- Leveraged borrowing makes up 30% of DeFi activity, says Redstone co-founder.
- So-called looping has evolved dramatically in recent years.
- But risks abound.
Leveraged borrowing, sometimes called looping, has emerged as a key driver of financial activity across decentralised finance.
That’s according to Marcin Kazmierczak, the co-founder of the crypto oracle provider Redstone.
The trading strategy now makes up roughly 30% of all activity in the $250 million DeFi market on Ethereum, according to internal data collected by Redstone.
“If you look into the composition of lending and borrowing positions on the major lending markets, such as Aave, Spark, Morpho, Compound, and Euler, the majority of that is looping,” Kazmierczak told DL News.
Redstone oracles collect data across various onchain environments, liquidity, as well as the composition of lending behaviour on different crypto apps.
He has not measured the popularity of the trading strategy on other smart contract platforms beyond Ethereum.
Looping leverage
Initially popularised in the early years of Maker, looping has evolved significantly.
A basic looping strategy involves depositing a cryptocurrency, such as Ether, and then borrowing another asset against that deposit, such as a stablecoin. The trader then buys more Ether with that borrowed stablecoin to make one “loop.”
This trade gave traders leveraged exposure to Ether.
However, the strategy has become more complicated alongside the creation of newer types of cryptocurrencies, according to Michael Bentley, the CEO of Euler Labs.
“Staked Ether emerged and people started looping staked Ether with Ether to increase exposure to the annual percentage yield,” he told DL News.
“These days, there’s a tremendous amount of yield-bearing stablecoins, and people love to loop those against the non-yielding stables.”
Bentley couldn’t confirm exact numbers, but he said he wasn’t surprised that looping makes up 30% of DeFi activity.
‘No free lunch’
Pent-up leverage in crypto markets isn’t new.
Indeed, various uncoilings of overextended borrowers have brought the industry to its knees on several occasions, including the $40 billion collapse of the algorithmic stablecoin USDT and the fall of the crypto exchange FTX.
So does looping pose risks for DeFi, too? Certainly.
“Loops also allow more leverage to build in the system and leverage can cause black swan events over long time horizons,” Bentley told DL News.
“There’s no free lunch in finance, as they say.”
Liam Kelly is a DeFi Correspondent at DL News. Got a tip? Email at liam@dlnews.com.