Automated vaults dominate leverage looping on lending platforms
“So we we did take those wallets, and we just ran them through ARCEM to see what they were labeled as. And these wallets are essentially vaults. Right? If you think about what leverage looping is, you could do it manually where you take the LST, borrow it, convert that into LST, and and do that loop again. But a lot of people are just doing this automatically through vault programs. So, for example, the top, wallet is EtherFi's Vault product. Right? So that basically just abstracts all the looping in the background, and you basically present it to the user as high yield ETH product.”
LayerZero default settings often utilize risky bridge signers
“Then, of course, layer zero, who had their their off chain RPC infrastructure compromised. Perhaps they shouldn't allow the one of one to be the out of the box kit, for new deployers on the OFT standard and perhaps push back more. I think the numbers show close to 40% of those unique OFT deployments on that that one of one. Really? So so you're saying that 40% of people that use this infrastructure still have that one of one? Not not of total capital, but of, unique OFT deployments, and a number have since been upgraded as well, following the exploit.”
Unified pools socialize risk across all protocol depositors
“the meat of it is that you have a pooled option, which is Aave, where each asset can be borrowed, and you're not choosing what assets you can be lent again. Right? So if I'm depositing ETH in the pool, any user with a help factor who has deposited collateral can borrow that ETH. I cannot say, for example, I'm not comfortable with a looper borrowing my ETH. I wanna make that available only to someone with BTC or USDC.”
Leverage looping drives 98 percent of rsETH collateral use
“What we're seeing instead, that type of behavior is people taking these pooled reserves, right, because it can be borrowed, and there's no distinction between what collateral types are used. And we see a lot of leverage sleeping, which is the activity of a user using an active state version of ETH that generates yield to borrow a passive wrapped ETH version of it, converting that back into the active asset that generates yield and looping that back and forth. So that is basically the primarily use case of using this wrapped ETH in the pool reserves. And when we looked a little bit deeper, we saw that around 98% of collateral backing these positions, wrapped in those board, was in these LSTs.”
Aave failed to flag bridge signer risks for collateral
“And then third, downstream, for Aave, when listing the the RSE as collateral, Perhaps, of course, the the one of one, signer on OFT deployment, that could have been flag flagged as a risk for the collateral listing and parameters adjusted accordingly, for that. Yeah. You would think I mean, I know we're gonna I think in this conversation, we'll get to things like like circuit breakers or rate limiting. But, yeah, all those things, certainly could have could have helped.”
Looping generates the majority of organic ETH borrow demand
“I would say it is real economic activity. Right? Because without this looping demand, ETH will have no utilization. The looping traders are borrowing ETH, which increases the utilization. It also increases the interest rate for the lenders. So when you deposit ETH onto the platform, I think you would have historically earned around 1.7% APY versus the example of Bitcoin that I gave where you earn 0.01 because no one's borrowing it. So it is generating economic activity. A lot of demand, a lot of use from lending platforms is this looping.”
