Looping (Leveraged Staking)

Looping is the practice of depositing an asset as collateral, borrowing a correlated asset against it, converting the borrowed amount back into the deposit asset and depositing again, repeating until the position reaches a target leverage. The most common form uses a liquid staking token: deposit the staked asset, borrow the underlying, stake it, deposit the new staking token, and repeat. Each turn is small but they compound, so a few loops can turn a modest yield spread — the staking return minus the borrow rate — into a headline figure several times larger. The arithmetic that makes it attractive is also what makes it fragile, because the same multiple applies to losses. Three things end a loop badly. The spread inverts, which happens whenever borrow demand spikes and the borrow rate rises above the staking yield, at which point the position pays to exist and every additional turn deepens the bleeding. The correlation breaks, because a liquid staking token trades at a market price rather than at redemption value, and a discount to the underlying moves a looped position toward liquidation without the underlying asset having moved at all. Or liquidity fails at the moment of unwinding, since exiting requires selling the staking token into whatever depth exists during the same stress that caused the problem. Looping is a leverage trade wearing the vocabulary of yield. Size it as leverage: watch the health factor, keep the loop count low enough to unwind in one transaction, and assume the exit is worse than the entry.