Looping: the first complex strategy

Exploring the finance of looping assets through Lendle.

5 min readAug 14, 2023

In the dynamic landscape of decentralized finance (DeFi), the notion of capital efficiency takes center stage. Among the tactical strategies emerging within platforms like Lendle, the concept of “looping” stands as a testament to the innovative spirit driving the DeFi revolution. This article unravels the intricacies of looping within Lendle’s framework, offering insight into its mechanics and showcasing its potential to shape the DeFi landscape.

The foundation of complex strategies

In our seminal article, we mentioned we would delve into more complex strategies enabled by Lendle. The simplest form of building more complex strategies on Lendle is to engage in so called “Looping” operations. This tactic, operatable directly on Lendle’s platform, offers a range of strategic avenues to optimize users’ financial approach. Looping doesn’t necessarily require interaction with external dApps or partners, though we’re actively collaborating with partners to enhance these offerings in the near future. Let’s delve into the mechanics and potential benefits of looping within Lendle’s DeFi landscape.

Looping is a cyclical process in which a user:

  • Supplies assets on Lendle;
  • Takes a loan against the Loan-To-Value (LTV);
  • Re-supplies the loan back as collateral to increase LTV;
  • Takes a loan against the new and increased LTV;
  • And so the cycle continues…

Nevertheless, a user can only borrow as much as the LTV ratio of the asset multiplied by the supplied asset allows them to take.

The simplest way to illustrate this is that the supplied and borrowed assets are the same currency.

Let’s assume Alice decides to loop USDT and the USDT parameters on Lendle are:

  • 80% Max LTV
  • 85% Liquidation threshold

If Alice supplies $100 USDT her LTV is calculated as follows:

LTV formula.

She can therefore take out a loan of $80 USDT. If she goes ahead to re-supply this, her new collateral would be $100 + $80 = $180.
Her new LTV would therefore be $180 * 80% = $144. She already borrowed $80, so she could, for this new loop, borrow an additional $144 — $80 = $64.

This process can then be repeated until the LTV and borrow reach roughly the same number.

For the mathematical wizards amongst us the maximum leverage can be calculated by:

Max leverage formula.

Alice could, therefore, keep looping until she reaches a situation where she has $500 USDT supplied and $400 USDT as a loan.

This example was detailed with a stablecoin and the same asset for simplicity’s sake, but in theory a mix of coins can be used for looping.

Having said this, looping entails very high risk because slight price changes can cause liquidation.

The Lendle team does not encourage any behaviour, but should you decide to use a looping strategy please do so with caution!
Now that we explored the concept of looping, let’s discuss why looping might be useful.

The utility of looping

Looping can be done primarily for 2 reasons:

  1. Increasing farming yield;
  2. Increasing leverage for directional purposes.

Since Lendle introduced a token model on top of the Aave v2 core logic for the lending pools, both the supplying and the borrowing of assets are incentivised with additional yield in $LEND tokens. Thus, the simplest method to increase this yield is by looping an isolated asset, as discussed above.

When looping an asset, users increase both their supply and borrow LTV. The $LEND incentive APR is calculated over these looped numbers, so by looping assets users can increase their $LEND APR drastically!

However, please note that the borrow interest rate is also calculated on the total amount borrowed, so by looping the interest that must be paid is also increased. Looping an isolated asset is therefore a trade-off between paying interest in the looped asset vis-à-vis the $LEND incentives earned.

For proficient DeFi users that fully understand the risks of being liquidated, it is also a strategy to supply assets that have a high utilisation rate as collateral and borrowing low utilised assets.
This strategy ensures high supply APY in the asset supplied as collateral, low borrow APY of the asset borrowed AND a boosted $LEND APR on both positions.

Moreover, in the example above Alice looped USDT, but the same principle can also be applied for a mixed set of assets.
By supplying one asset, borrowing another and then selling the borrowed asset, a short position is built because the user now has a loan in an asset that they do not possess.

Similarly, using USDT as collateral to borrow WBTC, then selling the WBTC for USDT and looping again builds up a leveraged short position on WBTC.
Naturally, the principle also works inversely when WBTC is supplied, USDT is borrowed, sold for WBTC and the WBTC is compounded.

Due to the cross-collateralized nature of Lendle, multiple assets can be combined into a looping strategy to adjust portfolio exposure to volatile assets; this can be done in accordance to the users’ own risk appetite, therefore providing a flexible tool to DeFi enthusiasts.

Looping for DeFi Success

In a landscape defined by innovation and strategic depth, looping emerges as a compelling strategy to be employed on Lendle. As we conclude this exploration into the dynamic world of looping within Lendle’s DeFi terrain, a clear vista of strategic possibilities emerges. Looping stands as a testament to the ingenuity and adaptability inherent in decentralized finance, offering users the ability to amplify yield farming, enhance leverage, and recalibrate their portfolio exposure. The self-contained nature of looping within Lendle provides a secure environment for these strategies, while ongoing collaborations with external partners promise even broader horizons for strategic financial engagement.

However, it’s essential to once again acknowledge the inherent risks that come with the looping strategy, including potential liquidation due to market fluctuations. Embracing looping requires a measured understanding of associated risks, but with prudence and strategic insight, users can harness this strategy to navigate the rapidly evolving landscape of DeFi.