After the October 10 market crash that saw massive losses in bitcoin and other cryptocurrencies, nearly $1 billion in DeFi positions involving Athena’s staked USDe (sUSDe) are now at risk, according to a new report from Sentora Research.
Since the crash, Sentora notes that rates in the DeFi markets have fallen significantly, which has reduced returns on leveraged strategies such as sUSDe loop trade. sUSDE is Athena’s staked USDe, a synthetic dollar stablecoin that generates dividends 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 Coin (USDC). They then use the borrowed USDT to buy more sUSDe, which is re-deposited as collateral to borrow additional USDT and buy even more sUSDe.
This cycle is repeated to amplify the dividend generated by the positive carry – the difference between the sUSDe stake reward and the cost of borrowing.
Negative Carry
However, since the October 10 crash, the yield spread has turned negative, hampering the appeal of the loop trade.
“After the Oct. 10 flash crash, funding rates in the DeFi markets have dropped significantly, reducing the yield for base trading strategies. On Aave v3 Core, the USDT/USDC lending rates sit ~2.0% / ~1.5% above the sUSDe yield, making carry negative for users who borrow stables to leverage sUSDe,” Sentora Research said in an email to CoinDesk.
The firm explained that as the spread remains below zero, looped positions that borrow stablecoins to buy sUSDe begin to suffer losses. If this continues, it could trigger the liquidation of around $1 billion in positions already exposed to negative carry on Aave v3 Core.
This negative carry can force the sale of collateral or deleveraging, weakening liquidity in the very places that provide leverage and potentially causing a cascading market effect.
What next?
Sentora said traders should watch out for the spread between Aave’s 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 may accelerate stress. Sentora wrote that there are an increasing number of looped positions nearing liquidation, particularly those within 5% of forced closure.
Going forward, traders need to keep a close eye on the increase in utilization rates in USDT and USDC lending pools, which could lift borrowing costs and increase stress amid the negative spread between Aave’s annual percentage return on loans and the sUSDe yield.
