How to Build a Crypto ETF Portfolio? The Actual Path of Passive Allocation
The essence of the looping yield strategy is to repeatedly deposit and borrow the same asset, using leverage to amplify the yield from single digits to double digits. This process creates no new value; it earns from the spread and protocol incentives. Once the spread disappears or collateral prices fluctuate, risks multiply exponentially.
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1. Prerequisites: Understand What You Are Really Earning
Before you begin, understand where the yield from looping strategies comes from. According to DeFi on-chain yield data for 2025, out of approximately $8 billion in on-chain yields that year, about half of the borrowing demand was recursive — users borrowed and then re-invested into other yield sources.
This means your profits come from three sources:
Spread: the portion where the deposit rate exceeds the borrowing rate
Protocol incentives: token rewards distributed by platforms to attract liquidity (e.g., points, airdrops)
Asset appreciation: the price increase of the collateral itself
If any of these three legs breaks, the strategy can turn from "accretion" to "loss."
Common failure reason: focusing only on the APY number without calculating net return. Actual return = protocol displayed APY − borrowing interest − gas fees − impermanent loss (if any). Many newcomers are lured in by APYs above 20% only to find that after deducting costs, the net return is worse than a fixed deposit.
2. Step One: Set Up the Loop — Using Pendle-Aave as an Example
This is the most common looping structure on the market today and once played a central role in the growth of Ethena's USDe.
Complete workflow (taking USDe/sUSDe as an example):
Purchase PT-sUSDe (Principal Token) on Pendle to lock in a fixed yield
Deposit PT-sUSDe as collateral into Aave and borrow USDC or USDT
Use the borrowed USDC to buy more USDe, then convert it into sUSDe
Repeat steps 1–3 until you reach the desired leverage multiple
With each cycle, your nominal position expands. Starting with $100, you could borrow about $90 the first time (assuming a 90% collateral factor), then deposit and borrow about $81 the second time, and about $73 the third time. By the third cycle, your total deposit size is approximately $344, or 3.4× the initial capital.
When is it considered complete: Your looping position is built, and you can see the current loan-to-value (LTV) ratio and liquidation threshold on the dashboard of the lending protocol (e.g., Aave).
Risk reminder: With each loop, your liquidation threshold draws closer. If the collateral value falls or the borrowing rate spikes, liquidation can happen within minutes.
3. Step Two: Monitor Risks — Three Deadly Variables
The fragility of a looping strategy comes from three variables; deterioration in any one of them can destroy the entire position.
Variable one: The spread between yield and cost
The spread is the lifeline of the loop. In Ethena's case, leveraged looping relied on persistently high funding rates. Once funding rates decline and USDe yield drops enough to no longer cover the borrowing cost of USDC/USDT, the loop will undergo "reflexive" deconstruction.
According to analysis reports, the 30-day average yield on USDC supplied to Aave is only about 2%, while 58% of stablecoin TVL yields less than 3% annually — lower than the U.S. Treasury rate. If you are looping in an environment where the borrowing rate is higher than the deposit rate, you lose money on every transaction.
Variable two: Collateral price stability
If you are looping with volatile assets like ETH or BTC, a price drop will directly cause a shortfall in collateral value. For example, you deposit weETH (EtherFi's staked ETH) as collateral on Aave to borrow ETH, then stake it back into weETH. weETH appreciates as staking rewards accrue (currently 1 weETH ≈ 1.074 ETH), but if the ETH price itself plummets, your collateral value still shrinks.
Variable three: The health of the protocol itself
In November 2025, Stream Finance lost $93 million due to the collapse of looping positions, and its synthetic dollar xUSD crashed from $1 to $0.16. Worse, multiple DeFi protocols (Morpho, Euler, Silo) had accepted xUSD as collateral, creating a chain reaction.
Risk reminder: If an interest-bearing asset (such as xUSD, USDe) is involved in the loop and that asset depegs, all positions using it as collateral will turn into bad debt.
4. Step Three: Exit Plan — Don't Let Liquidation Decide for You
Exiting a looping strategy requires more discipline than entering. Take the lesson from the Stream Finance collapse: when the market began to question xUSD's safety, liquidity providers rushed to exit en masse, triggering a "bank run."
Exit rules:
Set mandatory exit triggers: for example, unwind all looping positions when the borrowing rate exceeds the deposit rate by 1%
Exit in steps: reverse the operations — redeem, repay, and release collateral in sequence; do not withdraw everything at once (slippage could wipe out all profits)
Maintain a buffer margin: keep at least a 20–30% margin buffer; don't go right up to the liquidation line
When is it considered complete: You have clearly written down the exit conditions in your mind or in your notes, and when triggered, you execute decisively rather than "let's wait and see."
Risk reminder: Some real-world asset (RWA) tokens have long redemption cycles (up to several months). In a situation requiring emergency exit, funds may not be immediately available.
FAQ
Q: Is looping arbitrage between stablecoins (e.g., between USDC and USDe) less risky? Compared to volatile assets, price volatility risk is indeed lower, but it is not risk-free. The biggest risk is stablecoin depegging — if one of the stablecoins in your loop loses its peg, the collateral value evaporates instantly and could trigger cascading liquidations. Furthermore, even with stable prices, changes in borrowing rates or protocol rules can break the strategy.
Q: Do platforms like Aave and Morpho allow looping operations? Yes, this is a core function of DeFi lending protocols. You deposit, borrow, and redeposit entirely within the protocol's rules. Some protocols (e.g., Euler, Contango) even offer automated looping: you simply choose the target leverage multiple, and the system executes the looping steps automatically.
Q: Is the looping doll strategy suitable for ordinary people? Generally not. This strategy is suited for advanced users who have an in-depth understanding of DeFi protocols, can continuously monitor on-chain data and prices, and are willing to accept potential principal loss. The stablecoin deposit APY on Aave is currently only about 2–3%; if the spread is insufficient after looping, combined with liquidation risk and operating costs, you may end up losing money. It is recommended to first test the whole process with a very small amount (under $100), get a feel for the actual effects and risk exposure of looping, and then decide whether to scale up.
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Next Steps
Open a test position with no more than 5% of your total capital. Complete a full looping cycle on Aave or Morpho (deposit → borrow → redeposit), and record the gas fees and interest rate changes at each step. Then observe for a week to see whether the spread stays positive and the liquidation threshold remains safe. After one week, unwind and exit, calculating the net profit (or loss). If this test position loses you money, congratulations — you have learned something more than those who go all-in just looking at APY numbers.
