Sustainability of DeFi Carry Trading Using Stablecoins

We investigate the sustainability of a carry trade approach on AAVE V3, in which USDC is lended and used as collateral and Wrapped Ether is obtained by borrowing. We extend the Cox-Ingersoll-Ross model by incorporating Poisson-Exponential jumps to account for abrupt rate surges which can be seen on Decentralized Finance lending platforms. Using Monte Carlo simulation with 10,000 paths, we estimate liquidation probabilities. The approach takes into account compounding interest, price fluctuations for the borrowed asset, and the liquidation mechanics of AAVE V3. We use hourly data from January 2023 to January 2026 to estimate the model parameters for USDC and WETH, more specifically variable lending and borrowing rates. Our empirical results show that the average USDC supply rate (4.98%) exceeds the average WETH borrow rate (2.86%), yielding a positive spread 76% of the time. Even with WETH price appreciation from $1,381 to $4,926 during the sample period, the strategy yields a low probability of liquidation and positive expected returns. The 1-year liquidation probability is approximately 6.1-7.0% at depending on starting LTV and model used, with positive mean P&L for non-liquidated paths and mostly profitable paths. Our findings demonstrate that a profitable carry trade can be carried out on DeFi platforms using stablecoins as collateral and that these positions are sustainable.