Curriculum·J304 Lending, Borrowing, and Collateralized Leverage·about 32 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 spread 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. Celsius was among the largest operators of the structure. On 10 June 2022 the risk firm Gauntlet reported a large spike in Aave's value at risk driven by stETH price volatility and proposed freezing the stETH market, raising the loan to value ratio and pausing ETH borrowing, to reduce the chance of a liquidation spiral. Over the quarter Celsius withdrew a third of all of Aave's stETH deposits, most of it in a single day on 11 July. Across the wider June 2022 dislocation, more than 32,000 Aave positions were liquidated in a week, the largest count in the protocol's history to that point.
- 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 leverage multiplies the spread and the divergence by exactly the same factor, a structure advertised on the first number was carrying the second at the same multiple, and per J302-02 the divergence that arrived was about five percent.
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://messari.io/report/the-state-of-aave-q2-2022
- 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, which changed several times through 2022 partly in response to this risk. The relationship between loan to value, leverage and divergence tolerance is exact and does not depend on the specific numbers.
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.