Looping Strategies
Last updated
Last updated
What is Looping?
In Defi, loop strategies involve continuously borrowing and lending assets to increase returns. Leveraging, Yield Farming, and interest rate arbitrage are a few examples of common strategies, where users reinvest the accrued rewards or borrowed funds to increase earnings.
Manual looping step-by-step:
Initial Supply:
Example: Deposit 100 SOL into a lending protocol.
Borrowing:
Example: Borrow 90 JitoSOL against the deposited SOL. Given a loan-to-value (LTV) ratio of 90%, you can borrow up to 90% of the value of your deposited SOL.
Swapping:
Swap the borrowed JitoSOL back to SOL.
Re-depositing:
Deposit the newly acquired SOL back into the lending protocol.
Repeat:
Continue borrowing against the new deposit, swapping, and re-depositing through several loops.
As you can see, After multiple loops (typically 12-15), the additional exposure gained by each loop decreases. Each subsequent loop borrows a smaller amount due to the over-collateralization requirement. The effort and gas fees for looping increase while the incremental gain diminishes.
Indeed, manual looping is pretty expensive, especially on L1.
That’s why manual loops were soon automated via an automated Looping strategy by iLoop Protocol.
Instant Leverage Adjustments: Users can quickly increase or decrease their leverage in response to market movements, maximizing potential returns or reducing risk.
Simplified Process: The single-transaction mechanism simplifies the process of managing leverage, making it more accessible and user-friendly.
Increased Efficiency: By bundling multiple actions into one transaction, users benefit from reduced transaction costs and faster execution times.
Looping is a powerful strategy for gaining leverage and maximizing yield in DeFi, but it comes with risks and complexities. Understanding the mechanics and risks is crucial for effectively implementing this strategy.
