Aave, a leading decentralized finance (DeFi) platform, has teamed up with Ethena Labs to introduce a new feature called Liquid Leverage. This innovation aims to boost capital efficiency and provide users with attractive rewards. Let's break down what this means and how it works.

What is Liquid Leverage?

Liquid Leverage is a new integration that allows users to deposit a combination of sUSDe (staked USDe) and USDe into Aave's money markets. By supplying 50% sUSDe and 50% USDe, users can earn promotional rewards on their USDe deposits, currently offering an impressive ~12% APY. This is in addition to the standard USDe lending rate and the native APY of sUSDe.

How to Qualify for Rewards

To be eligible for these rewards, users must follow specific criteria:

• Supply a 50/50 split of sUSDe and USDe, with a cap on the USDe eligible for rewards.
• Borrow stablecoins such as USDC, USDT, or USDS, but not USDe.
• Perform at least one "loop," which involves borrowing stablecoins against the supplied sUSDe and USDe and then resupplying those assets back into Aave.

Aave recommends using its sUSDe e-mode, which now accepts both USDe and sUSDe as collateral. This mode enhances capital efficiency by allowing higher leverage for users earning Liquid Leverage rewards.

The Economics of Liquid Leverage

The strategy behind Liquid Leverage is designed to offer significant returns. At current interest and borrow rates, users can achieve a ~50% APR with approximately 5x leverage. Here's a breakdown of the economics:

• Deposit Asset: sUSDe + USDe
• Initial Deposit: $10,000
• USDe Promotional Rate: ~12%
• USDe Lending Rate: ~3.4%
• Borrow Asset: USDC
• Leverage Ratio: ~5x
• Post-Loop APR: ~49.89%
• Ethena Rewards Rate: ~25.25%

Addressing Past Challenges

One of the key issues that sUSDe users faced was the 7-day unstaking cooldown. Liquid Leverage addresses this by ensuring that at least half of a user's position remains in sUSDe, while the USDe component provides immediate liquidity. This allows for more effective risk management and flexibility.

Reward Distribution

Rewards for eligible Liquid Leverage users will be claimable via Merkl. The first claim will be available approximately one week after the launch, accounting for interactions up to that point. Subsequent claims can be made every 8-12 hours. Note that after one month, the promotional rate for USDe will decrease to align with Aave's native USDe lending rate, ensuring the total reward approximates the sUSDe APY.

Future Adjustments

As part of this integration, Ethena Labs will adjust the USDe Ethena rewards rate on most money market integrations to 5x prospectively. Additionally, users who loop sUSDe and USDe/eUSDe PTs while maintaining the underlying YT position will see their points earned on YTs reduced to a 5x rate going forward.

Conclusion

The introduction of Liquid Leverage by Aave and Ethena Labs marks a significant step forward in enhancing the DeFi experience. By combining the strengths of both platforms, users can now enjoy higher yields and improved capital efficiency. As always, users are advised to exercise caution when using leverage, given the inherent risks involved.

For more details, you can read the full announcement from Ethena Labs.

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