Collateral looping: gross exposure hidden inside repeated deposits

Keep a balance sheet after each round

Start with hypothetical equity of 1,000. Borrow 500, convert it into collateral of equal value and supply it: collateral is 1,500 and debt is 500, leaving equity 1,000 before costs. Borrowing and supplying another 250 gives collateral 1,750 and debt 750; equity still starts at 1,000.

Fees and price changes can reduce that equity. The example describes the arithmetic, not an executable borrowing limit.

Compare gross earnings with gross borrowing costs

If collateral earned a hypothetical 4% and debt cost 6%, the last example earns 70 and pays 45 over a year with balances and rates held fixed: net 25 before costs. Quoting 4% on 1,750 without the 750 debt cost would overstate the result.

Closing the loop has its own constraints

A collateral-price drop or rate increase can make the arrangement harder to maintain. Removing collateral first may fail a health check. A repay-with-collateral adapter can coordinate an unwind where supported, but it still needs valid execution and sufficient liquidity. A loop can depend on several contracts and markets at once.