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 by 2025, it is likely that the demand for leverage 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. 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.

We’re launching Loop Protocol as a hybrid solution capable of offering high leverage on ETH yields with favorable long-term interest rates for aligned borrowers.

What is Loop?

Loop is a dedicated lending market for Ethereum carry trades. Users will be able to supply a long tail of LSTs, LRTs, and their derivatives as collateral in order to borrow ETH for increased yield exposure.

• Lenders deposit ETH and receive back a receipt token, lpETH, that can be used throughout DeFi as well as staked to earn further subsidies beyond just protocol interest

• Loopers borrow ETH for automated releveraging strategies based on the collateral they provided in order to augment their ETH-denominated yields

Both sides can benefit from reduced protocol fees and extra rewards by locking a dynamic liquidity pool (dLP) token composed of the protocol’s governance token, LOOP, paired against lpETH. This ensures that protocol power users receive preferential rates all while keeping them aligned for the long term.

The goal of Loop is to create the most efficient market possible for ETH staking. By unlocking affordable credit for any type of LST, or the liquidity pool token of an LRT, Loop is able to level the playing field for all protocols working towards diversifying where users put their ETH to work. Moreover, we see lpETH lowering the barrier to entry for users who want to benefit from this releveraging activity without having to actively manage their positions, as it provides blended exposure to borrowing demand across all supported collateral pathways.

What is a dLP?

Loop has taken inspiration from the team behind Radiant Capital which introduced the concept of dynamic liquidity pool token staking. With the dLP model, users can make themselves eligible for protocol emissions and rebates by holding a threshold amount of the governance token paired against ETH; in their case, the dLP must be worth at least 5% of the user TVL provided to the protocol. This shifts rewards away from outright mercenary capital by incentivizing users to take longer term stakes in the performance of the underlying protocol.

With Loop, we’re taking this model one step further by pairing the protocol’s token, LOOP, against its issued asset, lpETH. This will ensure that the Loop dLP serves as a natural demand sink for lpETH due to users needing it to participate in staking. However, like with Radiant Capital, this pairing will still occur in an 80/20 Balancer pool. Any price distortion this activity has on the secondary price of lpETH can then be arbitraged through the minting or redemption of lpETH by third parties.

Users will be able to choose whether to lock their dLP stakes for durations of either one, three, six, or 12 months. As long as they maintain a threshold amount of stake, currently assumed to be 5% of the value of their borrowing activity, they will be eligible for augmented protocol emissions and revenue distributions. This implicitly results in lower borrowing rates and higher supply rates for aligned users. In practice, what this means is that Loop can charge higher borrowing rates upfront and rebate such users over time to the point where they wind up paying less or earning more than they would have on alternate platforms. The end result is a competitive moat that builds up over time in the form of to-be-paid-out subsidies. Moreover, this model provides more working capital for the protocol with which to de-risk its exposure as it onboards long tail collateral from Ethereum’s staking landscape.

What Comes Next?

We’re excited to share that Loop has been built out over the past six months and that our launch is imminent. You can expect our source code as well as our audit from Watchpug to be made public in April followed by a Code4rena campaign. For now, check out some sneak peeks of our UI below:

To prepare for the launch of Loop, we’ll be sharing more over the coming weeks on how you can become an early community member of the protocol. This will include:

• A (very short) points program followed by an Airdrop

• A whitelisted public sale accessible through the points program