Proposal to add PT-sUSDe-MAR272025 Market to FiRM

FiRM
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Summary

This proposal seeks to integrate the PT-sUSDe-MAR272025 token as a collateral asset on FiRM, Inverse Finance’s fixed-rate lending protocol. PT-sUSDe-MAR272025 is a Principal Token representing the right to receive 1 USDe upon maturity on March 27, 2025. By adding this asset to FiRM, we aim to enhance the platform’s offerings, attract sophisticated users, and capitalize on the fixed-yield opportunities presented by Pendle Finance’s yield tokenization mechanisms.

Background

Pendle Finance provides a platform for tokenizing yield-bearing assets through standardized wrappers called Standardized Yield (SY) tokens, adhering to EIP-5115. These SY tokens represent yield-bearing tokens in a standardized ERC-20 format, allowing users to deposit and redeem various supported tokens while ensuring a 1:1 backing with the underlying yield-bearing assets. Pendle enables the splitting of SY tokens into two separate components:

  • Principal Token (PT): Representing the right to reclaim the principal amount of the underlying asset at maturity.
  • Yield Token (YT): Entitling holders to the yield generated by the principal up to a specified expiry date.

PTs and YTs are minted and burned together before expiry, ensuring that for every PT, there is a corresponding YT. After the expiry date, yield accrual stops, and PTs and YTs can be redeemed independently. This system allows users to trade and speculate on future yields or lock in fixed interest rates.

Integrating PT-sUSDe-MAR272025 as collateral aims to leverage the fixed-yield opportunity provided by Pendle Finance and the fixed-rate borrowing capabilities of FiRM. This integration is particularly attractive for strategies like the carry trade, where users can lock in yield differentials between borrowing and lending rates. The sUSDe PT token offers a fixed yield due to its nature as a zero-coupon bond maturing at par value. FiRM’s fixed-rate lending complements this by allowing users to lock in borrowing costs, making it ideal for carry trade strategies. Additionally, the sUSDe PT token inherently prices in Pendle’s 30x sats multiplier providing an even more attractive proposition for users seeking higher yields.

Risk Assessment

Complete Risk Assessment - sUSDe PT Collateral on FiRM

The RWG conducted a risk assessment (linked above) which explored the integration of sUSDe PTs as collateral on FiRM. This assessment combines both quantitative and qualitative analysis, covering governance, security, liquidity, and competitive factors, and considering the unique characteristics of Pendle PTs, USDe, and the broader market context. These are summarized below:

  • Security: Pendle Finance has undergone multiple security audits by reputable firms such as ChainSecurity and Spearbit in 2024, with identified issues promptly addressed and resolved. Recent audits uncovered high and medium severity issues, all of which have been patched. Pendle operates an active bug bounty program on Immunefi with rewards up to $250,000, emphasizing their commitment to security. Additionally, PT contracts are immutable with no owner, reducing the risk of unauthorized modifications and enhancing the overall security posture.
  • Regulatory Risks: Regulatory risks stem from potential actions targeting stablecoins like USDe, which could impact its stability and operations. Ethena’s ability to blacklist addresses under specific legal circumstances introduces compliance mechanisms but may raise concerns about decentralization and user autonomy. Changes in regulatory frameworks or enforcement actions could affect USDe’s peg to the US dollar, influencing the collateral’s reliability and potentially impacting the value and usability of sUSDe PT tokens within the protocol.
  • Collateral & Liquidity: PT-sUSDe-27MAR2025 has substantial liquidity, with over $60MM in TVL on Pendle’s AMM and significant sUSDe liquidity across various pools totaling over $46MM. Liquidity is supported through underlying yield from sUSDe, PT yield from appreciation towards par value at maturity, and Pendle LP incentives.
  • Competitive Edge: Integrating PT-sUSDe-MAR272025 as collateral on FiRM offers several competitive advantages. By offering competitive borrowing terms and fixed rates, FiRM can attract sophisticated users executing carry trade strategies. The fixed-rate lending capabilities of FiRM complement the fixed-yield nature of the PT token, providing a compelling proposition for users seeking predictable returns.
  • Oracle and Price Feed: The proposed oracle mechanism utilizes a $1 fixed-price feed for PT-sUSDe-27MAR2025, simplifying reasoning about collateral factors and reducing complexity. A guardian-controlled oracle switch behind an 18-hour timelock will handle extreme market conditions, allowing the protocol to respond to events like a USDe depeg by switching to a live price feed. However unlikely the event of USDe depeg, the FiRM sUSDe PT market will remain agile with the ability to override the markets collateral price feed with the following options: Primary - $1 Hardcoded (Expected integration for the full vesting of the sUSDe PT); Pre-Maturity - sUSDe Chainlink USD feed divided USDe:sUSDe exchange rate (Emergency price feed solution with 18 hour time lock for critical Ethena failure); Maturity - USDe Chainlink USD feed (After Maturity price feed for 1:1 value of sUSDe PT and USDe). The Policy multisig is proposed to act as the oracle guardian, following procedures to safeguard the protocol and its users by activating the backup feed when predefined conditions are met.
  • Liquidations: Liquidating PT-sUSDe-27MAR2025 collateral presents challenges due to limited liquidity and the exotic nature of PTs. Liquidators can utilize Pendle’s AMM to trade PTs but may face price slippage and market impact, especially when disposing of large amounts. To mitigate these issues, liquidators might hold PTs until maturity to redeem at full value, liquidate incrementally to minimize market disruption, or engage institutional buyers who have a vested interest in acquiring PTs and may offer better liquidity options, ensuring efficient and effective liquidation processes. The liquidation incentive is set at 5% to compensate liquidators for the costs and risks associated with seizing and selling the PT collateral.

On-Chain Actions

To implement this proposal, the following on-chain actions are required:

  • Add PT-sUSDe-MAR272025 Market to DBR contract
  • Set borrowController of Market to FiRM BorrowController
  • Set market supply ceiling to 20,000,000 DOLA
  • Set daily limit in BorrowController to 2,000,000 DOLA
  • Set Collateral Factor to 87%
  • Set Liquidation Factor to 100%
  • Set Liquidation Incentive to 5%
  • Approve PT-sUSDe-MAR272025 market on the DBR Helper
  • Set Minimum Debt Amount in BorrowController to 3,000 DOLA
  • Set stalenessThreshold for PT-sUSDe-MAR272025 market to 86460
  • Set FiRM Oracle price feed for PT-sUSDe-MAR272025 to the deployed
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Is there any specific demand from some people to borrow against this? It seems to be considered as collateral, demand should be proven first. Given there seems to be quite some risk involved with the oracle concerning this collateral and the liquidation seems fastidious at best.

Also how does that work when the PT token reach maturity ? Is the position automatically liquidated? Does the borrower need to repay before the maturity its debt on Inverse?

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Hey @ratchet , great questions.

RE demand - yes there is huge demand to borrow against this collateral. We have been speaking with some defi super users as well as our largest borrowers on FiRM, and there is huge demand for this collateral. There is a good chance of this adding an additional 8 figures of DOLA debt to FiRM. Hint - check the debank of the wallet in my recent proposal to whitelist Temple DAO to use FiRM, you’ll see over $27m of DAI debt (paying 9.5% APR borrow rate) against this exact collateral on a different lending market.

Maker lent $50m DAI to the new Morpho vault for PT-sUSDe-MAR272025 and it was fully borrowed within a matter of hours. The demand for this collateral is huge.

When the PT token reaches maturity, holders can redeem it at will for the underlying (USDe in this case). So on FiRM, the moment maturity is reached, the price feed switches to using the Chainlink USDe feed, and will sit fine as this. Users can keep their positions if they wish, but this is unlikely as it is equivalent of simply using USDe as collateral (without any Ethena sats), so we’d expect all users to repay and withdraw on or very soon after the maturity date. Just to clarify, borrowers do not need to do anything before or after the maturity. And they won’t be liquidated unless their position becomes unhealthy (caused by their debt position increasing via replenishment, or USDe losing value).

I think the opportunity of PT tokens as collateral on FiRM is absolutely huge. Allowing borrowers to earn a fixed yield with a fixed borrow cost is highly synergistic; there will be no better market in DeFi to borrow against for this asset type. This is our first venture in PT market, but I believe that the value up for grabs for Inverse is massive here, and we will likely pursue multiple other PT markets in the future.

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Thanks for the update and clarification. I initially didn’t even consider pendle pt token as I did not think they would be compatible with FiRM. The switch to USDe feed is actually quite simple and well thought out.

I also believe the fixed yield coupled with fixed borrowing rates is a powerful combination. Probably a lot of other PT token are coming. Go Inverse

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