Curriculum·J304 Lending, Borrowing, and Collateralized Leverage·about 33 min
Looping and recursive strategies
By the end of this lesson you can
- →Compute the total exposure and leverage a loop produces from its loan to value
- →Show that leverage multiplies the staking yield and the divergence by the same factor
- →Determine the divergence at which a given loop is liquidated
- →Explain why every looper's exit is the same trade at the same moment
Junior · enrolled learners
This lesson opens with The stETH loops on Aave, June 2022.
- What happened
- A widely used strategy deposited Lido's stETH as collateral on Aave, borrowed ETH against it, converted that ETH to more stETH and repeated, capturing the staking yield on a multiplied balance; Gauntlet wrote that almost all ETH borrowing on Aave was recursive in this way. On 10 June 2022 stETH fell to about a 5 percent discount to ETH, and late that day Gauntlet saw a large spike in Aave's value at risk driven by stETH price volatility. On 11 June it suggested the community might freeze the stETH market and pause ETH borrowing as a precaution, so that a liquidation spiral could not reach Aave's users and token holders, and it later took those steps to a vote together with raising stETH's liquidation threshold. By 14 June the discount was almost 7 percent. Celsius, which had paused customer withdrawals, was by one forum participant's count Aave's largest stETH supplier, with 28 percent of the market, and on 12 July it repaid $63.5M of its Aave debt and withdrew 400,000 stETH, worth about $417M. Across the wider June 2022 dislocation, more than 32,000 Aave positions were liquidated in a week, the largest count among the events Aave has reported.
- The decision point
- The loop was never a yield strategy. It was a leveraged bet that stETH and ETH would trade at parity, and the staking spread was the payment for taking that bet. Because the staking yield and the divergence both act on the whole multiplied exposure, a structure advertised on the first number was carrying the second at the same multiple, and the divergence that arrived was about five percent, then nearly seven.
What you will be able to answer
- →What leverage does a loop produce?
- →What does leverage do to the spread and the divergence?
- →What is a loop actually a bet on?
- →Why is unwinding crowded?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://governance.aave.com/t/staked-eth-and-aave-risk-june-11th-update/8469
- https://www.theblock.co/news/defi/2022-06-10-lido-staked-ether-steth-discount-drops-to-5-for-second-time-in-one-month-151380
- https://www.theblock.co/news/defi/2022-06-14-lido-staked-ether-selloff-continues-as-larger-holder-unloads-56000-steth-151894
- https://www.theblock.co/news/defi/2022-07-12-celsius-takes-out-417-million-in-staked-ether-from-aave-157090
- https://aave.com/blog/historical-liquidations
- https://www.coindesk.com/business/2022/06/29/nansen-casts-blame-for-steth-de-peg-on-terra
Confidence high·Volatility medium·Reviewed 2026-08-06·Owner unassigned
Contested
The parameters in the worked example are illustrative of the structure rather than Aave's settings at any date. Per Gauntlet's 11 June 2022 post, Aave v2's stETH settings then were a 69 percent maximum loan to value (lowered from 73 percent in AIP-75) and an 81 percent liquidation threshold, which caps a loop at about 3.2 times and would not permit either example loop. The 93 percent threshold is chosen so that a 90 percent loop can be opened at all. The relationship between loan to value, leverage and divergence tolerance is exact and does not depend on the specific numbers.
The size of the June 2022 discount depends on the day and the source: The Block put stETH at about 95 percent of ETH on 10 June and at almost a 7 percent discount on 14 June. The worked example uses 0.95. Celsius's 28 percent share of Aave's stETH market is one forum participant's count in the Gauntlet thread, not Aave's own figure.
J302-02 covers the stETH discount as a pool pricing phenomenon and J303-01 covers the Curve pool composition. This lesson covers the leveraged position built on top of them. Keep the split and do not re-derive the discount here.