- Redstone’s founder highlights that around 30% of DeFi is linked to amplified borrowing strategies.
- The practice of “looping” has significantly changed over recent years.
- Significant risks are associated with this activity.
Amplified borrowing, often referred to as looping, has become a major component driving activity within the decentralized finance space.
This information comes from Marcin Kazmierczak, one of the founders of Redstone, a provider of crypto oracles.
Redstone’s internal data indicates that this investment approach accounts for about 30% of all activity within the Ethereum-based DeFi market, currently valued at $250 million.
Kazmierczak shared with DL News, “When examining lending and borrowing positions on major platforms like Aave, Spark, Morpho, Compound, and Euler, the vast majority are related to looping strategies.”
Redstone oracles collect data from various blockchain environments, liquidity sources, and patterns in lending behavior observed across different crypto applications.
He clarified that his analysis of this trading strategy’s prevalence is specific to the Ethereum network and doesn’t extend to other smart contract platforms.
Understanding Looping Leverage
Looping, which gained initial traction during the early stages of Maker, has undergone substantial transformations.
A basic looping technique involves depositing a cryptocurrency, for instance, Ether, and then borrowing another asset against that deposit, such as a stablecoin. The trader uses the borrowed stablecoin to purchase more Ether, thus completing a “loop.”
This trade allows traders to gain leveraged exposure to Ether’s price movements.
According to Michael Bentley, CEO of Euler Labs, the strategy has become increasingly sophisticated with the introduction of newer cryptocurrency types.
He told DL News, “With the emergence of Staked Ether, individuals started looping Staked Ether with Ether to amplify their annual percentage yield exposure.”
“Currently, there’s a substantial number of yield-generating stablecoins, and people are eager to loop them against non-yielding stablecoins.”
While Bentley couldn’t confirm exact figures, he expressed no surprise that looping accounts for 30% of DeFi activity.
The Inherent Risks
High leverage within crypto markets is not a novel phenomenon.
Numerous instances of overextended borrowers collapsing have severely impacted the industry, including the $40 billion failure of the USDT algorithmic stablecoin and the downfall of the FTX crypto exchange.
So, does looping present potential risks to DeFi? The answer is undoubtedly yes.
Bentley cautioned DL News, “Looping can introduce more leverage into the system, and leverage, over extended periods, can trigger black swan events.”
“As the saying goes, there’s no such thing as a free lunch in finance.”
Liam Kelly is a DeFi Correspondent at DL News. Have a news tip? Contact them via email at liam@dlnews.com.