Leverage Loop

What it actually means

Lending protocols let you deposit collateral and borrow against it. A leverage loop, also called looping or recursive borrowing, turns that single action into a cycle. You deposit a collateral asset, borrow a correlated asset against it, swap the borrowed asset back into the collateral asset, and redeposit. Each pass adds more of the same exposure on top of the position you already hold.

People loop for two reasons. The first is to amplify directional exposure, for example holding more ETH than your starting capital would allow. The second is to amplify yield, which is common with correlated pairs like ETH and a liquid staking token such as wstETH, where the collateral earns staking yield while the borrowed leg costs less than that yield.

How it is calculated

Each loop borrows a fraction of the collateral value set by the protocol parameters, so the total exposure converges to a multiple of your starting capital. With a borrow ratio of LTV per pass, the theoretical leverage approaches:

For example, if a market lets you borrow up to 80% of your collateral value, the loop converges toward 1 / (1 - 0.8) = 5x exposure. In practice you stop a few loops short of the theoretical maximum to keep a safety buffer, so a position targeting that market might settle around 3x to 4x. The economics are governed by net APY:

Both legs scale with leverage, so a small change in either the supply rate or the borrow rate moves your net return far more than it would on an unleveraged position.

Why it matters to you

A leverage loop compounds yield and liquidation risk at the same multiple. The things that change quietly on a normal position can move sharply on a looped one:

• Borrow rate increases hit the full leveraged borrow balance, so a rate spike can flip net APY negative.
• A small depeg between the collateral and borrowed asset can push the health factor toward liquidation faster than the price chart suggests.
• Liquidation removes the entire stack of loops, not just the last one, so the loss is amplified by the leverage you used.
• Unwinding takes several steps in reverse (withdraw, swap, repay, repeat), which is harder to do calmly under stress.

Real example

You start with 10 ETH worth $30,000 and loop an ETH and wstETH position. You deposit the ETH, borrow ETH against it, swap into wstETH, redeposit, and repeat a few times. After several passes your supplied collateral is roughly $90,000 and your borrowed balance is roughly $60,000, giving you about 3x exposure on your original $30,000. The wstETH staking yield applies to the full $90,000, while the borrow cost applies to the $60,000 debt. As long as staking yield stays above the borrow rate, net APY is positive and leveraged. If the borrow rate climbs above the staking yield, the same leverage now works against you.

Common misconceptions

A leverage loop is not free yield. The positive carry depends on the borrow rate staying below the supply yield, and borrow rates move with utilization. It is also a mistake to think correlated pairs are safe from liquidation. Liquid staking tokens can trade below their underlying asset during stress, and on a looped position that gap is what erodes the health factor first.

How Otomato monitors it

Otomato detects looped positions automatically across Aave, Morpho, Euler, and others with no setup, reading the supplied and borrowed legs as one position rather than asking you to configure anything. Because leverage amplifies every change, the default rules watch the things that matter on a loop: health factor crossing your thresholds, net APY turning negative when the borrow rate overtakes the supply yield, and depeg between the two assets. You only hear from Otomato when one of these materially shifts. Silence means the carry is still positive and the position is still safe.

Monitor this in your portfolio

Otomato detects your positions automatically and alerts you only when something material changes. No setup, no signatures.

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