The crypto world often feels like a high-stakes casino, doesn’t it? We hear about tokens rocketing or plummeting, fortunes made and lost in a blink. But away from the flashing lights and the hype, a quieter, more deliberate strategy has been steadily gaining ground. It’s called looping, and it’s where some of the smartest money is finding its home for 2025.
- Looping is a DeFi strategy that amplifies yield by using an asset as collateral to borrow more of the same earning asset. This creates a cycle designed to magnify small, consistent gains.
- The strategy is expanding beyond crypto-native assets to include real-world assets (RWAs) like tokenized private credit and real estate, offering predictable yields.
- Institutions are drawn to looping for its ability to increase capital efficiency and provide familiar risk/return profiles with enhanced transparency and liquidity compared to traditional finance.
Think of looping as a clever way to make your money work harder, much like traditional finance uses tricks like repo agreements or carry trades. The idea is simple: you take an asset that’s already earning you something, use it as collateral for a loan, and then put that borrowed money right back into the same kind of earning asset. It’s a cycle, a loop, designed to amplify those small, steady gains.
The Mechanics of a Loop
So, how does this quiet engine actually run? At its heart, looping relies on assets that grow in value over time. These are often called “yield-bearing” assets. Good examples include liquid staking tokens, like Lido’s wstETH, or synthetic dollars, such as Ethena’s sUSDe. They’re designed to accrue value, almost like a savings account that keeps adding pennies.
Let’s walk through a common example, one that involves EtherFi’s wrapped staking ether, known as weETH, paired with regular ETH. You start by depositing your weETH into a money market, which is essentially a lending platform (think of it like a digital bank). You then borrow ETH against your weETH collateral.
Here’s the clever bit: you take that borrowed ETH and immediately stake it on EtherFi, converting it back into more weETH. Then, you redeposit that new weETH as collateral. That’s one full loop. Each time you complete this cycle, you’re essentially borrowing to buy more of the asset that’s already earning you yield.
The magic comes from the asset’s design. weETH, for instance, steadily collects staking rewards. When EtherFi launched, one weETH was worth one ETH. Today, that same weETH is worth about 1.0744 ETH. It’s a slow, steady appreciation, but it’s consistent.
The key here is the spread. If your weETH is yielding, say, 3 percent annually, and the cost to borrow ETH is 2.5 percent, each loop captures a 0.5 percent gain. It might not sound like much on its own. But with a high loan-to-value ratio, perhaps 90 percent, and ten loops, that small spread can grow. The source article suggests this could potentially increase returns to roughly 7.5 percent annually. It’s a compounding effect, making a little bit go a long way.
This isn’t some fringe activity, either. Contango’s Q3 2024 estimates hinted that 20 to 30 percent of the $40 billion plus locked in money markets and collateralized debt positions came from looping strategies. That suggested $12 to $15 billion in open interest at the time, a quiet but significant part of the DeFi landscape.
Today, the scale is likely much larger. Aave alone holds close to $60 billion in total value locked (TVL), which is the total amount of crypto assets deposited in a decentralized finance protocol. Given that trading volumes for these leverage-based strategies often exceed open interest by a factor of ten, the annual transaction volume from looping might already be over $100 billion. It’s a substantial, if often overlooked, corner of the market.
Beyond Crypto: Real-World Assets Join the Loop
Here’s where things get really interesting. Looping isn’t just for crypto-native assets like ETH. It’s now extending its reach into the world of real-world assets (RWAs), which are physical or traditional financial assets represented on a blockchain. Imagine tokenized private credit or real estate. This opens up a whole new playing field for predictable, stable yields.
Consider an example: sACRED and USDC looping on Morpho. Here, a token representing a private credit fund, Apollo’s ACRED via its sACRED vault, is deposited. You borrow USDC (a stablecoin pegged to the US dollar) against it. Then, you convert that USDC back into more sACRED and redeposit it. It’s the same looping principle, but with an asset tied to traditional finance.
While the yield from these RWA loops aims for predictability, it does depend on the performance of the underlying private credit portfolio. It’s not quite as inherently stable as, say, the staking rewards from ETH, but it offers a different kind of stability, one tied to real-world economic activity.
Why are institutions, those big players in finance, interested in bringing real-world assets onto the blockchain? A big reason is that looping can amplify returns. It does this with risks that are transparent and easy to model. The parameters are auditable, meaning you can check the numbers yourself. This kind of clarity appeals to traditional financial firms.
We’re likely to see growth in areas like private credit vehicles. Think of Hamilton Lane’s SCOPE, made available through Securitize. It offers daily on-chain net asset value (NAV), which is the value of a fund’s assets minus its liabilities, delivered by RedStone. It also promises on-demand redemptions and steady monthly yield, according to the issuer’s materials.
Other promising areas include cash-and-carry strategies, like Spiko C&C, which aim to capture predictable term premiums. And then there are reinsurance-linked securities, such as MembersCap MCM Fund I. Historically, these have been known for low default rates and consistent payouts. Imagine those steady returns, now amplified through looping on a blockchain.
For institutions, looping means they can use their capital more efficiently. Yield-generating positions become repeatable, collateralizable instruments. The risk and return profile feels familiar, much like traditional fixed-income or money market desks. But here, you get 24/7 liquidity, transparent collateralization metrics, and automated position management. It’s like upgrading from a flip phone to a smartphone, but for your investments.
This strategy has been around in DeFi for a while, and it’s battle-tested. Its appeal to traditional finance is clear: higher yields, but within a framework of risks that are transparent, well-defined, and actively watched. As tokenized real-world assets grow, looping is set to become a fundamental building block for how portfolios are built on-chain. It’s another step in bridging the gap between the old world of finance and the new decentralized one.
So, while the headlines might shout about the latest volatile token, remember that quiet activity in the background. It’s the sound of capital working smarter, not just harder, and it’s reshaping what’s possible in the digital economy.
