Looping Strategies
Looping is an advanced strategy that allows you to utilize the same collateral multiple times, resulting in a higher yield from a larger principal. For example, starting with 1k worth of collateral, after a few loops, you can enjoy a yield generated by over 3k worth of collateral.
We are excited to introduce the Alpaca Money Market, offering you an opportunity to maximize your yield and explore various strategies.
Please note that looping a single asset works only on incentivised pools because without incentives Borrowing APR is always higher than Lending APR.
Follow our social media to be informed about incentives for pools to profitably perform this strategy.
To execute a strategy where you loop a single asset, you need an asset that meets the following criteria:
- Provides a good combination of Lending APY, Borrowing, and Collateral Factors.
- Has a lending APY with an absolute value higher than the borrowing APY for the asset.
- Maintains stability or appreciates in price over time.
This occurs when an asset pool offers additional incentives. Stay updated on our social media channels to learn about pools with extra rewards.
In this example, we will loop 1000 USDC stablecoin.
The lending rate is 3.77%, and the incentivized borrowing rate is slightly above 0%.
- Step 1: Begin by depositing USDC stablecoin as collateral.
After the deposit, the APY on my 1000 USDC is 3.77%. Here's how the account looks after the first deposit.
- Step 2: Borrow from the Money Market using the Safe Max option to borrow the maximum reasonable amount.
After this step, you will have 1000 USDC deposited into the protocol and approximately 719 USDC borrowed in your wallet.
- Step 3: Deposit more USDC for lending in the same account.
After the deposit, the Borrow Limit Used will allow you to safely borrow against your collateral again.
- Step 4: Repeat steps 2 and 3 multiple times.
Here's how the account looked after the 2nd loop:
3rd loop:
4th loop:
I completed the loop 4 times. Doing it more times is not justified as the incremental value won't cover gas fees. You can loop more if you have a higher amount of funds.
That's it! You have successfully looped stablecoins on the Money Market.
The current value of lending deposits is approximately $2870, and loans are around $1870. In total, I now have approximately 2.87 times more capital than I started with. Additionally, due to pool incentivization, I even earn for borrowing!
The estimated net annual income is $108, which effectively amounts to a 10.8% APY on the initial 1000 USDC deposit!
Not bad for a stablecoin deposit without liquidation risk, right? 😎
Keep in mind that the starting APY was 3.77% on lending and the borrowing rate was around 0%.
If you manage to get in early on an incentivized collateral asset pool, you may achieve even better results. Enable notifications for our Twitter posts to stay informed about new pool openings.
Note that the account dashboard displays APY on the total Supply and Borrow amounts as the platform cannot distinguish if the amounts come from looping or unrelated deposits/borrows.
This setup requires very little maintenance. You may want to ensure that the borrowed asset performs well and that the rates generate profit. Remember that when a pool is incentivized, the borrowing APY is affected by rewards in the ALPACA token or the pool-specific token. Your loan accrues interest faster than your lending deposit, increasing the Borrowing Limit Used. Monitor your Borrowing Limit Used and repay accrued interest if necessary using your rewards.
You can start withdrawing your collateral and paying off the loans, reversing the steps outlined in this tutorial. Remember that this strategy involves working with incentivized asset pools. The total Supply and Borrow APRs are a combination of two elements:
Real yield Supply/Borrow APR: The remuneration for liquidity providers and borrowers.
Distribution APR: Additional incentives in ALPACA or the pool-specific currency.
Without additional incentivization, your collateral grows slower than your loans. However, you remain profitable due to accrued rewards. Eventually, you will need to convert part of your rewards or use additional capital in the borrowed token to cover the accrued interest.
- Limited liquidation risk by supplying and borrowing the same token.
- Neutral exposure when using stablecoins, as long as the stablecoin maintains stability.
- High collateralization factor, as we deal with just one asset, allowing the Borrow Limit Used to exceed 85% and make loops more efficient.
- No need for swaps to build up the position.
- End of incentivization period: Borrowing fees are usually higher than lender revenues. Once the incentives expire, this strategy may become unprofitable.
- Asset-associated risks: We thoroughly vet the tokens listed on our money market, but it's important to conduct your own research (DYOR) and monitor their performance.
- Smart contract risks: We prioritize the security of the protocol and have conducted over 22 audits. You can find the list of audits here.
When looping volatile assets, follow these steps:
- Supply asset A to the lending pool.
- Borrow asset B using asset A as collateral.
- Sell the borrowed asset B for the lending asset A.
- Repeat these steps multiple times.
To successfully execute this strategy, ensure that the following conditions are met:
- Asset A should have a high APY for lending.
- Asset A should have a high collateral factor.
- Asset B's APY for borrowing should be close to 0 or positive.
- Asset B should have a high borrow factor.
- The value of asset A (collateral) should not significantly decrease compared to asset B.
If asset B's value decreases compared to asset A, you will have additional borrowing limits available. You can repurchase asset B at a lower price when returning the loan, generating additional profit on top of the generated yield.
Let's illustrate this strategy using ETH (asset A) and BTCB (asset B) as an example. ETH offers a 4.7% lending APY, and borrowing BTCB is incentivized with a 0.7% APY.
- Step 1: Deposit approximately $1000 worth of ETH as collateral.
Here's how the account looks after the transaction:
- Step 2: Borrow BTCB against the ETH collateral.
After this transaction, Borrow Limit Used for the account will raise.
- Step 3: Swap the borrowed BTCB for ETH.
Perform a simple swap on Alpaca Perp Exchange, not buying a perpetual futures contract. You may be able to swap with 0% fees in certain conditions.
After swapping supply ETH to Lending like in Step 1, your Borrow Limit Used will go down.
- Step 4: Repeat steps 2,3 and 1 a few times.
Here's how the account looked after the 2nd loop:
3rd loop:
Continue repeating the steps based on the amount of funds you are looping, the desired duration, and the APYs. The more rounds you complete, the more effective your position will be.
The revenue generated from the APY should justify the gas fees for transactions and potential swapping costs.
The current value of lending deposits is approximately $2460, and the loan is around $1460. In total, I now have 2.4 times more capital working for me than I started with.
The estimated annual revenue from lending alone is approximately $113, equivalent to 11.3% of the initial $1000 ETH deposit. This is 2.4 times higher than the initial ETH lending APY.
Due to the incentivization of borrowing BTCB, my net annual revenue for both lending and borrowing is projected to be close to $124 (12.4% of the initial $1000 worth of ETH deposit).
Note that the account dashboard displays APY on the total Supply and Borrow amounts as the platform cannot distinguish if the amounts come from looping or unrelated deposits/borrows.
Interest rates: Ensure that the lending APR is higher than the borrowing APR. There may be short periods where these values are close or the borrowing APR is higher. Avoid keeping the position open for too long under unfavorable conditions.
Asset prices: Monitor the prices of both assets relative to each other. Observe your borrow limit to track this relation easily.
If the value of the collateral and accrued interest increases, it will decrease the borrow limit. If the borrowed asset's value increases compared to the collateral, it will increase the borrow limit used. These scenarios have different implications, which you should carefully consider.
Assuming the lending interest rates were consistently higher than the borrowing rates, you need to withdraw your collateral and repurchase the previously borrowed and sold asset on the market. Repay your loans.
Consider different scenarios based on asset price changes and the difference between accrued lending and borrowing interest to determine your profit or loss.
- Flexibility in choosing assets based on expected interest rates and price behavior.
- Access to the best APYs for both lending and borrowing.
- Potential risk reduction through asset correlation.
- Asset price divergence: Monitor prices to ensure the value of your collateral remains higher than the value of your loans.
- Changing lending and borrowing fees: Stay updated on rates to ensure your position remains profitable and be aware of potential catalysts for rate changes.
- Asset-associated risks: While we thoroughly vet the tokens listed on our Money Market, conduct your own research and monitor their performance.
- Swapping fees: Consider the costs of swapping assets, which can be minimal if using our DEX and supporting rebalancing the ALP pool.
- Smart contract risks: We prioritize the protocol's security and have undergone over 22 audits.
To execute this looping strategy, follow these steps while considering the prerequisites:
- Look for a stablecoin with a high APY for lending and a high collateral factor.
- Choose a volatile asset with a high APY for borrowing, preferably close to zero or positive.
- Ensure the selected volatile asset remains relatively stable or decreases in value compared to the stablecoin during the holding period.
Start with a deposit of $1000 in BUSD.
- Step 1: Place the BUSD into a lending pool.
- Step 2: Borrow the volatile asset you are bearish on, such as Ether (ETH), against BUSD as collateral.
- Step 3: Supply the borrowed asset (ETH) to the lending pool.
- Step 4: Repeat steps 2 and 3 based on the yield generated by subsequent loops and gas fee costs.
Here's how the account looked after the 2nd loop:
3rd loop:
4th loop:
Currently, the value of the lending deposits is $2710, and the value of the loans is $1710, resulting in 2.71 times more capital than the initial amount.
Starting with $1000 BUSD, the projected net annual income is $122, equivalent to over 12% APY.
Note that the account dashboard displays APY on the total Supply and Borrow amounts as the platform cannot distinguish if the amounts come from looping or unrelated deposits/borrows.
In this setup, the volatile asset borrowed is also supplied as collateral. This dilutes the share of initially deposited stablecoins in the total supplied amount. As a result, price fluctuations of the volatile asset have less influence on the borrow limit, making the setup safer and easier to maintain.
If the volatile asset significantly gains value compared to the stablecoin, it is advisable to add more collateral to the supply side of the money market account. Also, monitor the changes in APYs for both assets.
To unwind the position, simply withdraw the collateral and repay the loans, reversing the steps from the beginning of this tutorial. Since the collateral has grown faster than the outstanding loan value, there should be no issues with the withdrawal and repayment process.
If the borrowed asset experiences a significant decrease in value but is expected to rise in the future, consider buying it on the market using additional capital. After repaying the loan, the initial borrowed asset will still be earning yield in the lending pool while you wait for its value to appreciate.
- Relatively small liquidation risk due to the correlation between collateral and loan value movements.
- Flexibility in choosing assets for higher yields.
- No need for swaps to build the position.
- Asset price divergence: Monitor prices to ensure collateral value remains higher than the loan value.
- Changes in lending and borrowing fees: Stay updated on rates to ensure a profitable position and be aware of rate-changing catalysts.
- Asset-associated risks: Although efforts are made to vet listed tokens, conduct your own research and stay vigilant.
- Smart contract risks: The protocol prioritizes security and has undergone 22 audits.
Last modified 1mo ago