Looping: How 5% Per Year Turns Into 15%, and When the Noose Tightens Around Your Neck

Looping-a recursive leverage strategy for returns: you deposit an income-generating asset into a lending platform, borrow stablecoins or the underlying asset against it, buy more of the income-generating asset, deposit it again-and repeat this cycle several times.

The Math Behind the Loop

Each cycle increases your exposure: with a 75% LTV, you can leverage $100 in capital into a position worth $300-400. Profit = (asset yield - loan rate) × position size. A 3% spread in a four-fold loop translates to ~12% on capital. It looks good as long as the spread is positive.

Built-in self-liquidation mechanism

• The spread flips: the borrowing rate is floating; if demand for loans rises, your loop earns negative interest, and the loop silently eats away at your capital.
• Depegging within the loop: a classic example is an LST loop against the underlying asset-a 3-5% discount on the depositary receipt with 4x leverage leads to liquidation, even though “fundamentally, everything is fine.”
• Pool liquidation: Under stress, the borrowing pool can be drained to the bottom-there’s physically nothing left to unwind the loop (exit) with; you just sit and watch.

Rules: Calculate the liquidation threshold based on the deposit margin, not the asset price; monitor the borrowing rate weekly; remember that “delta-neutral” does not mean “risk-neutral.” A loop is a leveraged carry trade, and it dies the same way-instantly and en masse.