After the stock market crash of October 10 which led to massive losses for bitcoin and other cryptocurrencies, nearly $1 billion in DeFi positions involving USDe (sUSDe) staked by Ethena are now at risk, according to a new report from Sentora Research.
Since the crash, Sentora notes that rates in DeFi markets have fallen significantly, reducing returns on leveraged strategies such as sUSDe loop trading. sUSDE is Ethena’s Staked USDe, a synthetic dollar stablecoin that generates yield by staking the underlying USDe token.
The loop
The popular strategy involves traders depositing sUSDe as collateral on DeFi platforms like Aave and Pendle to borrow stablecoins such as Tether. and USD coin (USDC). They then use the borrowed USDT to purchase more sUSDe, which is redeposited as collateral to borrow additional USDT and purchase even more sUSDe.
This cycle is repeated to amplify the yield generated by positive carry – the difference between sUSDe staking rewards and borrowing costs.
Negative carriage
However, since the October 10 crash, the yield spread has turned negative, reducing the appeal of loop trading.
“Following the October 10 flash crash, funding rates in DeFi markets have declined significantly, reducing returns on core trading strategies. On Aave v3 Core, USDT/USDC borrowing rates remain stable. ~2.0% / ~1.5% above the yield of sUSDe, making carry negative for users borrowing stablecoins to leverage sUSDe,” Sentora Research said in an email to CoinDesk.
The company explained that as the spread remains below zero, loop positions that borrow stablecoins to purchase sUSDe begin to incur losses. If this persists, it could trigger the unwinding of approximately $1 billion in positions already exposed to negative carry on Aave v3 Core.
This negative carry may force the sale of collateral or deleveraging, thereby weakening liquidity in the very markets providing leverage and potentially causing a cascading market effect.
And then?
Sentora said traders should pay attention to the gap between the annual percentage yield (APY) of Aave borrowing and the sUSDe yield, especially when it remains below zero.
Utilization rates in USDT and USDC lending pools, where increases in borrowing costs may accelerate strains. Sentora wrote that there are a growing number of loop positions on the verge of liquidation, particularly those within 5% of a forced close.
Going forward, traders should closely monitor rising utilization rates in USDT and USDC lending pools, which could increase borrowing costs and increase stress amid a negative spread between Aave’s annual percentage yield of borrowing and sUSDe yield.
