How to Utilize stcUSD, PT-stcUSD, and PT-cUSD on Morpho

When used responsibly, leverage is a powerful tool that maximizes yields for users, and it’s all the more effective when the money legos click together so effortlessly. By combining Morpho’s efficient lending markets with Pendle’s yield-tokenization, users can construct looping positions that dramatically amplify returns on stcUSD, PT-stcUSD, and PT-cUSD positions.

What is Looping Anyway?

Looping is a leverage strategy in DeFi where a user repeatedly borrows against collateral and redeposits the borrowed assets to amplify exposure. The process typically involves:

Supplying collateral to a lending market.
Borrowing against that collateral.
Using the borrowed funds to buy more of the same asset and redepositing it as collateral.
Repeating the cycle multiple times.

Each loop compounds the position size, turning small yield spreads into amplified returns. While looping increases exposure, these dynamics can be managed through buffers, monitoring, and position sizing to keep the strategy resilient.

The Building Blocks

stcUSD: A yield-bearing stablecoin from Cap. It accrues yield by design.
PT-stcUSD: The Principal Token of stcUSD on Pendle. It represents fixed yield exposure (redeemable 1:1 for stcUSD at maturity).
PT-cUSD: The Principal Token of cUSD, Cap’s non-yield-bearing stablecoin. Also redeemable 1:1 at maturity.
Morpho: A lending/borrowing protocol that allows efficient looping by borrowing against collateral with optimized rates.

The Looping Process

Deposit collateral (e.g. stcUSD or PTs) into Morpho.
Borrow against it: usually borrowing USDC depending on the market.
Re-deploy the borrowed funds back into the loop:
- Buy more PTs (to lock in fixed yield at a discount).
Repeat the cycle multiple times until you reach your target leverage ratio.

The Benefits

Yield Amplification: Small spreads between PT fixed yield and borrow rates get multiplied.
Capital Efficiency: Unlock more out of the same level of collateral.
Strategy Flexibility: Choose between fixed yield exposure (PTs) or floating (stcUSD).

Example: Looping PT-stcUSD

Let’s say you start with $1,000 in stcUSD and want to loop into PT-stcUSD on Morpho.

Initial Deposit
- Deposit $1,000 stcUSD into Morpho as collateral.
First Borrow
- Borrow $900 cUSD (90% LTV for simplicity).
- Swap $900 cUSD → $900 PT-stcUSD.
- Your position: $1,000 collateral + $900 PT exposure.
Second Loop
- Deposit the $900 PT-stcUSD back as collateral (via Pendle + Morpho).
- Borrow $810 cUSD against it.
- Buy $810 more PT-stcUSD.
- Position: $1,000 + $900 + $810 = $2,710 PT exposure.
Repeat the Cycle
- Each loop, you borrow 90% of the prior amount and buy more PTs.
- After 5 loops: ~$5,868 PT exposure.
- After 9 loops: ~$8,783 PT exposure.

Yield Math

PT-stcUSD fixed yield: 15% APR.
Morpho borrow rate: 10% APR.
Net spread per loop: +5%.

With $8,783 in PT exposure from $1,000 starting capital:

Gross yield = $8,783 × 15% = $1,317/year.
Borrowing cost = ~$8,783 × 10% = $878/year.
Net PnL = $439/year → 53.9% of initial capital.

The Risks (and How to Mitigate Them)

Looping is designed to enhance yields, but it works best when approached with awareness and safeguards. Here are the main factors to watch and how to stay in control:

Interest Rate Shifts
- Context: If borrow rates on Morpho approach or exceed your PT fixed yield, returns compress.
- Mitigation: Monitor rates regularly and size leverage so you can adjust or unwind comfortably if conditions change.
Liquidation Thresholds
- Context: Higher leverage means thinner margins between collateral and debt.
- Mitigation: Keep a healthy buffer below the max LTV (e.g., operate at 70–75%). On-chain alerts can help you stay ahead.
Basis Dynamics
- Context: PTs may trade at a discount to redemption value depending on liquidity and market demand.
- Mitigation: Favor PTs with deeper liquidity and shorter maturities, and avoid overextending in thin markets.

By applying these guardrails, looping becomes not just a tool for yield, but a disciplined strategy that can withstand shifts in market conditions.

Key Takeaways

Each loop magnifies your effective yield while tightening margins, so moderation matters.
At higher leverage, monitoring borrow rates and PT pricing becomes essential.
Risk management is less about avoiding looping and more about using it intentionally, with buffers and limits in place.

Conclusion

Looping stcUSD, PT-stcUSD, and PT-cUSD on Morpho is an almost magical tool available to DeFi users who want to further put their capital to work. When executed with discipline, it transforms any position into an outsized return by responsibly harnessing leverage and elegantly implementing money lego composability.