While many in the crypto space pursue volatility, the most capital-efficient investments of 2025 are surprisingly straightforward: looping. These structured strategies discreetly recycle billions across the same assets, converting moderate yield spreads into substantial, risk-adjusted gains. Essentially, they serve as the on-chain equivalents of TradFi’s repo and carry trades, now augmented by tokenized real-world assets.
What is DeFi looping and how does it work?
DeFi looping is a mechanism for yield amplification that relies on correlated collateral and debt. The core idea of looping involves yield-bearing assets—tokens that appreciate over time. Examples include liquid staking tokens like Lido’s wstETH, synthetic dollars like Ethena’s sUSDe, or tokenized private credit funds such as Hamilton Lane’s SCOPE. The process starts with depositing a yield-bearing asset, like weETH, into a money market account, borrowing a closely related asset against it, such as ETH, reinvesting that borrowed amount back into the yield-bearing asset (e.g., staking ETH on EtherFi), and then redepositing it as collateral—completing one full loop. A commonly used looping structure is weETH (EtherFi’s wrapped staking ether) paired with ETH on lending platforms like Spark.
Asset design: weETH collects staking rewards, causing its value to gradually increase over time. At the EtherFi protocol launch, 1 weETH was equal to 1 ETH. Today, it stands at 1.0744 ETH.
weETH / ETH price appreciation over time via liquid restaking yield accrual, Source: RedStone
Risk correlation: If weETH yields approximately 3 percent annually and ETH borrow rates are at 2.5 percent, each loop captures a 0.5 percent spread. With a 90 percent loan-to-value ratio and 10 loops, that spread compounds, potentially boosting returns to around 7.5 percent annually.
Market size in 2025 and growth potential
Contango’s estimates for Q3 2024 indicated that 20 to 30 percent of the over $40 billion locked in money markets and collateralized debt positions can be attributed to looping strategies. This suggests an open interest of approximately $12-15 billion, or about 2-3 percent of the total DeFi TVL at the time.
Currently, this figure is likely much higher: Aave alone has close to $60 billion in TVL. Given that trading volumes in leverage-based strategies often exceed open interest by a factor of ten, annual transaction volume from looping may already exceed $100 billion.
Beyond ETH: stable-yield assets
Looping can also be applied to asset pairs that are not necessarily native to crypto. A practical case is sACRED / USDC looping on Morpho. In this instance, a token representing a tokenized private credit fund (Apollo’s ACRED via sACRED vault) is deposited to borrow USDC, which is then converted back into sACRED and redeposited. Although the yield profile aims to be predictable, it relies on the performance of the underlying private credit portfolio and is not as inherently stable as ETH staking rewards.
RWA looping strategy on Morpho secured by RedStone price feeds, Source: Gauntlet.
Future directions: tokenized funds as loop collateral
Institutions are moving real-world assets on-chain in part because looping can enhance returns with clear, modelable risks and verifiable parameters. Key growth areas may include:
- Private credit vehicles, such as Hamilton Lane’s SCOPE, accessible via Securitize, with daily on-chain NAV provided by RedStone and on-demand redemptions, aimed at delivering consistent monthly yield based on issuer materials.
- Cash-and-carry strategies like Spiko C&C, which capture predictable term premiums.
- Reinsurance-linked securities, such as MembersCap MCM Fund I, which historically feature low default rates and reliable payouts.
Why this matters for institutions
Looping facilitates a more efficient capital allocation by converting yield-producing positions into repeatable, collateralizable instruments. The risk-reward profile is akin to traditional fixed-income and money market operations, yet it comes with 24/7 liquidity, transparent collateralization metrics, and automated position management.
This is among DeFi’s most proven strategies, holding strong appeal for traditional finance: increased yields within a framework of transparent, well-defined, and actively monitored risks. As tokenized real-world assets scale, looping is set to become a fundamental component in on-chain portfolio management, further bridging the divide between traditional and decentralized finance.
