sUSDe Loop Trades: $1 Billion in DeFi Positions at Risk Post-Crash

Following the October 10 market downturn, which resulted in significant losses for Bitcoin and other cryptocurrencies, a new report from Sentora Research highlights that nearly $1 billion in DeFi positions involving Ethena's staked USDe (sUSDe) face potential risk.

Impact on DeFi Markets

The crash led to a notable drop in DeFi market rates, affecting yields on leveraged strategies like the sUSDe loop trade. Ethena's sUSDe, a synthetic stablecoin pegged to the dollar, generates returns by staking the underlying USDe token.

The Loop Strategy

This strategy involves using sUSDe as collateral on DeFi platforms such as Aave and Pendle to borrow stablecoins like Tether (USDT) and USD Coin (USDC). Borrowed USDT is then used to acquire more sUSDe, which is redeposited as collateral, creating a cycle to enhance yield.

Challenges Ahead

Since the market crash, the yield differential has turned negative, undermining the loop trade's profitability. "After the flash crash on October 10, funding rates on DeFi platforms have significantly decreased, reducing yields for basis-trade strategies. On Aave v3 Core, USDT/USDC borrow rates are approximately 2.0%/1.5% above the sUSDe yield, resulting in negative carry for those leveraging sUSDe," stated Sentora Research. The ongoing negative spread could lead to the unwinding of nearly $1 billion in positions exposed to negative carry, potentially triggering collateral sales or deleveraging.

Future Considerations

Traders must closely monitor the spread between Aave's borrow annual percentage yield (APY) and the sUSDe yield. Rising utilization rates in USDT and USDC lending pools could drive up borrowing costs, intensifying stress. Sentora warns of a growing number of looped positions nearing liquidation, especially those within 5% of forced closure.