Editing Openai/6973721c-28b0-8007-a991-09211709d274 (section)

==== 1) Economic risks of Pendle PT looping (Morpho / Euler) ====

===== A) You’re short funding + long a “zero-coupon bond” =====

A Pendle PT is like a zero-coupon bond: you buy it at a discount and it converges toward redeemable value at maturity. docs.pendle.finance<ref>{{cite web|title=docs.pendle.finance|url=https://docs.pendle.finance/ProtocolMechanics/YieldTokenization/PT/|publisher=docs.pendle.finance|access-date=2026-01-23}}</ref>
Looping = levering that convergence trade, but you’re also short the borrow rate (variable funding).

Failure mode: borrow APR spikes (utilization shock) while PT implied yield compresses → carry turns negative, you de-lever into bad liquidity.

===== B) Liquidation is driven by oracle + LLTV/LT, not “fundamentals” =====

Even if PT “should” converge, your position lives/dies by the money market’s collateral valuation rule.
* Morpho Blue: liquidation eligibility is when LTV > LLTV, and health factor is computed directly from collateral value, debt, and LLTV. Morpho Docs<ref>{{cite web|title=Morpho Docs|url=https://docs.morpho.org/learn/concepts/liquidation/|publisher=Morpho Docs|access-date=2026-01-23}}</ref>
* Euler: liquidation is triggered when risk-adjusted collateral value < debt, and can happen due to price moves or debt growth. Euler Docs<ref>{{cite web|title=Euler Docs|url=https://docs.euler.finance/concepts/risk/liquidations/|publisher=Euler Docs|access-date=2026-01-23}}</ref>

Key economic risk: oracle design (spot vs smoothed vs PT-specific risk oracle). If the oracle can be pulled by secondary-market dislocations, you can be liquidated even though “maturity value” is fine.

===== C) “Liquidity gap” risk (the silent killer) =====

Liquidators must sell seized PT somewhere (or hedge it). If the PT market is thin / out of range / stressed, liquidation execution can fail or clear at huge discounts → bad debt risk for the market and forced liquidation losses for you. This is explicitly called out in PT risk discussions for money markets. Aave<ref>{{cite web|title=Aave|url=https://governance.aave.com/t/llamarisk-insights-aaves-pt-token-exposure-risk-outlook/22312|publisher=governance.aave.com|access-date=2026-01-23}}</ref>

Looping amplifies this because everyone is crowded on the same unwind path.

===== D) Maturity + roll risk (cliff events) =====

As maturity approaches, PT volatility typically declines and convergence strengthens, but your loop introduces a “roll decision”:
* close before maturity (market liquidity)
* hold through maturity (redemption mechanics, settlement timing, post-maturity oracle handling, etc.)

If many players roll at once, PT liquidity + borrow liquidity can both gap.

===== E) Underlying asset + wrapper risk =====

PT inherits risk from:
# Pendle contracts (tokenization + redemption flow)
# the underlying yield-bearing token / protocol (LST/LRT, stable yield token, etc.) A failure in either can reprice PT sharply and instantly. docs.pendle.finance<ref>{{cite web|title=docs.pendle.finance|url=https://docs.pendle.finance/pendle-v2/Developers/Oracles/PTAsCollateral|publisher=docs.pendle.finance|access-date=2026-01-23}}</ref>

===== F) Reflexivity + “loop convexity” =====

Looping makes your liquidation distance nonlinear:
* small adverse move → higher LTV
* higher LTV → less buffer
* any further move → liquidation cascade

This is why “2–3x is fine, beyond that gets hairy” is a common heuristic in PT looping guides. Medium<ref>{{cite web|title=Medium|url=https://medium.com/contango-xyz/how-to-enter-a-pt-loop-like-a-pro-2f279e72ac3f|publisher=medium.com|access-date=2026-01-23}}</ref>