After the October 10 market crash that caused massive losses in bitcoin and other cryptocurrencies, nearly $1 billion in DeFi positions involving Ethena’s staked USDe (sUSDe) 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 from leveraged strategies like 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 like Tether. and USD currency (USDC). They then use the borrowed USDT to purchase more sUSDe, which is re-deposited as collateral to borrow additional USDT and purchase even more sUSDe.
This cycle repeats to amplify the return generated by positive carry: the difference between sUSDe staking rewards and borrowing costs.
Negative carry
However, since the October 10 crisis, the yield spread has turned negative, which has affected the attractiveness of circular trading.
“Following the flash crash on October 10, funding rates in DeFi markets have fallen significantly, cutting into the returns of base trading strategies. In Aave v3 Core, USDT/USDC lending rates remain unchanged ~2.0% / ~1.5% above the sUSDe yield, making the carry negative for users borrowing stablecoins to take advantage of sUSDe,” Sentora Research said in an email to CoinDesk.
The firm 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 liquidation of approximately $1 billion in positions already exposed to negative carry in Aave v3 Core.
This negative carry can force collateral sales or deleveraging, weakening liquidity in the same places that provide leverage and potentially causing a cascade effect in the market.
What’s next?
Sentora said traders should keep an eye on the spread between the Aave loan annual percentage yield (APY) and the sUSDe yield, especially when it remains below zero.
Utilization rates in USDT and USDC lending pools, where increases in borrowing costs can accelerate stress. Sentora wrote that there are a growing number of loop positions that are about to be liquidated, especially those that are within 5% of the forced closure.
Going forward, traders should watch for rising utilization rates in the USDT and USDC loan pools, which could raise borrowing costs and increase stress amid the negative spread between Aave’s annual percentage yield on the loan and the sUSDe yield.
