DeFi Looping Strategies for Real-World Assets Gain Traction in 2025
DeFi looping is emerging as a capital-efficient strategy for 2025, recycling billions through yield-bearing assets to generate risk-adjusted returns. This approach functions similarly to traditional finance's repo and carry trades, enhanced by tokenized real-world assets.
Understanding DeFi Looping
DeFi looping amplifies yields using correlated collateral and debt. Key points include:
- Involves yield-bearing tokens like liquid staking tokens (e.g., Lido’s wstETH) and tokenized private credit funds (e.g., Hamilton Lane’s SCOPE).
- The process consists of depositing an asset, borrowing against it, and reinvesting the borrowed amount into another yield-bearing asset.
- A widely adopted structure is weETH paired with ETH on lending platforms.
For instance, weETH has increased in value from 1 ETH to 1.0744 ETH.
Risk and Return Potential
Looping captures yield spreads effectively:
- With weETH yielding ~3% and ETH borrow rates at 2.5%, each loop generates a 0.5% spread.
- Using a 90% loan-to-value ratio, ten loops can compound returns to approximately 7.5% annually.
Market Size and Growth Forecasts
Contango estimates that looping strategies account for 20-30% of over $40 billion in money markets, equating to $12-15 billion in open interest. Current transaction volumes from looping may exceed $100 billion, supported by Aave's nearly $60 billion TVL.
Application Beyond Crypto
Looping also applies to non-crypto assets, such as sACRED / USDC on Morpho, involving tokenized private credit portfolios.
Future Directions
Key growth areas for looping include:
- Private credit vehicles with daily on-chain NAV.
- Cash-and-carry strategies capturing predictable term premia.
- Reinsurance-linked securities associated with low default rates.
Implications for Institutions
Looping enhances capital efficiency, transforming yield-generating positions into repeatable instruments. Its risk-return profile aligns with traditional fixed-income strategies but offers 24/7 liquidity and transparent metrics. As tokenized RWAs expand, looping could become integral to on-chain portfolio construction, bridging gaps between traditional and decentralized finance.