The Shift in Aave’s USDe Borrowing Costs: A Threat to Yield Loops

A new proposal by risk management firm LlamaRisk is set to reshape the landscape for Ethena’s USDe on the Aave V3 lending platform. By advocating for a significant hike in borrowing rates across multiple chains, the proposal aims to curb high-leverage strategies that currently exploit the spread between borrowing costs and staking yields. This shift could effectively turn profitable yield-bearing "loops" into "negative carry" positions, signaling a major adjustment for decentralized finance (DeFi) participants who rely on these strategies.

Restructuring the Cost of Debt

The core of the recommendation involves raising the base variable borrow rate for USDe from 5% to 6% across five key Aave V3 markets: Core, Plasma, Monad, Mantle, and Avalanche. Additionally, the proposal suggests a one percentage point reduction in "Slope1" to help fine-tune the rate curve. While the impact varies depending on market utilization—with the Mantle market seeing the steepest rise of 89 basis points and Avalanche the most modest at 13 basis points—the overall goal is to increase the cost of debt for approximately $323.8 million in USDe positions currently held against $1.18 billion in total supply.

The End of Profitable Yield Loops

This adjustment specifically targets "yield loops," a popular strategy where users borrow USDe and recycle it into yield-bearing sUSDe to capture the interest spread. With the current sUSDe supply APY sitting at approximately 4.72%, the proposed borrowing rates (which in some markets already exceed 6%) would create a "negative carry" environment. This means the cost of maintaining the debt would outweigh the rewards earned from staking, rendering these leverage strategies unprofitable once transaction costs and frictions are factored in.

Long-term Market Stabilization

Beyond simply raising costs, the proposed changes are part of a broader strategy to de-risk the protocol. By making borrowing more expensive, the initiative aims to reduce the prevalence of loop-funded supply. According to the staged repricing program, unwinding these leveraged positions could eventually lift the organic yield available to remaining sUSDe holders toward a target of 5.3%. For now, the implementation serves as a signal that the era of easy spreads between Aave borrowing and Ethena staking may be coming to a close.