Why Loop?
Why DeFi needs a Credit Hub for Restaking.
Last updated
Why DeFi needs a Credit Hub for Restaking.
Last updated
Yield has become Ethereum’s defining feature since its adoption of Proof-of-Stake. Tens of billions of dollars have flown into liquid staking tokens since the fall of 2022, and in recent months, the allure of re-staking via Eigenlayer has further drawn in capital. Underpinning this hunt for crypto-native yield has been a dynamic DeFi lending landscape allowing users to leverage up their exposure by borrowing against those staked and restaked positions. As restaking goes live in the coming months and Ethereum achieves its institutional ascendancy with an ETF, it is likely that the demand for credit will only increase going forward.
A quick scan of the lending avenues facilitating the ETH carry trade (i.e., borrowing for cheaper than the yield earned on leveraged collateral), however, shows that there are still opportunities for optimization. Users tend to go about it in one of two ways:
Borrow dollars against ETH-denominated collateral
Borrow ETH against ETH-denominated collateral
In the case of the former, borrowers are limited in the leverage they can take on because DeFi lending platforms need to protect against bad debt risk with conservative loan-to-value ratios and a limited offer of only LSTs that are accepted as collateral. Users who want to borrow dollars wind up getting 70 to 80% of their collateral value as a result.
Platforms that facilitate the borrowing of ETH against ETH-denominated liquid staking tokens (LSTs) or liquid restakings tokens (LRTs) are able to offer a much higher loan-to-value ratio as there is not as stark of an asset-liability mismatch, though collateral depegs are of course possible. That said, In the world of utilization based interest rates, this quickly leads to an unattractive cost of capital.
Loop launches as a hybrid solution capable of offering high leverage on ETH yields with favorable long-term interest rates for aligned borrowers.
The collateral in the Loop protocol comprises Pendle LRT LP tokens. While other protocols like Silo utilize PTs, LP tokens offer a unique proposition. They allow participants to earn both Yield and Points without compromise. The underlying Pendle LP tokens themselves generate substantial yield, enabling the accrual of both points and yield effectively.
The lending process within the Loop protocol is enhanced by the receipt token lpETH. Drawing inspiration from the Ethena model, which uses USDe instead of direct USDT lending, lpETH aims to be a high-yielding ETH derivative.
By designing secondary use cases for lpETH, the opportunities of lpETH extend beyond just staking. This leads to an increased staking APR, allowing Loop to attract more lending capital.
A core objective of the Loop protocol is to boost the APR of lpETH to attract more lending capital. Because the activity of looping effectively combines yield with points, it presents what is essentially a "free lunch" scenario, allowing the protocol to levy substantial interest rates essential for maintaining robust lpETH APRs. Loopers have the opportunity to recover their borrowing costs by locking funds in the dLP (Dynamic Liquidity).
The model adopted from Radiant involves the dLP, or Dynamic Liquidity, which is obtained by locking LOOP-lpETH Balancer LP tokens for up to a year. By ensuring that 5% of the Total Looped Position Size is held in dLP, participants qualify for LOOP emissions to offset the interest paid. This mechanism, proven by Radiant's success, mandates purchasing and locking LOOP, ensuring deep liquidity and enabling higher chargeable interest rates. This strategy has not only sustained high liquidity levels but has also supported significant protocol growth, mirroring Radiant’s success in maintaining substantial on-chain liquidity.
