{
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  "id": "collateral-looping",
  "canonical": "https://degreesofsatoshi.com/encyclopedia/collateral-looping/",
  "collection": "defi",
  "title": "Collateral looping: gross exposure hidden inside repeated deposits",
  "description": "See how repeated borrowing and re-supplying grows gross exposure without creating an equal amount of new net equity.",
  "aliases": [
    "recursive borrowing collateral looping",
    "recursive borrowing balance sheet"
  ],
  "dates": {
    "published": "2026-10-02",
    "modified": "2026-10-02",
    "verified": "2026-10-02T19:18:00.092Z",
    "dataAsOf": "2026-10-02"
  },
  "authorship": {
    "publisher": "Degrees of Satoshi editorial project",
    "process": "AI-assisted research and drafting with a separate automated source-verification pass; no external expert or named human review is implied."
  },
  "quickAnswer": {
    "text": "Collateral looping repeatedly borrows against supplied assets, uses the borrowed value to acquire more collateral and supplies it again. This increases both collateral exposure and debt. It can amplify a yield difference, but it also amplifies price, borrowing-rate and liquidation risks; the larger supplied balance is not all new wealth.",
    "claimId": "collateral-looping-quick-answer",
    "sourceIds": [
      "x425-defi-aave-pool",
      "x425-defi-aave-health",
      "x425-defi-aave-liquidity"
    ]
  },
  "keyFacts": [
    {
      "label": "Two sides grow",
      "value": "New borrowing creates debt even when its proceeds are re-supplied.",
      "sourceIds": [
        "x425-defi-aave-pool"
      ],
      "id": "two-sides-grow",
      "claimId": "collateral-looping-fact-two-sides-grow"
    },
    {
      "label": "Interest cost",
      "value": "Borrowing continues to accrue its applicable rate.",
      "sourceIds": [
        "x425-defi-aave-liquidity"
      ],
      "id": "interest-cost",
      "claimId": "collateral-looping-fact-interest-cost"
    },
    {
      "label": "Liquidation",
      "value": "Debt must remain adequately backed at current valuations.",
      "sourceIds": [
        "x425-defi-aave-health"
      ],
      "id": "liquidation",
      "claimId": "collateral-looping-fact-liquidation"
    }
  ],
  "prerequisites": [
    "collateral-and-health-factors"
  ],
  "sections": [
    {
      "id": "example",
      "heading": "Keep a balance sheet after each round",
      "sourceIds": [
        "x425-defi-aave-pool"
      ],
      "paragraphs": [
        "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."
      ]
    },
    {
      "id": "yield",
      "heading": "Compare gross earnings with gross borrowing costs",
      "sourceIds": [
        "x425-defi-aave-liquidity"
      ],
      "paragraphs": [
        "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."
      ]
    },
    {
      "id": "unwind",
      "heading": "Closing the loop has its own constraints",
      "sourceIds": [
        "x425-defi-aave-health",
        "x425-defi-aave-swaps"
      ],
      "paragraphs": [
        "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."
      ]
    }
  ],
  "faq": [
    {
      "question": "Does re-supplying borrowed funds cancel the loan?",
      "answer": "No. The supply claim and borrowing obligation remain separate until a repayment operation reduces the debt.",
      "sourceIds": [
        "x425-defi-aave-pool"
      ]
    }
  ],
  "claims": [
    {
      "id": "collateral-looping-quick-answer",
      "articleSlug": "collateral-looping",
      "statement": "Collateral looping repeatedly borrows against supplied assets, uses the borrowed value to acquire more collateral and supplies it again. This increases both collateral exposure and debt. It can amplify a yield difference, but it also amplifies price, borrowing-rate and liquidation risks; the larger supplied balance is not all new wealth.",
      "sourceIds": [
        "source-b35859a766315ce4",
        "source-74f79d59daaab5f0",
        "source-1c9a4ee4b0c4a761"
      ],
      "sourceLocators": [
        {
          "sourceId": "source-b35859a766315ce4",
          "locator": "repay; setUserUseReserveAsCollateral; withdraw; setUserEMode"
        },
        {
          "sourceId": "source-74f79d59daaab5f0",
          "locator": "Health Factor; Managing Health Factor"
        },
        {
          "sourceId": "source-1c9a4ee4b0c4a761",
          "locator": "Supply; Borrow; Repay"
        }
      ],
      "scope": {
        "collection": "defi",
        "dataAsOf": "2026-10-02",
        "blockHeight": null
      },
      "qualification": "",
      "evidenceStatus": "documented",
      "verification": {
        "status": "verified",
        "method": "independent automated source review",
        "checkedAt": "2026-10-02T19:18:00.092Z",
        "reviewer": "Independent automated verification — Codex root, separate from the DeFi drafting agent",
        "notes": [
          "Checked supply and borrow accounting.1750−750=1000equity;1750×.04−750×.06=25 hypothetical income beforecosts; no limit or profitability promise."
        ]
      }
    },
    {
      "id": "collateral-looping-fact-two-sides-grow",
      "articleSlug": "collateral-looping",
      "statement": "Two sides grow: New borrowing creates debt even when its proceeds are re-supplied.",
      "sourceIds": [
        "source-b35859a766315ce4"
      ],
      "sourceLocators": [
        {
          "sourceId": "source-b35859a766315ce4",
          "locator": "repay; setUserUseReserveAsCollateral; withdraw; setUserEMode"
        }
      ],
      "scope": {
        "collection": "defi",
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      "qualification": "",
      "evidenceStatus": "documented",
      "verification": {
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        "checkedAt": "2026-10-02T19:18:00.092Z",
        "reviewer": "Independent automated verification — Codex root, separate from the DeFi drafting agent",
        "notes": [
          "Checked supply and borrow accounting.1750−750=1000equity;1750×.04−750×.06=25 hypothetical income beforecosts; no limit or profitability promise."
        ]
      }
    },
    {
      "id": "collateral-looping-fact-interest-cost",
      "articleSlug": "collateral-looping",
      "statement": "Interest cost: Borrowing continues to accrue its applicable rate.",
      "sourceIds": [
        "source-1c9a4ee4b0c4a761"
      ],
      "sourceLocators": [
        {
          "sourceId": "source-1c9a4ee4b0c4a761",
          "locator": "Supply; Borrow; Repay"
        }
      ],
      "scope": {
        "collection": "defi",
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      "qualification": "",
      "evidenceStatus": "documented",
      "verification": {
        "status": "verified",
        "method": "independent automated source review",
        "checkedAt": "2026-10-02T19:18:00.092Z",
        "reviewer": "Independent automated verification — Codex root, separate from the DeFi drafting agent",
        "notes": [
          "Checked supply and borrow accounting.1750−750=1000equity;1750×.04−750×.06=25 hypothetical income beforecosts; no limit or profitability promise."
        ]
      }
    },
    {
      "id": "collateral-looping-fact-liquidation",
      "articleSlug": "collateral-looping",
      "statement": "Liquidation: Debt must remain adequately backed at current valuations.",
      "sourceIds": [
        "source-74f79d59daaab5f0"
      ],
      "sourceLocators": [
        {
          "sourceId": "source-74f79d59daaab5f0",
          "locator": "Health Factor; Managing Health Factor"
        }
      ],
      "scope": {
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        "dataAsOf": "2026-10-02",
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      "qualification": "",
      "evidenceStatus": "documented",
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        "checkedAt": "2026-10-02T19:18:00.092Z",
        "reviewer": "Independent automated verification — Codex root, separate from the DeFi drafting agent",
        "notes": [
          "Checked supply and borrow accounting.1750−750=1000equity;1750×.04−750×.06=25 hypothetical income beforecosts; no limit or profitability promise."
        ]
      }
    }
  ],
  "sources": [
    {
      "id": "x425-defi-aave-pool",
      "label": "Aave v3 Pool",
      "publisher": "Aave",
      "url": "https://aave.com/docs/aave-v3/smart-contracts/pool",
      "locator": "repay; setUserUseReserveAsCollateral; withdraw; setUserEMode",
      "note": "Specific v3 write-method constraints and amount sentinel.",
      "version": "Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded",
      "checkedAt": "2026-10-02T18:53:21.762Z",
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    {
      "id": "x425-defi-aave-health",
      "label": "Health Factor and Liquidations",
      "publisher": "Aave",
      "url": "https://aave.com/help/borrowing/liquidations",
      "locator": "Health Factor; Managing Health Factor",
      "note": "Weighted liquidation thresholds; no universal safe ratio.",
      "version": "Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded",
      "checkedAt": "2026-10-02T18:53:21.960Z",
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      "recordId": "source-74f79d59daaab5f0"
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    {
      "id": "x425-defi-aave-liquidity",
      "label": "LiquidityPool",
      "publisher": "Aave",
      "url": "https://aave.com/docs/aave-v3/concepts/liquidity-pool",
      "locator": "Supply; Borrow; Repay",
      "note": "Pooled supply/collateral interest and repayment asset.",
      "version": "Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded",
      "checkedAt": "2026-10-02T18:53:21.761Z",
      "contentSha256": "cdf88867bba9c9025d998e8b31713ea0de41e0d4a8c7caaa1593f065fd242077",
      "recordId": "source-1c9a4ee4b0c4a761"
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    {
      "id": "x425-defi-aave-swaps",
      "label": "Aave v3 Swap Features",
      "publisher": "Aave",
      "url": "https://aave.com/docs/aave-v3/smart-contracts/swap-features",
      "locator": "Repay with collateral; Collateral Swap; Debt Swap",
      "note": "Documented adapter/flash-loan/DEX composition; availability varies by market.",
      "version": "Documentation retrieved for the 2026-10-02 editorial scope; content hash recorded",
      "checkedAt": "2026-10-02T18:53:21.663Z",
      "contentSha256": "b99c7a66fb373b3f455a161aa0503452eeb99555856ba3dcafedde5bf66a33c7",
      "recordId": "source-f84decea4c02489e"
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  ],
  "related": {
    "articles": [
      "repay-with-collateral",
      "aave-efficiency-mode",
      "defi-tvl"
    ],
    "dossiers": [],
    "wallets": []
  },
  "revisionHistory": [
    {
      "date": "2026-10-02",
      "kind": "published",
      "summary": "First publication after primary-source research and separate automated verification."
    }
  ],
  "citation": "Degrees of Satoshi editorial project. “Collateral looping: gross exposure hidden inside repeated deposits.” Published 2026-10-02; updated 2026-10-02. https://degreesofsatoshi.com/encyclopedia/collateral-looping/"
}