Venus Stars
What Is DeFi Looping?
You can lend or borrow crypto assets on a DeFi platform and earn crypto assets in exchange for supplying an asset. More complex strategies, however, can be used to increase yield output. One such yield-increasing technique is Looping. In DeFi, looping is the process of supplying and borrowing the same assets and then resupplying the borrowed assets to amplify your returns by increasing your Annual Percentage Rate (APR) and Annual Percentage Yield (APY).
Looping in DeFi can look different on different platforms. However, the operational metrics are fundamentally similar.
DeFi Lending platforms (such as Venus, Aave, Compound, etc.) enable investors to deposit their crypto assets into different markets and earn interest. Moreover, these platforms demand that investors who want to borrow assets provide collateral to the supply market. This means that both lenders and borrowers are lending their assets. It also implies that tokens can be used as collateral for borrowing after staking.
These platforms also give their native tokens as a reward when you Supply/Borrow your assets in their Core Markets. For example, you can supply ETH (as collateral) and borrow ETH at the same time and occasionally receive positive APY with native token rewards on both sides.
After borrowing an asset, you return it to the protocol to earn additional lending APY. This is a leverage loop, which you can repeat eight to thirteen times before the returns begin to decline in relation to the efforts.
However, looping leverage is only profitable when the supply APY exceeds the borrow APY. You must also ensure that your borrowing is lower than the liquidation threshold. If the liquidation threshold is 80%, for example, use leverage between 65 and 75%.
A more comfortable Looping strategy can be envisaged for VenusPrime users in Venus Protocol. When you are a Venus Prime, you earn higher Supply Apy and extra high Apy on the borrow side as incentive rewards. This also gives you more looping opportunities.
Looping is a cyclical process in which a user:
- Supplies assets on Lending Platforms
- 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…
A user can only borrow as much as the asset’s LTV (CF) ratio multiplied by the asset in supply allows.
Let’s illustrate this with the simple fact that the assets supplied and borrowed are the same currency
Let’s say we are looping on Venus using USDT :
- 80% LTV (CF) for USDT
If we supplies $100 USDT our LTV (CF) is calculated as follows:
We can therefore take out a loan of 80 USDT. If we goes ahead to re-supply this, our new collateral would be 100 + 80 = 180 USDT.
Our new LTV would therefore be 180 * 80% = 144 USDT. We already borrowed 80, so we could, for this new loop, borrow an additional 144 — 80 = 64 USDT.
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:
We could, therefore, keep looping until we reache a situation where we have 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.
With mix of coins, looping entails very high risk because slight price changes can cause liquidation.
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.
The yield farming process is complex, putting both borrowers and lenders at risk. Users are more vulnerable to temporary losses and price fluctuations when markets are volatile.
The content of this article is not Financial Advice. It covers the Looping strategy in DeFi for educational purposes only.
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