Structured Looping

A yield-bearing asset is supplied as collateral. A correlated asset, typically the one the collateral is denominated in, is borrowed against it, swapped back into the collateral asset and supplied again. Each pass adds exposure at a diminishing rate fixed by the market’s loan-to-value ratio; the total exposure converges to a multiple determined by that ratio. Several protocols now execute the full loop in a single transaction using a flash loan, which reduces execution risk but changes nothing about the risk of the finished position.

The most common structure supplies a liquid staking or liquid restaking token and borrows the underlying asset. Because collateral and debt move together in price, the position is close to directionally neutral; what it carries is the spread between the staking yield and the borrow rate, multiplied by the leverage. Its principal risk is that the staked token trades below its redemption value, because of a slashing event, a redemption queue or simple selling pressure, at which point the collateral falls while the debt does not.

A yield-bearing stablecoin or tokenized Treasury instrument is supplied and a plain stablecoin borrowed against it. The spread is the instrument’s yield less the borrow rate. These loops have little price risk between legs but full exposure to the collateral instrument’s peg, and to borrow-rate spikes when demand for borrowed dollars rises, which tends to happen in exactly the moments when the yield-bearing instrument is most likely to trade at a discount.

A lending position’s health factor is the ratio of collateral value, after haircut, to debt. At one it is liquidated. Every loop is opened with a buffer well above that threshold and monitored continuously against collateral price, borrow rate and the liquidity available to exit. The unwind path (repay, withdraw, swap, repeat) needs the swap leg to have depth, and it is tested against available depth before the position is opened.