Crypto for Advisors: The Mechanics of Generating Yield On-Chain

How does decentralized finance (DeFi) work? In today's Crypto for Advisors newsletter, Elisabeth Phizackerley and Ilan Solot and from Marex Solutions co-authored this piece about the mechanics of a DeFi transaction using Ethena, Pendle and Aave and how they all work together to create investment yields. Then, DJ Windle breaks down the concepts and answers questions about these investments in "Ask an Expert." Thank you to our sponsor of this week's newsletter, ￰0￱ financial advisors near Minneapolis, Grayscale is hosting an exclusive event, Crypto Connect, on Thursday, September ￰1￱ more . – Sarah Morton Unknown block type "divider", specify a component for it in the `components.

types` option DeFi Yield Engines: Ethena, Pendle, Aave, and Hyperliquid In traditional finance, advisers are used to products like bond funds, money market instruments, or structured notes that generate yield by recycling capital more ￰2￱ decentralized finance (DeFi), a similar idea exists — but powered entirely by smart contracts, exploring how financial markets can run on blockchain ￰3￱ has been no shortage of DeFi experiments over the past six years, since the sector kicked off; however, few have worked as well as the interplay between Ethena, Pendle, and Aave. Together, these three protocols have built a self-reinforcing cycle that channels more than $4 billion in composable ￰4￱ the space develops, the interlinkages will likely expand even further, for example, by integrating elements of Hyperliquid and its new layer-1, HyperEVM.

First, some definitions: Ethena: like a money market fund generating yield from futures. Pendle: like a bond desk splitting that yield into “fixed” vs. “floating” portions. Aave: like a bank offering loans against crypto-native collateral.

Hyperliquid: like any crypto exchange for futures and spot trading, but fully ￰5￱ original USDe PT loop works roughly like this: It begins with Ethena, which issues USDe, a synthetic dollar backed by a combination of stablecoins and ￰6￱ uses deposits to implement delta-neutral strategies on futures contracts to generate yield, which gets paid to stakers of ￰7￱ USDe is earning around 9% as of late ￰8￱ then takes USDe and decomposes it into two parts: Principal Tokens (PTs) and Yield Tokens (YTs). YTs represent the variable stream of yield (and any points accrued) from the underlying asset – USDe in this ￰9￱ PTs represent the underlying value of USDe, which is sold by Pendle at a discount (like a T-bill) then redeemed one-to-one at ￰10￱ Aave closes the loop by allowing investors to borrow against their PT ￰11￱ PTs have a predictable redemption structure, they work well as collateral.

So, depositors often borrow USDC (for example), and recycle it back into Ethena to mint new USDe, which flows again into Pendle, reinforcing the ￰12￱ short, Ethena generates yield, Pendle packages it, and Aave leverages ￰13￱ structure now accounts for the majority of Ethena’s deposits on Aave and most of Pendle's total value locked (TVL), making it one of the most influential yield engines ￰14￱ flywheel didn’t only work because yields are attractive, but because the protocols share a common ￰15￱ three are EVM-compatible, making integration ￰16￱ is designed to be fully on-chain and crypto-native, avoiding dependencies on banks or off-chain assets.

Additionally, they operate in the same DeFi “neighborhood,” with overlapping user bases and liquidity pools that accelerate ￰17￱ might have otherwise remained a niche experiment has become a core building block of on-chain yield ￰18￱ natural question now is whether a fourth protocol will join, and Hyperliquid has a strong case for doing ￰19￱ uses Hyperliquid perps as part of its yield-generating strategy, and USDe is already embedded within both HyperCore and the ￰20￱ has $300 million in TVL tied to HyperEVM products, and its new Boros funding-rate markets is a natural fit for Hyperliquid perpetual futures. Aave’s relationship with Hyperliquid is more tentative, but the emergence of HyperLend, a friendly fork on HyperEVM, points to a deeper integration ￰21￱ Hyperliquid expands, the system could evolve from a closed loop into a broader ￰22￱ would no longer just cycle within three protocols but flow directly into perpetual futures markets, deepening capital efficiency and reshaping how on-chain yield strategies are ￰23￱ Ethena-Pendle-Aave loop already shows how fast DeFi can scale when protocols share the same ￰24￱ could push this model even further. - Ilan Solot , senior global markets strategist and co-head of digital assets, Marex Solutions - Elisabeth Phizackerley , macro strategist analyst, Marex Solutions Unknown block type "divider", specify a component for it in the `components.

types` option Ask an Expert ￰25￱ does “composability” mean in DeFi? ￰26￱ traditional finance, products exist in ￰27￱ DeFi, composability means protocols plug into each other like Lego ￰28￱ creates yield, Pendle packages it, and Aave lends against it, all ￰29￱ makes growth fast but also means risks can spread ￰30￱ are Principal Tokens (PTs) and Yield Tokens (YTs)? ￰31￱ splits an asset into two ￰32￱ Principal Token (PT) is like buying a bond at a discount and redeeming it ￰33￱ Yield Token (YT) is similar to a coupon, providing an income stream. It’s simply a way to separate principal from yield in crypto ￰34￱ is a “delta-neutral strategy”? ￰35￱ uses this to keep its synthetic dollar ￰36￱ holding crypto and shorting futures simultaneously, gains and losses offset each ￰37￱ setup stays dollar-neutral while still generating yield similar to market-neutral hedge fund strategies, but on-chain. - DJ Windle, founder and portfolio manager, Windle Wealth Unknown block type "divider", specify a component for it in the `components.

types` option Keep Reading There are now 92 cryptocurrency-related ETF applications pending approval with the ￰38￱ and Exchange ￰39￱ Cloud is developing the Universal Ledger (GCUL) , a new Layer-1 blockchain designed for financial ￰40￱ Chair Paul Atkins has floated the vision for a unified “SuperApp Exchange” where investors could trade everything from tokenized stocks and bonds to cryptocurrencies and digital assets under a single platform.