Ethena's Liquid Leverage is now live on Aave, marking a significant development in the decentralized finance (DeFi) space. This integration allows users to deposit a 50/50 split of sUSDe and USDe, unlocking the potential to earn sUSDe yields on the entire position. Let's dive into what this means and how it works.

Understanding Ethena's Liquid Leverage on Aave

Ethena's Liquid Leverage strategy is designed to enhance capital efficiency and yield generation for users. By depositing 50% sUSDe and 50% USDe into Aave, users can leverage the promotional rewards for USDe, currently offering an impressive ~12% APY, in addition to the standard USDe lending rate and sUSDe's native APY. This setup not only boosts potential returns but also addresses previous challenges faced by sUSDe users, such as the 7-day unstaking cooldown.

How to Qualify for Rewards

To be eligible for the Liquid Leverage rewards, users must meet specific criteria:

• Supply Ratio: Deposit sUSDe and USDe in a 50/50 ratio, with a cap on USDe eligible for rewards. Any additional USDe supplied beyond this cap will not be rewarded.
• Borrowing Requirements: Borrow USDC, USDT, or USDS, but not USDe. This ensures that the leverage is applied effectively.
• Looping: Perform at least one loop by borrowing stablecoins against the supplied sUSDe and USDe and then resupplying those assets back to Aave.

Aave's sUSDe e-mode, which now accepts USDe and sUSDe as collateral, further enhances capital efficiency, allowing users to achieve higher leverage while earning rewards.

The Economics of Liquid Leverage

The strategy promises substantial returns, with current interest and borrow rates potentially rewarding users with a ~50% APR at a ~5x leverage. Here's a breakdown of the economics:

• Deposit Asset: sUSDe + USDe
• Initial Deposit: $10,000
• Leverage Ratio: 5.00x
• Total USD Supplied: $50,000
• USDe Promotional Rate: ~12%
• sUSDe + USDe Rewards: ~5.97%
• Interest Expense on USDT Borrow: -5.86%
• Net Income: $1,098
• Post-Loop APR: 49.89%
• Ethena Rewards Rate: 25.25%

These figures illustrate the potential for significant yield enhancement through Liquid Leverage.

Claiming Rewards and Future Adjustments

Rewards for eligible Liquid Leverage users will be claimable via Merkl, with the first claim available in approximately one week, backdated to the launch date. Subsequent claims can be made every 8-12 hours. It's important to note that after one month, the USDe promotional rate will decrease to align with Aave's native USDe lending rate, ensuring that the total yield approximates the sUSDe APY.

Additionally, Ethena will adjust the USDe rewards rate on most money market integrations to 5x prospectively, and users looping sUSDe and USDe/eUSDe PTs while maintaining the underlying YT position will see their points earned on YTs reduced to a 5x rate.

Implications for the DeFi Ecosystem

This integration represents a step forward in addressing liquidity and risk management challenges within DeFi. By combining Ethena's innovative financial mechanisms with Aave's robust infrastructure, users gain access to a more flexible and efficient way to manage their positions. The ability to unwind positions quickly with USDe, while still benefiting from sUSDe yields, mitigates the risks associated with the 7-day unstaking cooldown.

For those interested in exploring this further, you can read the full announcement from Ethena Labs.

Conclusion

Ethena's Liquid Leverage on Aave is a game-changer for DeFi enthusiasts looking to maximize their yields while managing risk. With clear guidelines on how to qualify for rewards and a transparent breakdown of the economics, this integration offers a compelling opportunity for users. As always, caution is advised when leveraging, but for those willing to navigate the strategy, the potential rewards are significant.

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