What Is Recursive looping?

Recursive looping means borrowing against an investment and reinvesting the borrowed money, potentially repeating the process to increase the position. The investment serves as collateral, assets pledged to secure a loan from lenders through a lending protocol. The borrower owes those lenders money; they are not borrowing from themselves.

This creates leverage: a larger investment than the investor’s own money could buy. A vault may automate buying assets, pledging them, borrowing and reinvesting. Returns depend on income from the entire investment minus interest on the debt and other costs.

Hypothetical example

Suppose an investor supplies 100 USDC and borrows a further 200 USDC to hold 300 USDC worth of investments for one year. If the investments earn 5%, they generate 15 USDC; if borrowing costs 3% on the 200 USDC debt, interest costs 6 USDC. The remaining 9 USDC is a 9% return on the investor’s 100 USDC, before fees.

If borrowing instead costs 8% for that year, interest is 16 USDC, leaving a 1 USDC loss even though the investments earned income. These simplified figures assume unchanged asset prices and balances, simple annual interest, no compounding and no fees; they are not current rates or an offer. A 10% fall in the investment’s price would separately lose 30 USDC, or 30% of the investor’s original money, before interest and fees.

Borrowing rates, collateral prices and market rules can change the outcome. Insufficient collateral can trigger liquidation, and limited liquidity can make repaying debt or selling investments difficult. Price-feed errors and software failures can also cause losses.

See Morpho’s variable-rate market documentation for the underlying lending mechanics, and principal token for an example of buying a token below its redemption value.

See also decentralised finance.