Key Takeaways
- Looping idea is to borrow at a low-interest rate, then lend that same money at a higher rate and pocket the difference between
- Looping allows investors to profit from borrowed funds without them needing to provide personal information or going through KYC demands
- Looping in Defi definitely has the chance for success. It may seem simple, but there is potential money to be earned by making use of looping
The recent ‘The Defiant’ newsletter suggested that no yield is a bad yield. However, 60% APR sounds almost too good to be true and there’s, a yield-increasing technique called looping that offers exactly that when it comes to stablecoins, Ether or even Matic investment.
To put it simply, looping is supplying an asset and borrowing against that asset repeatedly.
So, What is Looping?
When Looping, one can repeat the same process until his returns begin to subside in order to increase the annual percentage rate (APR) and annual percentage yield (APY).
In the early DeFi stages, investors were using peer-to-peer lending and collateralized loans for borrowing.
Nowadays, it’s almost impossible to apply for loan payback in the DeFi ecosystem because of the fact that the reputation systems are restrained.
Investors can, however, both lend and borrow on a decentralized app (dApp) in order to generate yield.
Still, when compared to centralized finance, DeFi borrowing and lending process is definitely more efficient, transparent, and more accessible. This means that with DeFi, anyone may become a borrower or a lender totally anonymously.
Looping allows investors to profit from borrowed funds without them needing to provide personal information, prove their identity, or going through KYC demands.
DeFi Borrowing and Lending Explained
After one borrows an asset, they give it back to the protocol in order to earn additional lending APY. This is called a leverage loop, and one can usually repeat it around eight to thirteen times before the returns begin to fall in correlation with the investment itself.
In order for looping leverage to be profitable, the supply APY has to be higher than the borrow APY.
If one wants to become a lender, on the other hand, they have to invest their assets into a DeFi-based smart contract. For this, they get tokens that represent interest and principal payments. These deposited coins are also used as loan collateral – the higher the collateral, the higher the loan.
Are 60% + Yields Sustainable, or is this a DeFi Trap?
High and easy-to-earn yields were the main focus of the 2020-2022 DeFi rally.
It was a fantastic time for stablecoins, and there were plenty of stimuli for traders who then managed to earn astronomical yields. Alpha was easily generated and there were almost no risk management mechanisms.
However, DeFi became one of the most affected when it came to a crypto market downturn – starting from Anchor collapse to the Terra network crash, including pressure in stEth and LIDO.
All of this led to the insolvency of some of the biggest market players and, therefore, to the change in the whole nature of DeFi, where the balance between alpha and risk in DeFi has changed enormously.
This then led to the 70% shrink of the total value locked in all DeFi protocols from its ATH, to around $74 billion today.
Conclusion
Looping in Defi definitely has the chance for success. After all, the basis for DeFi is lending and borrowing. It may seem simple, but there is potentially money to be earned by making use of looping.
Also, this means that potential borrowers or lenders don’t have to deal with traditional finance institutions and still can earn a substantial yield.
However, as in every investment, it is important that people do their own research and to proceed with caution when things sound too good to be true.
Teuta is a seasoned writer and editor with more than 15 years of experience. She has expertise in covering macroeconomics and technology as well as the cryptocurrency and blockchain industries. She has worked for several publications as a journalist and editor, including Forbes, Bloomberg, CoinTelegraph, Coin Rivet, CoinSpeaker, VRWorld and Arcane Bear.
Teuta began her professional career in 2005, working as a lifestyle writer at Cosmopolitan in Croatia. From there, she branched out to several other publications, covering mainly business and the economy. She then turned her attention to the world of cryptocurrency and blockchain, believing that crypto is among the most important inventions in the history of humanity. Her involvement in fintech began in 2014 and she has since lent her expertise in writing, editing and gathering information about the world of crypto, blockchain, NFTs and Web3.
An all-round news hound, mentor, editor, and writer, Teuta enjoys teamwork and good communication. She holds a WSET2 diploma and has a thing for chablis, punkrock music and shoes. She also holds a double MA in Political science and Entrepreneurship.
