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LTV Looping
Money Boost
TL; DR
If you really like an asset, take out a loan on it and use that loan to take out an other loan. And another. And another. Ad nauseum.
Loan-To-Value Looping
LTV Looping is essentially leveraging the loan you decide to take out against collateralized assets.
Where one would take a loan out against their assets and, according to the number of loops they choose, would repeat the loan with the same loan-to-value ratio with every new repetition of that loan using borrowed funds, consequently growing the initial asset base i.e, using more borrowed funds to borrow funds. You generally would use looping as a way to long your position of an asset.
When borrowing funds in DeFi, even without leverage, there is a risk of liquidations. Most lending pools will have a Maximum Debt Ratio characterized by the LTV which will be used to calculate a position’s Health Factor ((Total Amount of Collateral x LTV threshold)/Total Amount Borrowed).
Liquidations occur when your collateral that you borrow against drops to a point that your LTV ratio crosses the threshold programmed by the protocol and your Health Factor drops below 1.
Here is an simple example:
  • Tom is bullish FTM, currently sitting at $1.40 and wants to 3x long his 100 FTM on Jerry Finance
  • The Maximum Debt Ratio (LTV) for FTM that Jerry Finance offers is 70%.
  • Jerry Finance offers jfUSDC loans against FTM and the ability to loop or leverage that loan in one click. By looping once, Jerry Finance takes the jfUSDC loan and buys the equivalent FTM and adds into Tom’s collateral. By looping twice Jerry Finance simply repeats the aforementioned process and then again, this time with the collateral containing the new borrowed funds.
Below is a table demonstrating the number of loops and the resulting leverage that occurs.
At 6 loops, you will see that Tom has 3.05882x his collateral, and borrowed 205.882 FTM to grow his position to 305.882.
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We can calculate the health of Tom's loan using the Health Factor Calculation:
(Collateral x Max Debt Ratio) / Amount Borrowed = Health Factor
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In this case:
(305.882 x 70%)/205.882 = 1.0400
Because the Maximum Debt Ratio (LTV) allows a 70% threshold. If FTM were to dip anywhere below its price at the time of the loan (1.40$), Tom would run a risk of getting liquidated because his collateral would be worth less than 305.882 FTM and the resulting Health Factor would dip below 1, making him subject to liquidation.
Tom should therefore look to deposit more collateral or loop less than 70% LTV of a loan to give himself some breathing room and so he doesn't have to keep staring at the 1 minute chart.
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