Crypto Newbie / Simulators / Leveraged Loop
Leveraged Loop (Recursive Farming) Simulator
DeFi loopers deposit ETH into Aave, borrow USDC at 70% LTV, buy more ETH, re-deposit, borrow again — repeat 5-10 times. The result is leveraged exposure (3-5×) to ETH with simultaneous interest payments. This simulator runs the exact math so you can see: how much your leverage actually compounds per loop, what the asymptotic max is, what your real net APY is after borrow costs, and crucially — how small an ETH drop kills the whole position. Most loopers don't realise the borrow rate often exceeds the supply rate, making the strategy a guaranteed loss.
Loop config
Final position
Effective leverage
3.06×
Asymptotic max (∞ loops)
6.38×
Net APY
-0.12%
Unleveraged yield
4.00%
Liquidation price shock
18.91%
Collateral price drop that triggers liquidation. With high leverage, even a small adverse move kills the entire position.
Loop-by-loop progression
| Loop | Total collateral | Total borrow | Leverage | Net APY |
|---|---|---|---|---|
| 1 | $17.0k | $7.0k | 1.70× | 2.60% |
| 2 | $21.9k | $11.9k | 2.19× | 1.62% |
| 3 | $25.3k | $15.3k | 2.53× | 0.93% |
| 4 | $27.7k | $17.7k | 2.77× | 0.45% |
| 5 | $29.4k | $19.4k | 2.94× | 0.12% |
| 6 | $30.6k | $20.6k | 3.06× | -0.12% |
The compounding math, in plain terms
Start with $100. Deposit, borrow $70 (70% LTV). Total ETH exposure: $170. Re-deposit the $70, borrow another $49 (70% of $70). Total: $219. Each loop adds 70% of the previous loop's borrow. After N loops: total exposure ≈ $100 × (1 + 0.7 + 0.7² + ...) = $100 × (1 − 0.7^N) / 0.3. At 10 loops, exposure ≈ $328 — 3.28× leverage. Asymptotic max: $333 (3.33× leverage at 70% LTV). Gas costs + slippage make 10+ loops typically not worth the marginal benefit; most loopers stop at 5-7 loops where ~90% of the asymptotic benefit has been captured.
Why net APY is usually negative
Looping compounds your supply yield BUT also compounds your borrow cost. Net APY = supply × leverage − borrow × (leverage − 1). With supply = 4%, borrow = 6%, leverage = 3.3×: net = 13.2% − 13.8% = -0.6%. You PAY to be leveraged. This is the dirty secret of looping. The strategy only profits when (a) supply rate > borrow rate (rare, mostly during incentive programs handing out tokens), (b) you're directionally right and ETH pumps enough to overshadow the spread cost, or (c) the protocol pays you bonus tokens (e.g., COMP for Compound's lending markets) that exceed the rate spread.
Liquidation risk gets dramatically worse
Unleveraged ETH at $3,500 survives a 100% drop (to $0) before "liquidation" (you just have less ETH). Leveraged at 3.3× on Aave with 83% LT: ETH drops 10% → HF drops to ~1.05 (risky). ETH drops 15% → HF below 1.0 → liquidation. So a position designed to capture 13% net APY can be wiped out by a single bad day in crypto. Historical context: ETH has had multiple 20-50% drops in single days (March 2020, May 2021, June 2022). Looping with 3×+ leverage in volatile markets is structurally a 'pick up pennies in front of steamrollers' trade.
When looping actually makes sense
Three scenarios: (1) Incentive farming — protocol pays bonus tokens that make net APY genuinely positive (e.g., Lido + Aave during STMATIC incentives 2022 gave 8-15% real net APY for stETH loopers). (2) Stablecoin loops — supply USDC on Aave, borrow USDT, swap, deposit; lower volatility means lower liquidation risk and stable spread economics. (3) Yield strategies on dPxETH/wstETH or other yield-bearing tokens where the underlying yield itself exceeds borrow costs. For ETH/BTC loops without bonus incentives: the math basically never works for retail.
Frequently asked questions
+Why does Aave allow 80% LTV if 70% is already dangerous?
Aave's 80% LTV is the BORROW limit; the LIQUIDATION threshold is 83%. The 3% gap is a safety buffer. Borrowing at 80% LTV is allowed but discouraged for active positions — you have almost no buffer for price moves. Most experienced borrowers stay at 50-65% LTV, which gives 18-33% price-move buffer before liquidation. Looping at the borrow limit is a bot strategy that requires constant rebalancing — not for humans.
+Can I loop on Compound or just Aave?
All major lending protocols support looping: Aave, Compound, Spark, Morpho, Euler. The math is identical; differences are in liquidation thresholds, supported assets, and oracle architectures. Some L2 protocols (Radiant on Arbitrum, Mendi on Linea) compete on lower gas costs for the many transactions looping requires. The protocol matters less than the rate spread between supply and borrow — pick the venue with the best spread for your collateral.
+What's 'recursive' vs 'leveraged' looping — same thing?
Mostly synonymous in DeFi parlance. 'Recursive' emphasises the mechanical iteration; 'leveraged' emphasises the outcome (multiplied exposure). Some platforms (DefiSaver, Instadapp) automate the loops as a single tx via flash loans — same end state but cheaper gas. The 'flash loan loop' is the same math executed atomically; you avoid the multi-tx gas costs but the strategy itself is identical.
+Is looping with stablecoin collateral safer?
Much safer. USDC collateral has near-zero volatility (barring depeg events); your liquidation price effectively doesn't move with markets. The only risk is the protocol's depeg liquidation logic (some protocols liquidate USDC positions during USDC depegs — see March 2023 SVB crisis). Stablecoin loops are typically used to harvest interest rate arb or stake-yield via wstETH-style wrapper tokens.
+Why does the simulator's 'liquidation shock' get smaller with more loops?
Because each loop adds borrowing without adding fresh equity — your borrow-to-equity ratio worsens. At loop 1: borrow $70 against $100 collateral, 30% buffer before LT. At loop 10: borrow $230 against $330 collateral, only 13% buffer before LT. Higher leverage = closer to liquidation. The simulator visualises this trade-off explicitly so you can pick a leverage that matches your risk tolerance.