The staking loop: leverage on ETH and where it breaks
Lesson 32 of 58 in the course “Crypto”. Free, with animations and a quiz.
Stacking staking and Aave
You already know two things: wstETH earns staking yield, and on Aave you can borrow against collateral. The loop joins them. You deposit wstETH into Aave, borrow ETH, swap it for wstETH and deposit that as collateral again. After a few rounds you have, say, three times the wstETH you started with, plus an ETH debt. Staking now works on that whole amount. For pairs like this Aave has E-mode with a high borrowing limit, because wstETH and ETH usually move together.
The math: it works while borrowing is cheap
Take a 3× loop: staking works on three of your ETH, and you pay interest on two borrowed ones. Yield = 2.5% × 3 − borrow rate × 2. If ETH borrows at 1.5%, you get about 4.5% a year. At 2.5% you get the same 2.5% as without the loop, just with risk. At 4% you are already losing. Aave’s borrow rate floats and jumps when lots of people want to borrow ETH. So a loop is not “passive income”; you have to watch it.
June 2022: when “almost ETH” stopped being ETH
The loop relies on stETH being worth almost exactly one ETH. In June 2022, staking withdrawals did not exist yet, and Celsius and the Three Arrows Capital fund were panic-selling stETH. On the market it dropped to about 0.94 ETH. Six percent sounds small, but with high leverage it is enough to push the health factor toward one. People with high leverage lost collateral or rushed to repay debt at a loss. Withdrawals work now and gaps are smaller, but the risk has not gone away.
Rules if you try it anyway
Honestly, a beginner does not need a loop. Regular staking pays ~2.5% with almost no hassle, while a loop adds a couple of percent and a whole set of risks. If you still want to try, keep leverage at 2–3× at most. Once a week, compare the ETH borrow rate with the staking yield. Set a health factor alert. And decide in advance what you will do if stETH drifts from ETH again. This is the last lesson of the staking block: next come big money, taxes and trading.
Check yourself
- A 3× loop, 2.5% staking, ETH borrowed at 4%. The result?
Correct answer: About −0.5% a year. 2.5% × 3 = 7.5%, minus 4% × 2 = 8%. That is about −0.5%: the loop loses money. - What broke many loops in June 2022?
Correct answer: stETH fell below ETH on the market. stETH slid to about 0.94 ETH, so collateral lost value against the ETH debt, and high-leverage health factors fell toward one.
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