What You Need to Know
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Understanding Decentralized Finance (DeFi)
In today’s newsletter, Elisabeth Phizackerley and Ilan Solot from Marex Solutions provide insights into a DeFi transaction’s mechanics involving Ethena, Pendle, and Aave that work in tandem to generate yields for investment returns. Additionally, DJ Windle explains these concepts and addresses questions about these investments in “Ask an Expert”.
Acknowledgments
Thank you to this week’s newsletter sponsor, Grayscale, which is hosting an exclusive event, Crypto Connect, on September 18 near Minneapolis. Learn more.
DeFi Yield Engines: Role of Key Players
In contrast to traditional finance, where yields are generated through bond funds and similar products, DeFi uses smart contracts. Ethena acts similarly to a money market fund, generating yield through futures. Pendle splits yield into fixed and floating portions, while Aave operates like a bank, allowing loans against crypto collateral.
The USDe PT loop illustrates this process: Ethena issues USDe and uses deposits for delta-neutral strategies generating around 9% yield. Pendle then decomposes USDe into Principal Tokens (PTs) and Yield Tokens (YTs), facilitating investment via Aave, optimizing yield potential through strategic borrowing and recycling back into Ethena.
Combined, this structure significantly impacts the DeFi landscape, contributing to a robust yield engine that integrates Aave, Pendle, and Ethena while setting sight on further expansion with Hyperliquid products. As the space evolves, we may see liquidity increasingly flow towards perpetual futures markets, expanding the efficiency and adaptability of on-chain yield strategies.
Ask an Expert
Q. What does “composability” mean in DeFi?
A. In traditional finance, products operate separately. DeFi allows seamless connections between protocols, facilitating rapid growth but also spreading risks quickly.
Q. What are Principal Tokens (PTs) and Yield Tokens (YTs)?
A. Pendle divides assets into PTs (like discounted bonds) and YTs (similar to coupons).
Q. What is a “delta-neutral strategy”?
A. Ethena employs this strategy to maintain stability for its synthetic dollar by balancing gains and losses through futures contracts, mirroring a hedge fund approach while functioning on-chain.
Stay tuned for further updates on the evolving world of decentralized finance!
