Depositing collateral, borrowing against it, buying more of the same asset and repeating, to build leverage without a derivatives venue.
Each loop adds less than the last because of the collateral-factor. At 0.8, $10,000 compounds to a theoretical maximum of about $50,000 of exposure, or roughly 5x, and each iteration costs gas.
The popular version loops a liquid-staking token against the asset it represents, earning the staking yield on a multiplied base while paying borrow-apr. It looks like a stable spread and it hides two fragilities: the spread can invert when borrow rates spike, and the two legs can diverge if the staking token trades at a depeg discount.
Leverage is leverage regardless of the wrapper. A 5x loop is liquidated by a drawdown of roughly 20% in the collateral's relative value, and looped positions unwind together, which is what turns a modest depeg into a liquidation-cascade.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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