The Pendulum Swings: How Pendle, Ethena, and Aave Are Revolutionizing Yield Farming in 2025
Yield farming just got its second wind—and this time, it's swinging for the fences.
Three protocols are rewriting the DeFi playbook: Pendle, Ethena, and Aave. They're not just tweaking formulas—they're rebuilding yield mechanics from the ground up.
Pendle: Time-Traveling Your Returns
Pendle lets traders split yield from principal—betting on future rates today. It's like options trading meets DeFi, minus the Wall Street suits.
Ethena's Synthetic Dollar Revolution
Ethena creates dollar-denominated yield without traditional banking rails. It's global, permissionless, and quietly terrifying to legacy finance.
Aave's Liquidity Engine
Aave turns dormant assets into yield-generating machines. Their algorithmically optimized pools make traditional savings accounts look like relics.
These protocols prove yield farming's evolution isn't slowing down—it's accelerating. While traditional finance still debates whether crypto is 'real,' DeFi builders are busy reinventing money itself. Sometimes the best investment strategy is simply keeping up with the pendulum's swing.
What’s Happening with Pendle?
For the second time in just two years, the yield-trading protocol Pendle has landed in the spotlight of the DeFi community.
The first surge of activity and capital inflows came in May–June 2024, fueled by EigenLayer. As part of its airdrop campaign, users deposited ethereum or its derivatives into protocol pools and received liquid restaking tokens in return.
These tokens could then be used for yield trading on Pendle, allowing investors to hedge against fluctuations in staking returns. However, the interest back then was largely speculative — and Pendle’s total value locked (TVL) quickly dropped once the distribution ended.
The second wave of interest began to build in spring 2025 — and it has already eclipsed the growth sparked by EigenLayer. Between May and September, the platform’s TVL surged from $3 billion to $11 billion.
Alongside the growing deposit volumes, Pendle’s financial metrics have also climbed. In recent months, the platform has seen a significant increase in fees — and, consequently, in revenue. While these metrics haven’t yet reached the peaks seen during the January “Trump rally,” August’s earnings were twice as high as July’s and nearly five times higher than April’s.
At the same time, up to 80% of the fees are distributed to PENDLE holders who have staked their tokens in the protocol.
The surge in protocol activity has also impacted the utility token’s price. For instance, in August, PENDLE ROSE by more than 50%, but after hitting a local peak of $6, it underwent a correction amid a broader market downturn.
However, the key distinction of the second wave of interest in Pendle isn’t just its scale — with TVL nearly double previous peaks — or even the token rally, but the very structure of deposits. Over 70% of the liquidity locked in Pendle is tied to stablecoins.
The Ethena Factor
Pendle’s growth in 2025 WOULD not have been possible without Ethena. As of September 1, 2025, USDe and its derivatives account for roughly 75% of all funds locked in the protocol. Overall, Pendle holds about 60% of the total supply of the stablecoin.
The key driver behind this shift was the emergence of a new source of yield in DeFi. For a long time, Ethereum provided the optimal balance between risk and reward. Stakers earned stable annual returns of 3–5%, along with additional income from airdrops and incentives offered by liquid staking and restaking protocols.
Against the backdrop of near-zero returns from dominant stablecoins and the high volatility of other staking-eligible assets, this was a relatively SAFE and profitable way to earn.
However, in 2024, the stablecoin USDe appeared. Its issuer, Ethena, generates revenue from funding rates on ETH futures. Most of these earnings are distributed to USDe holders, who, under current market conditions, enjoy higher returns than those offered by Ethereum.
Pendle offers USDe holders an additional way to earn, allowing them to lock in the stablecoin’s high yields through so-called Principal Tokens (PT). This pairing laid the groundwork for the rally observed since May, although another component was still needed to trigger the deposit “boom” — which we’ll explore in more detail below.
Mutual InfluenceNotably, as liquidity flows into Pendle, the supply of USDe is also rising at a similar pace. Of course, this trend could be partly driven by the broader adoption of stablecoins, but the issuance rate of Ethena’s instrument in July–August, in percentage terms, was noticeably higher than that of most competitors.
An important consequence of USDe’s rising popularity is its potential impact on the Ethereum market — one of the main collateral assets for the stablecoin. As of writing, Ethena holds $1.6 billion worth of ETH and related liquid staking tokens.
Leverage as a Growth Booster
A key driver behind the rapid rise of the Pendle–USDe pairing was that major lending protocols began accepting PT backed by Ethena stablecoins as collateral. This made it possible to use leverage to maximize returns and set the full yield farming engine in motion.
The concept itself isn’t new. As early as November, the Euler lending protocol proposed launching markets for tokenized Pendle positions. After community approval, the project implemented several technical solutions, such as permissionless PT markets, Pendle AMM TWAP oracles to smooth fluctuations, and batched transactions.
At that time, however, the platform was still recovering from a reputational crisis following a hack, and its TVL was NEAR historic lows.
However, despite record-high deposit volumes, Euler remains a relatively small platform that cannot generate the scale of the “yield engine” Pendle requires. The total PT for USDe on the protocol amounts to just over $315 million.
For this reason, the main driver of the narrative is not the innovative Euler, but the true DeFi “heavyweight.”
Aave
Following a vote in April 2025 to add a new type of collateral, AAVE introduced the first PT for eUSDe, and later for sUSDe.
Within a few weeks, the volume of collateralized positions with a May 2025 maturity grew from $164 million to $500 million. The next batch in July peaked at $1.5 billion, and the September batch reached $2.3 billion. At the same time, short-term investors utilized the full available limit for this type of collateral.
As of writing, the total Ethena-related assets on Aave are estimated at $6.8 billion, of which $4.2 billion are PT. This means the lending protocol has accumulated roughly half of the total stablecoin supply — and a similar share of Pendle positions tied to USDe and sUSDe.
The math is straightforward. As of writing, the fixed yield on PT for USDe and sUSDe stands at 13% and 12%, respectively, while stablecoin borrowing rates on Aave range between 5–7%. This means each “loop” of the yield engine generates roughly 5–6% net income on the position for the investor.
To minimize volatility risks, Aave has set a collateral factor of 91% for stablecoin loans under PT, with liquidation triggered at 93%. When borrowing USDe specifically, these thresholds shift to 94% and 96%, respectively.
It’s worth noting that for PT linked to Ethena — with a market cap exceeding $7 billion — Pendle provides only about $290 million in liquidity. Whether this is sufficient in the event of mass liquidations due to a price spike remains an open question.
Morpho
Another important platform driving Pendle’s yield engine is Morpho. It operates as a “lending market infrastructure” on top of Aave and Compound, offering isolated pools with fixed collateral factors. This setup allows for a greater number of credit pools backed by PT.
However, when it comes to Ethena-backed tokens, the protocol primarily provides additional capacity for those who couldn’t access Aave’s limits. In Morpho pools, USDC and DAI can also be borrowed against PT, though the interest rate reaches up to 9% per year.
As of writing, over $1 billion in various PT is locked on Morpho, with the lion’s share — $844 million — tied to USDe positions.
Smaller platforms that have integrated Pendle assets include Silo Finance and Inverse Finance. As of writing, they hold $16 million and $26 million in various PT, respectively.
Reminder of RisksLike any Leveraged earning strategy, reusing collateralized positions across multiple platforms comes with certain risks. The main ones include:
— Liquidity: The previously mentioned imbalance between PT liquidity pools relative to their collateralized volume can turn forced liquidations in stress scenarios into a “bottleneck” for a specific protocol, potentially triggering a domino effect across the ecosystem.
— Declining USDe Yield: Ethena’s business model relies on funding rates — the gap between Ethereum futures contracts and the spot market. As market liquidity grows, this gap narrows, affecting payouts to token holders. The institutionalization of Ethereum could reinforce this dynamic.
— Issuer Reserves and Operational Risks: Ethena maintains a reserve fund for emergency liquidation of derivative positions, but the consequences and scale of cascading liquidations remain unclear. Additionally, a panic sell-off could lead to a token depeg, with a corresponding repricing of collateral.
It’s also important to remember the typical risk of hacks in the crypto industry. The Euler case is a prime example. In the case of collateralized positions, a hack on one platform followed by a sell-off could trigger mass liquidations across the entire ecosystem.
The Pendle–Aave–Ethena triad has effectively created a large-scale “combine” for yield farming with minimal risk. While in previous cycles Ethereum served as the underlying asset for such complex strategies, in this case, stablecoins take the lead. The key advantages of using them include:
- Stability: Near-zero volatility reduces risks for both lenders and borrowers.
- Guarantees: Most issuers, including Ethena, provide either direct redemption or full backing of the token with digital or fiat assets.
However, the most significant shift has been the emergence of a separate category of stablecoins with built-in yield, whose issuers distribute a portion of profits to holders. Ethena is the locomotive of this narrative, offering the highest payouts thanks to its collateral model.
That said, Pendle can also support alternative stablecoins.
Beyond Ethena
The expansion of the “PT engine” to other tokens increases both Pendle’s influence and the use of stablecoins within the DeFi infrastructure.
A significant barrier to this direction has been U.S. regulatory policy. In particular, the GENIUS Act passed in July prohibits issuers from paying rewards directly to users. As a result, the largest players in the segment, aiming for official status in the United States, are unable to launch yield-bearing tokens with direct payouts, as Ethena does.
In the face of growing competition, they are looking for workarounds to attract users, including cashback, bonuses for transactions, and passive earning products on centralized exchanges. However, these incentives are tied to centralized services and cannot be used within DeFi.
On the other hand, many platforms offer rewards for locking centralized and potentially regulated stablecoins like USDT and USDC. This capital is then deployed for lending, liquidity provision, and other yield strategies in decentralized finance. In return, users receive yield-bearing wrapped tokens.
Many of these instruments are already available on Pendle, such as SuperUSDC from Superform, dUSDC from Dolomite, and stkaUSDT from Aave.
Another important area is decentralized stablecoins. Unlike Tether or Circle, these issuers often distribute profits directly to holders, similar to Ethena.
On Pendle, offerings already include syrupUSDC from Maple’s tokenization platform, USDX from Stables Labs, and USDO from OpenEden. They are backed by tokenized U.S. bonds or institutional loans and provide relatively predictable yields, simplifying integration and adoption for investors.
Overall, the platform offers over 80 pools for yield-bearing tokens, synthetic stablecoins, and other instruments from various providers. Ethena overshadows these markets by offering higher and more stable yields, as well as support from lending platforms.
As of writing, most Pendle markets are still too undercapitalized to be considered collateral on major lending platforms. However, this may change as these services become more tolerant of risk or as the volume of non-USDe PT grows.
The RWA FactorAlthough the GENIUS Act has effectively sidelined decentralized stablecoins in the U.S., the development of RWA (Real-World Assets) — particularly the tokenization of U.S. Treasury bonds — may improve their standing.
The MOVE of finance onto blockchain allows RWA platforms and other issuers to launch stablecoins with predictable payouts outside the United States.
Examples include the previously mentioned USDO and USDX, as well as USDS from sky.money or Ethena’s alternative token, USDb. They use money market tokens or debt obligations as collateral, which also enables them to implement incentives for user engagement.
This approach increases risks for holders, but they remain lower than those associated with algorithmic stablecoins. It is this model that underpins many minor assets in the space.
The Morpho example above demonstrates that supporting alternative positions on Pendle as collateral is feasible. The race for adoption will be won by those who secure this leverage — first from smaller platforms, and later from DeFi giants like Aave.
Alternative Options
Using stablecoins as the underlying assets for the described yield engine is the safest approach, but it’s not the only way to earn. Volatile instruments are already available on Pendle, such as wrapped Bitcoin, Hyperliquid (HYPE), or Ethena (ENA).
These assets haven’t achieved the widespread adoption of USDe due to the lack of leverage. However, if leverage expansion becomes possible, the most likely direction could be RWA assets.
According to rwa.xyz, the total tokenized financial assets were estimated at $27 billion at the time of writing, with U.S. Treasury bonds representing one of the largest segments.
Some of these assets are already represented on Pendle through the collateralization of various stablecoins. Beyond government debt, certain commodities, equities, and roughly $15 billion in private credit have also been tokenized. Many of these can be used for speculation, while others provide passive income to holders — both types are potentially suitable for yield trading.
The main challenge is that access to most of these instruments is controlled by the issuer and subject to regulatory oversight. Traditional market participants are currently limited in their use of DeFi tools. However, this could change as industry regulations evolve.
The democratization of tokenized assets on one hand, and expanded opportunities for TradFi on the other, enable the use of RWAs on Pendle and similar platforms.
It is also important to note that Ethereum, Solana, and other Proof-of-Stake (PoS) cryptocurrencies are used for yield trading as well.
Like the stablecoins described above, these assets generate yield. At the time of writing, staking via Lido provides Ethereum holders with 2.7% annually, while Jito pays solana stakers around 6.7%. Their limited use is due to the fact that:
- Cryptocurrencies introduce additional risk for lending platforms and users due to high volatility.
- Current staking yields lag behind those of many stablecoins.
However, this balance could shift if Ethena or other issuers are forced to cut payouts, for example, due to a reduction in the U.S. Federal Reserve rate or funding rates in the derivatives market.
Risk tolerance is equally important. When investors gain confidence in the continued growth of PoS cryptocurrencies, demand for Pendle’s yield engine could rise.
Thus, the expansion of leverage is most likely to target the asset categories mentioned above. For RWAs, this trend is tied to regulation and may take time, whereas the adoption of PoS cryptocurrency PTs as collateral depends primarily on market conditions.
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