How is decentralized funding (Defi) work? In today’s crypto for advisers newsletter, Elisabeth Phizackerley and Ilan Solot and from Marex Solutions, co-author of this piece about the mechanics of a defi-transaction using ethena, commute and aave, and how they all work together to create investment outcomes.
Then DJ Windle breaks down the concepts and answers questions about these investments in “Ask an expert.”
Thanks to our sponsor for this week’s newsletter, Grayscale. For financial advisers near Minneapolis, Grayscale hosts an exclusive event, Crypto Connect, Thursday 18 September. Learn more.
– Sarah Morton
DEFI PUCE
In traditional funding, advisors are used for products such as bond funds, money market instruments or structured notes that generate dividends by recycling capital more effectively. In decentralized funding (Defi)There is a similar idea – but driven exclusively by smart contracts investigating how financial markets can run on blockchain rails. There has been no shortage of defi experiments in the last six years since the sector started; However, few have worked as well as the interaction between Ethena, Pendle and Aave. Together, these three protocols have built a self -reinforcing cycle that channels more than $ 4 billion in composed assets. As the space develops, the interconnections are likely to be further expanded further by integrating elements of Hyperliquid and its new LAG-1, Hyperevm. First some definitions:
- Ethena: As a money market fund that generates dividends from futures.
- PENDERLY: As a bond desk that divides, giving to “fixed” vs. “floating” parts.
- AAVE: As a bank offering loans against crypto-native security.
- Hyperliquid: Like any crypto exchange to futures and spot trading, but fully on the chain.
The original USDE PT -LOOP works roughly like this: It begins with ethena issuing the USDE, a synthetic dollar supported by a combination of stableecoins and crypto. Ethena uses deposits to implement Delta-neutral strategies on future contracts to generate dividends paid for stakes of USDE. Staked usde earns about 9% at the end of August.
Pendle then takes usde and breaks down it into two parts: Principal tokens (Pts) and dividend mower (YTS). YTS represents the variable flow of yield (and any points accrued) From the underlying asset – usde in this case. While PTS represents the underlying value of usde sold by commute to a discount (like a t-bill) Then one-to-one is redeemed by maturity.
Then Aave Løkken closes by allowing investors to borrow against their PT deposits. Since PTs have a predictable redemption structure, they work well as security. So depositors often borrow USDC (for example)And recycle it back to Ethena to mint new usde, which flows back into pendants and amplifies the loop.
In short, ethena generates dividends, commuting packs it, and Aave takes advantage of it. This structure now emerges for the majority of ethhena’s deposits on Aave and most of Pendles total value locked (Tvl)Make it one of the most influential yield engines on-chain.
This flywheel not only worked because the yield is attractive, but because the protocols share a common foundation. All three are EVM compatible, making integration easier. Each is designed to be fully on-chain and crypto-natives and avoid dependencies of banks or off-chain assets. In addition, they operate in the same defi “neighborhood” with overlapping user bases and liquidity pools that accelerate the adoption. What might otherwise have been a niche experiment has become a core building of on-chain outcomes.
The natural question now is whether a fourth protocol will participate in, and Hyperliquid has a strong case to do so. Ethena uses Hyperliquid Perps as part of its yield -generating strategy, and USDE is already embedded in both Hypercore and Hyperevm. Pendle has $ 300 million in Tvl tied to Hyperevm products, and its new Boros financing speed markets are a natural fit for hyperliquid eternal futures. Aave’s relationship with Hyperliquid is more tentative, but the emergence of Hyperlend, a friendly fork on Hyperevm, points to a deeper integration ahead. As Hyperliquid is expanded, the system could develop from a closed loop to a wider network. Liquidity would no longer just cycle within three protocols, but flow directly into eternal futures markets, elaborate on capital efficiency and reshape how out-chain outcomes are built.
The Ethena-Pendle-AG-Loop already shows how quickly defi can scale when protocols share the same environment. Hyperliquids could push this model further.
– Ilan Solot, Senior Global Markets Strategist and Co-Manager for Digital Assets, Marex Solutions
– Elisabeth Phizackerley, Macro Strategist Analyst, Marex Solutions
Ask an expert
Question: What does “composability” mean in defi?
ONE. In traditional financing there are products in silos. In defi, composability means that protocols are connected to each other as LEGO blocks. Ethena creates dividends, pendants packing it, and Aave borrows against it, all on-chain. This makes growth quickly, but also means that risks can spread quickly.
Q. What is the principal -tokens (Pts) and dividend mower (YTS)?
ONE. Pendle divides an asset into two parts. The most important token (Pt) is like buying a bond with a discount and redeeming it later. Yield token (Yt) Looks like a coupon that gives an income stream. It is simply a way to separate the principal from yield in cryptoform.
Question: What is a “Delta-neutral strategy”?
ONE. Ethhena uses this to keep its synthetic dollar steady. By holding crypto and mapping futures at the same time, gains and loss are offset. The setup remains dollar-neutral, while still generating dividends similar to market-neutral hedge fund strategies but on-chain.
– DJ Windle, Founder and Portfolio Manager, Windle Wealth
Continue to read
- There are now 92 cryptocurrency-related ETF applications pending approval with the US Securities and Exchange Commission.
- Google Cloud develops Universal Ledger (Gcul)A new LAG-1 blockchain designed for financial institutions.
- SEC chairman Paul Atkins has fled the vision for a unified “SuperApp Exchange” where investors could trade everything from tokenized shares and bonds to cryptocurrencies and digital assets under a single platform.
