USDC lending pools can increase stress levels due to spikes in borrowing costs. Sentora indicated that there is a growing number of looped positions approaching liquidation, particularly those that are within 5% of forced closure.
As we move forward, traders must closely monitor the uptick in utilization rates within USDT and USDC lending pools, as this could raise borrowing costs and heighten stress amidst the negative spread between Aave’s borrowing annual percentage yield and the sUSDe yield.
