Understanding Yield Loops

Understanding Yield Loops

Yield loop strategies are Earn positions that enable you to boost your yields by Multiplying the underlying yield-bearing asset.

This works by depositing the yield asset and borrowing a like-kind pair without the native yield, such as borrowing ETH against wstETH.

After multiplying several multiples or “looping”, the result is a greater return on the yield because the exposure to the yield is much greater.

All of this assumes that the borrow rate is less than the gross yield, resulting in a higher net yield than the native yielding asset.

While these strategies have gained a lot in popularity, it can be a bit overwhelming understand, which is best for me? or the simpler question, how do I choose?

  1. Yield asset selection: Do I want exposure to this yield and this asset?
  2. Protocol selection: What protocol do you trust?
  3. Borrow rate and net yield: is the borrow rate low enough to yield positive net yield?
  4. Liquidity: Is there enough liquidity to ensure that future demand will not increase the borrowing rate?
  5. Liquidation price and risk management: What kind of risk do you want to take and how do you know what to monitor?

How to select the right yield asset for you

For some, the only thing that matters is the yield the asset generates. If that is the case, your decision is simple: go with the highest-yielding asset.

For some, other factors matter, like decentralization or the longevity and trust in the asset.

On Summer.fi, you can easily select for both of these factors:

  • First, sort by “7-day net APY”
  • Second, select the “bluechip assets” tag

Next, you’ll have to make another fundamental decision, what kind of native yield asset do you want to earn with?

  • Stablecoins: ETH has an ETH-denominated yield, while stablecoins have stablecoin-denominated or ETH Derivatives?

The difference here is obvious: ETH has an ETH-denominated yield, while stablecoins have a stablecoin-denominated yield.

The main difference is that ETH Derivatives enable users to maintain volatile exposure to ETH while earning boosted yields.

Once again, Summer.fi makes this easy. Just select the “Stablecoin strategies” or “ETH derivative yield loops” tag, under the Yield Loop tab.


Choosing a protocol that you trust

After you’ve decided on the asset and yield loop strategy, you’ll need to choose a protocol. If you have a specific one in mind, you can select that one via the Protocols dropdown.

Now, assuming you don’t know which protocol to use, Summer.fi makes it easy. All you have to do is select the “>1B TVL” tag, and “Longevity Tag” to select for protocols that have the most market stress and resilience.


Choosing the right borrow rate and Net yield

Unlike doing yield loop strategies manually, this factor is exactly the same as the first. All you need to do is look at the “7 Day Net APY” column. Summer.fi computes the Net Yield for you, taking into account the borrow rate.

Why this matters is because the borrow rate must always be less than the boosted yield for the strategy to be profitable.

Selecting for ample liquidity

One of the final factors to consider is Liquidity. Liquidity really matters for two critical reasons.

  1. Borrow rates. If protocols or pairs with low liquidity are chosen, you might impact the borrow rate, impeding the profitability of the strategy. When possible air on the side of ample liquidity.
  2. De-peg risk. At the level of the asset itself, its liquidity matters quite a lot, in the case of market stresses. You can find the liquidity of an asset by searching DeFillama or Dune.

How to choose a liquidation price and manage risk

Ulitmately, there is no one size fits all answer to choosing a liquidation price. You have to do your own analysis and choose what you believe to be within the bounds of safe.

Though, the general principle for yield loop strategies is to choose a liquidation price that has proven to be strong even during times of market stress.

How do you do that?

Know your pair. If you are doing a ETH derivative yield loop, or a stablecoin derivative yield loop, make sure to check the historical chart.

  • How? Take the pair, then go to an app like 1inch and view the max chart. Pay close attention to periods of stress and how the price reacted. From there, choose a liquidation price that you are comfortable with.

Getting in touch

If you have any questions regarding Summer.fi, contact us at support@summer.fi or our social media.




Knowledge Base