Navigating DeFi Loops: Why Isolated LRTs Are Superior for Optimal Yield
‘Looping’ has emerged as a popular DeFi strategy to reach optimal returns. It involves leveraging assets through repetitive cycles, thus enabling users to boost their returns significantly.
As liquid restaking grows, the introduction of Liquid Restaking Tokens (LRTs) is set to revolutionize these strategies, offering new avenues for yield farming. In this article, we explore why isolated liquid restaking tokens (iLRTs) offer a superior avenue to yield accrual in looping compared to other methods, such as basket-based approaches. Let’s dive in.
What is Looping in Defi?
Looping is a strategy in DeFi where users continuously borrow and stake assets to compound their yield. Essentially, it involves leveraging the collateral value of staked assets to borrow more, repeating the process to maximize returns.
The most common Looping strategies in Defi leverage liquid staking tokens (LSTs). For instance, users might stake Ethereum (ETH) to receive a staked ETH derivative in return (Liquid Staking Token - LST), use this as collateral to borrow more ETH, and then stake once again to mint more LSTs, thus creating a cycle. While this method can multiply yield potential, it also comes with certain risks due to the layers of leverage involved. As users continue to borrow against their collateral, they increase their exposure to price fluctuations, liquidity constraints, and the possibility of liquidation during market downturns, making this strategy inherently more volatile.
How LRT Differ from LST Loops
LST Looping Mechanics
The typical LST looping process involves:
- Staking Ethereum (ETH) and receiving LSTs, such as stETH or rETH.
- Using these LSTs as collateral to borrow ETH.
- Staking the borrowed ETH to mint additional LSTs, creating a loop.
This approach allows users to increase their exposure to ETH, but it also exposes them to ETH’s price volatility and liquidity risks. The effectiveness of this strategy largely depends on ETH’s market performance and the liquidity of LSTs.
LRT Looping Mechanics
Liquid Restaking and Liquid Restaking Tokens (LRTs) offer a different approach. As restaking ecosystem grows and becomes more profitable through Actively Validated Services (AVS), users will eventually be able to borrow LRTs against other existing LSTs. The potential loop here involves restaking LSTs to receive LRTs, using LRTs as collateral to borrow more LSTs, and repeating the process.
Unlike LST looping, LRT looping allows users to tap into additional yield streams from restaking, leveraging rewards from Actively Validated Services (AVSs). The abstraction offered by liquid restaking enables the diversification of income sources, thus reducing reliance on a singular asset and boosting yield potential.
The Advantages of iLRTs for Looping
What are Isolated Liquid Restaking Tokens (iLRTs)?
Isolated Liquid Restaking Tokens (iLRTs) is a specific approach to Liquid Restaking. This approach ensures that the iLRT a users receives in returns for restaking solely represents his asset type. This way, users receive a unique iLRT for each singular asset deposited, making such isolation precise for tracking.
For further details of what Isolated Liquid Restaking Tokens (iLRTs) are and what they represent, check out our blogpost about it: Isolated liquid Restaking Tokens: All You Need To Know
Why Isolated Restaking (iLRTs) is the Best Option for Looping
-
Native Liquid Restaking Tokens (nLRTs): Native restaking allows users to stake and restake ETH in one click, taking LSTs out of the equation. This method is not conducive to maximizing yield through looping, as it lacks the necessary step of receiving a staking derivative in return to further borrow against.
-
Basket-Based Liquid Restaking Tokens (bLRTs): Basket-based approaches in restaking aggregate several LSTs together, exposing users to a mixed pool of assets. While this method can provide diversified exposure, it also creates uncertainty due to thecomplexity in managing different LST types. The inability to isolate specific risks associated with a certain asset type can lead to cannibalistic outcomes, where gains in one asset are offset by losses in another.
All Liquid Staking Token Options supported by EigenLayer (Source)
- Isolated LRTs (iLRTs): iLRTs are the preferred choice for looping, offering multiple advantages:
-
Predictable Exposure: iLRTs provide exposure to a single underlying asset type, enabling users to optimize their strategies without worrying about the performance of a mixed basket of assets.
-
Controlled Risk: The isolation of assets allows for better risk management, as users can avoid the potential pitfalls of pooled exposures.
-
Maximized Yield: By focusing on a targeted restaking position, iLRTs allow for optimized yield maximization, especially when combined with additional yield streams from AVSs in Defi Looping strategies.
The Future of Looping with iLRTs
Impact of AVS Integration
The emergence of Actively Validated Services (AVSs) is set to elevate the profitability of restaking, paving the way for more sophisticated looping strategies. AVSs in restaking provide the source of yield opportunities that can be tapped into Liquid Restaking protocols, which further optimizing returns for restakers iLRT holders. This effect is compounded by the intervention of AVS curators, which further maximize yield by careful selection and management of AVSs.
Opportunities for LRT Looping
As DeFi protocols continue to evolve, several developments could support and develop iLRT looping strategies:
-
New AVS Partnerships: Collaborations between AVS providers and restaking protocols could unlock new yield streams, enhancing the attractiveness of iLRTs.
-
Protocol Upgrades: Future upgrades to restaking protocols may offer better terms for iLRT holders, such as lower fees or increased yield.
-
Cross-Chain Looping: Innovations like cross-chain looping could allow users to loop assets across multiple blockchains, maximizing yield potential in diverse DeFi ecosystems.
Be in the Loop
As we’ve seen, iLRTs offer significant advantages for looping strategies over other approaches, enabling users to maximize yield through looping and restaking. By providing controlled exposure, optimized strategies, and increased transparency, Inception LRTs stand out as a superior solution for DeFi enthusiasts seeking to maximize their returns.
