Aave and Pendle may have found a way to keep yield capital from ever leaving DeFi

Key Takeaways

• Aave's fixed-yield market and Pendle's principal tokens are creating a cycle where investors can keep yield capital within DeFi.
• This cycle allows investors to lock in returns, use collateral to borrow stablecoins, and then move into a later-dated maturity.
• The October PT began with a 20 million-token supply cap, but was fully utilized within days, prompting Aave to increase the cap to 80 million.
• The December PT is expected to be the rollover destination for the October position, with as much as 67.4 million of Aave collateral potentially migrating into it.

Market & Token Impact

• The October PT has attracted significant demand, with active AUSD loans on Aave jumping 113% to $8.7 million in 15 days.
• The December PT has smaller liquidity, with only $1.61 million of liquidity and 904,717 PT outstanding.
• The fixed-yield market and principal tokens are creating a new dimension to the rollout, with the surge in AUSD borrowing adding another layer to the cycle.

Broader Context & What's Next

• The emerging cycle between Aave's lending infrastructure and Pendle's fixed-yield markets has the potential to revolutionize the way DeFi protocols operate.
• The success of this cycle will depend on the ability of the protocols to scale and manage the increased demand and liquidity.
• The next market still has to scale, with the December PT's liquidity and trading volume being significantly smaller than the October position.
• The economics of the fixed-yield market and principal tokens are already tighter than when the October market began, with the implied yield of the December PT at 5.64%.
• The temporary one-percentage-point campaign incentive lifted the effective rate to 6.64%, exceeding borrowing rates of 4.28% for mUSD and 5.10% for USDT0.
• The spreads can change quickly, and Aave borrowing rates vary with utilization, while PT yields move as traders buy or sell the instrument.
• The incentive boosting December returns is also temporary, and the surge in AUSD borrowing adds another dimension to the rollout.
• The success of this cycle will depend on the ability of the protocols to manage the increased demand and liquidity, and to maintain the stability of the fixed-yield market and principal tokens.