What Is Recursive looping?
Recursive looping, also known as recursive lending or borrowing loops, is a leveraged yield farming strategy in decentralised finance (DeFi) lending markets. It involves repeatedly borrowing against deposited collateral—often using the borrowed assets as additional collateral—to amplify exposure to interest rates, liquidity mining rewards, or other yields offered by lending protocols like Aave, Compound, or Euler. This creates a “loop” that multiplies the effective capital deployed without requiring additional external funds, essentially allowing users to borrow from themselves to lend back into the protocol.
How Recursive Looping Works
The process typically leverages overcollateralized lending mechanics in DeFi, where loans require collateral worth more than the borrowed amount (e.g., a 75% loan-to-value ratio means you can borrow up to 75% of your collateral’s value). Here’s a step-by-step breakdown:
Initial Deposit: A user deposits an asset (e.g., 100 USDC) as collateral into a lending protocol like Aave, earning supply interest and possibly governance tokens (e.g., ETH on Ethereum).
Borrowing: They borrow against this collateral—often the same asset or a correlated one (e.g., borrow 75 USDC against the 100 USDC collateral). The borrowed amount incurs borrowing interest, but if supply rewards outweigh borrowing costs, the net yield is positive.
Re-Deposit and Repeat: The borrowed asset is re-deposited as additional collateral, enabling more borrowing. This loop is repeated multiple times (e.g., 3-5x) to achieve higher leverage, such as turning 100 USDC into effective exposure of 300-400 USDC. Modern implementations often use flash loans (temporary, uncollateralized loans repaid in the same transaction) to automate the entire loop atomically, avoiding multiple on-chain steps and reducing gas fees.
Yield Amplification: The strategy profits from the spread between supply APY (annual percentage yield) and borrow APY, plus any token incentives. For instance, if supplying earns 5% APY plus rewards while borrowing costs 3%, the net yield per loop compounds. It’s commonly applied to stablecoins or real-world asset (RWA) tokens for lower volatility.
In vault-based DeFi (e.g., Yearn Finance or recursive yield loops), automated strategies or “vaults” handle this recursively, where the vault borrows to fund its own liquidity provision, creating self-sustaining yield loops.
Risks and considerations
Liquidation Risk: Leverage amplifies losses; a small price drop in the collateral asset can trigger cascading liquidations if the loan-to-value ratio exceeds safe levels.
Interest Rate Volatility: If borrow rates spike above supply rates (e.g., due to market stress), the loop becomes unprofitable, leading to negative yields.
Smart Contract and Protocol Risks: Bugs, oracle failures, or protocol exploits can lead to total loss.
Tax Implications: In some jurisdictions, each borrow/re-deposit may trigger taxable events, creating a “recursive tax” burden.
Systemic Effects: Widespread recursive looping can inflate protocol TVL (total value locked) artificially, potentially masking underlying risks and contributing to market bubbles and cascading liquidation.
While recursive looping can generate high APYs (e.g., 10-50% or more in bull markets), it’s suited for experienced users who monitor health factors and use tools like DeFi aggregators for optimization.
See also