Leveraged borrowing, also known as looping, has become a pivotal component of financial activity within decentralised finance (DeFi), accounting for approximately 30% of all operations in the Ethereum market, according to Marcin Kazmierczak, co-founder of cryptocurrency oracle provider Redstone. This growing trend in DeFi is reflected by internal data from Redstone, which underscores the substantial role looping plays in major lending platforms such as Aave, Spark, Morpho, Compound, and Euler.
Kazmierczak indicated that many lending and borrowing positions in these markets are centred around looping strategies. Redstone’s oracles aggregate data across various onchain environments and monitor liquidity trends as well as lending behaviours across different crypto applications. However, he noted that his analysis has primarily focused on Ethereum, without extending the metrics to other smart contract platforms.
Currently, DeFi activities on Ethereum represent over 60% of all onchain operations, as reported by DefiLlama. The strategy of looping has undergone significant evolution since its rise with Maker in the early years of DeFi. At its core, a straightforward looping strategy involves depositing a cryptocurrency, such as Ether, to borrow another asset, typically a stablecoin. Traders then utilize this stablecoin to purchase more Ether, creating what is referred to as one “loop,” which results in leveraged exposure to Ether.
The complexity of the strategy has increased with the introduction of new cryptocurrency forms. Michael Bentley, CEO of Euler Labs, noted that the emergence of staked Ether prompted traders to combine it with Ether for higher yield exposure. He explained, “These days, there’s a tremendous amount of yield-bearing stablecoins, and people love to loop those against the non-yielding stables.” Bentley expressed that while he could not provide exact statistics, the 30% figure for looping activity in DeFi did not surprise him.
However, with the potential for amplified returns comes heightened risk. The history of crypto markets is rife with examples of the consequences of excessive leverage, evidenced by significant events including the collapse of the algorithmic stablecoin USDT and the downfall of the crypto exchange FTX. Bentley cautioned that strategies like looping can further entrench leverage in the system, thereby increasing the likelihood of black swan events over extended periods. “There’s no free lunch in finance,” he remarked, highlighting the inherent risks involved.
As the DeFi market continues to expand, the implications of leveraged borrowing activities will remain a critical area of scrutiny for investors and regulators alike.
