Defensive Looping

Defensive looping is an informal DeFi term for a cautious version of looping, the strategy of depositing an asset in a lending protocol, borrowing against it, swapping the loan back into the deposited asset and repeating the cycle to build a leveraged position. In the defensive form, the user keeps the loan-to-value ratio well below the protocol's limit and usually pairs assets that move together, such as ether and a liquid staking token, so that price swings are less likely to trigger forced liquidation. The aim is to earn the gap between the yield on the deposit and the cost of borrowing, not to bet on price. Risks remain: borrowing rates can rise above the yield, correlated assets can briefly separate, and smart-contract or oracle failures can still cause losses. Also see leverage.