Intro
Ethena’s USDe reached $10bn in 500 days since launch, becoming the fastest growing stablecoin in history to reach that milestone. USDe had already shown explosive growth, but it needed deeper DeFi integrations to unlock its full potential. Enter: Aave. By enabling recursive lending and leveraged positions, Aave unlocked new use cases for USDe, fostering its evolution from a synthetic dollar to a yield powerhouse.
Today, more than 50% of USDe-related assets have been deposited on Aave, a testament to the flywheel effects of the Aave liquidity engine.
Background
Ethena Labs is the creator of the Ethena protocol and the USDe synthetic dollar, which utilizes a delta-neutral strategy involving short positions on derivatives markets to offset price risk of underlying collateral assets and maintain peg stability.
Ethena employs an adaptive model that adjusts the collateral mix of USDe between short ETH/BTC perpetual positions and yield-bearing stablecoins depending on prevailing market conditions. During periods of elevated funding rates, Ethena maintains a higher reliance on delta-neutral strategies, which earn positive funding and basis spread for the protocol. During periods where funding rates are yielding less than US treasuries (typically during market downturns), Ethena will allocate a higher proportion of USDe backing assets to liquid stablecoins. This flexibility enables Ethena to optimize yield and risk exposure around USDe.
Staking USDe through Ethena yields sUSDe, which distributes yield generated from funding and rewards from backing assets to token holders.
The Aave x Ethena Partnership ("Aavethena”)
Aave's strategic partnership with Ethena Labs stems from a shared vision: enhancing capital efficiency and yield opportunities in DeFi. As the liquidity hub for the DeFi ecosystem, Aave enhances the utility of Ethena assets by unlocking new avenues for users to leverage the synthetic dollar through its integration.
The initial listing of sUSDe on Aave v3 in December 2024 allowed token holders to borrow against their sUSDe deposits while preserving the ability to earn yield from the underlying asset. This also presented new composable DeFi primitives, including leveraged yield strategies (i.e., "looping”) that involve repeatedly borrowing against collateral and reinvesting into more of the same asset type to effectively create leveraged exposure to sUSDe for amplified yields. Specifically, how this process is executed:
- Acquire sUSDe either from staking USDe on Ethena or swapping stables,
- Supply sUSDe to Aave by depositing as collateral,
- Borrow stables like USDC against sUSDe collateral deposits,
- Reinvest borrowed funds into more sUSDe. Then repeat steps (1-4).
On Aave, this strategy has also grown to involve Pendle’s yield tokenization solution, which splits yield-bearing tokens like sUSDe into a fixed principal component and a variable yield component (i.e., Principal Tokens (PT) and Yield Tokens (YT), respectively). PT assets represent the principal redeemable at maturity for its face value (e.g., 1 sUSDe per PT), traded at a discount to provide token holders with a fixed APY. Aave’s onboarding of PT-sUSDe as another collateral option alongside sUSDe provide users with the ability to turn sUSDe’s variable yields (ranging from ~4-15% in 2025) into predictable returns with added protection against drops in funding rates thanks to the fixed APYs of Pendle’s PT assets.
On July 29, Ethena launched Liquid Leverage, a new integration on Aave that provides users with enhanced leverage and borrowing capabilities for further yield stacking strategies. Liquid Leverage addresses the liquidity constraint associated with the 7-day unstaking period for sUSDe - maintaining a 50/50 mix of USDe and sUSDe keeps a portion of deposited funds liquid, free from the cooldown constraint. This improves the capital efficiency of leveraged strategies on Aave and is currently incentivized to provide a blended return that approximates a yield of a 100%-sUSDe position.
The Aave Value Prop
Aave's partnership with Ethena extends far beyond mere new listings - it presents new composable DeFi primitives. For Ethena, Aave provides a new venue to amplify yields for both the protocol (from stablecoin collateral deposited on Aave) and its users looking to engage in leveraged yield strategies as described above. Users also benefit from Aave's risk management tools like Efficiency Mode (E-Mode) for correlated assets. By limiting borrowable assets to highly correlated assets belonging to the same category as the collateral (e.g., dollar-pegged stablecoins or ETH liquid staking derivatives), E-Mode offers users higher liquidation thresholds for the ability to take on higher leverage levels than in Standard Mode.
Of course, there is a limit to how much USDe can be looped on Aave, depending on asset-specific supply caps and other set risk parameters. Risk managers for Aave consistently monitor and actively manage the Ethena exposure in relation to the rest of the protocol with frequent changes to supply caps on each market for USDe and USDe-related assets (e.g., sUSDe and PT-sUSDe assets) and occasional changes to the associated interest rate models. The effectiveness of these risk management strategies have been evident in stablecoin borrow rates across Aave Core, which have largely remained largely consistent even as Ethena-related borrowing demand has surged on Aave. This also highlights Aave as the only platform in DeFi capable of supporting these strategies at scale.
Ethena's ascension to $10bn has been historic and Aave is proud to be a key accelerator in its journey. As more users turn to Ethena and Aave to take advantage of USDe’s competitive yields, it creates a virtuous cycle of liquidity. The Aavethena partnership showcases the deeply embedded nature of Aave within the native DeFi ecosystem and how Aave’s platform can be used to foster innovative yield strategies and catalyze growth, including for other DeFi protocols and project teams. Looking ahead, the upcoming launch of Aave V4 will unlock even more capabilities to leverage yield in new composable ways.