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Looping on Aave.

nftchance

11/13/2025

If you want leverage on your crypto holdings without handing custody to an exchange, looping is the cleanest path.

You keep your spot holdings and use them as collateral on a lending protocol like

Aave, recursively borrowing against them to multiply your exposure. No counterparty. No funding rates. Just you, your collateral, and transparent onchain rules.

Just one drawback.

Getting into a looped position manually requires dozens of individual transactions. Maintaining that position as prices move requires constant attention and quick action. Getting out requires even more work than getting in. Most people don't have the patience, the gas budget, or the operational discipline to execute this well over time.

Looping is powerful, but only if you can maintain it consistently.

The Mechanic

Looping is recursive borrowing.

Health Factor is the Only Number That Matters

When you're running a looped position, there are a lot of numbers you may pay attention to. The current price of

ETH. Your total collateral value. How much you've borrowed. Your theoretical leverage multiplier. The APY you're earning on deposits. The interest rate you're paying on borrows.

You can forget all of them for a moment. The only number that determines whether your position survives another block is your account health factor.

Health factor is a ratio that Aave calculates continuously based on your current collateral value and your outstanding debt:

\text{Health Factor} = \frac{\text{Collateral Value} \times \text{Liquidation Threshold}}{\text{Total Debt}}

This singel number tells you how close you are to liquidation, the point at which Aave will automatically sell your collateral to repay your debt.

Collateral Value is how much your deposited assets are currently worth in dollar terms. If you've deposited

ETH and the price of

ETH changes, your collateral value changes with it.

Liquidation Threshold is a percentage set by Aave for each asset type, representing how much of your collateral's value the protocol considers "usable" for backing your loans. Think of it as Aave saying "we'll count 86 cents of every dollar of

ETH you've deposited when calculating whether you're safe."

Total Debt is the dollar value of everything you've borrowed. If you borrowed

USDC (a stablecoin), this number stays relatively constant regardless of

ETH's price movements.

When your health factor equals 1, you're right at the liquidation threshold. Any lower and Aave's liquidators can step in and start selling your assets. You'll lose a chunk of your position to liquidation penalties, and you have no control over the timing or the execution price.

This is what we're trying to avoid at all costs.

Thankfully, this system works in the opposite direction too. The higher your health factor, the safer your position. A health factor of 2 means you have twice as much effective collateral as required to back your debt. A health factor of 1.5 gives you a 50% buffer. A health factor of 1.2 gives you a 20% buffer above the liquidation line.

Of course, the higher your health factor, the less leverage you have.

Conservative operators often maintain a health factor of 1.5 or higher, accepting lower leverage in exchange for a larger safety buffer. Using 1.5 as your basis, one can weather bigger price swings without needing to take action. More aggressive traders might run at 1.1 or even 1.05, maximizing their leverage while accepting that a relatively small adverse price movement could trigger liquidation.

There's no universally "right" answer. It depends on your risk tolerance, your conviction in the trade, how actively you can monitor and manage the position, and how much volatility you expect in the underlying asset.

How Much Leverage Can I Get?

The next obvious question when understanding Aave looping is figuring out how much leverage you can really get exposure to. On Aaave, maximum leverage is a function of two variables:

the liquidation threshold of your collateral asset (set by Aave) and
the target health factor you want to maintain (your choice based on risk tolerance):

Lower health factors give you more leverage, but shrink your margin for error. At a health factor of 1.05, a price drop of less than 5% pushes you directly into liquidation territory. At 1.5, you can weather a 33% drop before liquidation becomes a concern.

ETH goes up 10%, your leveraged position gains 10% times your leverage multiplier. If

ETH goes down 10%, you lose 10% times your leverage multiplier.

A 10% price drop at 3.5x leverage costs you 35% of your equity.

How Many Loops Does It Take?

With our understanding of looping established the questions now becomes how much work we have to do to get our position set up at our target leverage.

At this point, you'll find the the first major flaw with manual looping:

You cannot reach your target leverage in a single transaction. Each loop only gets you partway there, with diminishing returns each time.

When you deposit fresh collateral, your health factor improves because you have more assets backing your debt. When you borrow against that new collateral, your health factor drops because you've taken on more debt. Each cycle moves you closer to your target, but the amount you can safely borrow shrinks with each iteration. You're working with progressively smaller margins:

Amongst the team of Plug, we like to think of it as filling a container with a series of increasingly smaller cups. The first pour adds a lot. The second adds less. By the tenth or twelfth pour, you're adding tiny amounts to reach your goal.

To reach a target health factor of 1.2 starting from a fresh

ETH deposit in an

ETH/

USDC long on Aave V3, you're looking at approximately:

13 separate deposit transactions
12 separate borrow transactions
12 separate swap transactions

Each transaction requires you to calculate exactly how much to borrow or deposit to move toward your target without overshooting. And each transaction is an opportunity to make a mistake: enter the wrong amount, approve the wrong token, set insufficient gas and have the transaction fail, or simply fat-finger a number and damage your position.

How Do I Get Out?

Getting out of a looped position is just as tedious as getting in. Sometimes more so, because you might be exiting under pressure when prices are moving against you.

You can't simply withdraw all your collateral and walk away. Your debt is substantial, and attempting to withdraw too much collateral at once would push your health factor below 1, triggering liquidation. Aave enforces a maximum loan-to-value (LTV) ratio that limits how much collateral you can remove while maintaining a safe position.

For

ETH on Aave V3, there are two key thresholds to understand:

Max LTV (~80%) is the maximum percentage of your collateral value you can borrow against when opening or increasing a position. This is your ceiling for taking on new debt.
Liquidation LTV (~86%) is the threshold at which your health factor hits 1 and liquidation begins. Go below this and you start losing collateral to liquidators.

The gap between these two percentages, roughly 6 percentage points, is your operating room for unwinding.

To exit a looped position, you need to work in reverse, step by step:

Withdraw as much collateral as you safely can without triggering liquidation (staying above the liquidation LTV)
Swap that withdrawn collateral for your debt token (ETH → USDC in our example)
Use those stablecoins to repay part of your debt
With less debt, you can now safely withdraw more collateral
Repeat until your debt is fully repaid

Only after your debt is completely cleared can you withdraw your remaining collateral along with any gains you've accumulated.

If it took you 40 transactions to enter the position at your target leverage, expect a similar number to exit cleanly. And if you're exiting because prices moved against you, you're doing this under time pressure while your health factor continues to deteriorate.

Flashloans and Atomic Execution

Most people execute each step manually, one transaction at a time. Deposit. Wait for confirmation. Borrow. Wait. Swap. Wait. Deposit again. Flashloans collapse the entire looping process into a single atomic transaction.

Instead of manually walking up the leverage ladder one rung at a time, a flashloan lets you temporarily borrow exactly the amount of capital you need to move your position from where it is now to where it should be. No collateral required, no intermediate exposure, no partial states.

The key property that makes this safe is atomicity. All of the following happens in one transaction:

Borrow a large amount of capital via a flashloan
Use it to adjust your Aave position (depositing collateral, repaying debt, or both)
Borrow against the updated position
Repay the flashloan in full

If any step fails due to insufficient liquidity, price movement, invalid health factor, or unexpected constraint, the entire transaction reverts. The blockchain rolls back to the exact state it was in before the transaction started. You're never left half-levered or mid-exit.

When operating with manual steps, you have to think in terms of sequences of actions: deposit this much, borrow that much, swap this amount, and repeat. Each step depends on the successful completion of the previous one, and any miscalculation can throw off the entire process. Because of this, looping manually is error-prone and operationally complex.

With flashloans, we think in terms of states. Given your current position and the market conditions, what is the desired end state? How much collateral and debt do you want after this operation? The flashloan provides the exact capital needed to transition directly from your current state to your target state in one atomic step.

Monitoring Never Stops

Flashloans reduce forty transactions to one. Markets don't wait for you.

ETH moves while you sleep, while you're in meetings, while you're on a flight with no wifi. Your health factor drifts with every price tick, sometimes toward safety, sometimes toward liquidation. Maintaining a target health factor is a continuous process that runs as long as your position exists.

Say you're disciplined. You check your position every six hours: 6am, 12pm, 6pm, 12am. That's four check-ins per day, every day, for as long as your position exists. Each check-in isn't just glancing at a number. You're loading the Aave dashboard, reading your current health factor, checking the current price, mentally calculating whether you need to act, and if you do, executing a multi-step rebalance.

That's 28 check-ins per week. 120 per month. 1,460 per year. And that's assuming you never sleep past 6am, never get stuck in a meeting, never take a vacation where you're not thinking about your leveraged

ETH position.

Even at four check-ins per day, you're still exposed for six hours at a time.

ETH can move 10% in six hours. It's done it before. It'll do it again. At 3.5x leverage, that's a 35% hit to your equity. Enough to push you from comfortable to liquidated while you were in a movie theater with your phone on silent.

So maybe you check more often. Every two hours. Every hour. Now you're at 16 check-ins per day. 112 per week. You've turned position management into a part-time job. Your phone buzzes with price alerts. You wake up at night to check charts. Your partner asks why you're staring at your phone during dinner. The position that was supposed to make you money is now consuming your attention as a cost of keeping it alive.

And you're still not safe. Because even hourly check-ins leave gaps. Because you can't check while you're driving. Because you can't check during your kid's recital. Because you're a human being with a human life, and the market doesn't care about any of that.

Every rebalance you execute manually costs gas. At 3.5x leverage, you might need to rebalance dozens of times per month during volatile periods. Each one a multi-transaction affair if you're not using flashloans. Each one a potential mistake if you're tired or rushed or distracted.

Automated Maintenance

The problem with manual maintenance isn't that it's hard. It's that it never ends. Every hour of every day, for as long as your position exists, you're either checking it or worrying about whether you should be checking it. The position owns a piece of your attention permanently.

Automation dissolves this entirely.

You wake up, and your position is exactly where you want it. You go to work, and your position is exactly where you want it. You have dinner with your family, and your position is exactly where you want it. The market crashes at 3am while you're asleep, and by the time you wake up, your position has already rebalanced itself back to target. You never had to do anything. You never had to know.

The math that used to require your active attention now runs continuously in the background. Every block, the system reads your position state. Every block, it compares where you are to where you want to be. When there's a gap, it calculates the exact adjustment and executes atomically. One flashloan-powered transaction. No multi-step sequences. No racing against price movements. No fumbling with interfaces while your health factor deteriorates.

This is what makes looping viable as a long-term strategy. The mechanics we covered earlier, the flashloans that collapse forty transactions into one, the health factor math that determines your leverage, none of it matters if you can't maintain the position consistently over time. Manual maintenance fails eventually. Not because you're not smart enough or disciplined enough, but because you're human. You sleep. You get distracted. You take vacations. You have a life outside of staring at charts.

Automation removes you from the critical path. The position doesn't need you to be available. It doesn't need you to be paying attention. It just stays where you want it, continuously, whether you're watching or not.

State-Based Execution

Manual looping forces you to think in sequences. Deposit this much. Borrow that much. Swap here. Deposit again. Each step depends on the previous one. You're managing a chain of operations, and if any link breaks, you're left in an intermediate state trying to figure out what went wrong.

Automation inverts this entirely. Instead of specifying a sequence of actions, you specify a destination. Where do you want your position to be? What health factor represents the right balance between leverage and safety for you?

The system reads your current state: collateral, debt, prices. It computes where you are. It computes where you want to be. When the gap exceeds a threshold, it closes it. When it doesn't, it waits.

The entire decision reduces to one comparison. Current debt versus target debt.

If you're carrying more debt than your target implies, you're overleveraged. Prices moved against you, or your health factor drifted below where you want it. The system repays the excess.
If you're carrying less debt than your target allows, you have room to add leverage. Prices moved in your favor, or you deposited fresh collateral. The system borrows the difference.
If they're close enough, you're already where you want to be. Nothing happens.

You're not telling a system how to manage your position step by step. You're declaring where your position should be, and letting the system figure out what that requires at any given moment. The target health factor is the only input. Everything else follows from that single number.

Looping is Simple

The recursive borrowing. The health factor math. The dozens of transactions to enter. The dozens more to exit. The constant monitoring. The rebalancing. One sentence.

The collateral you're depositing. The asset you're borrowing. The safety buffer you're maintaining. Everything else — how many loops, when to rebalance, how much to borrow or repay — follows from those inputs.

You're declaring an outcome. The system reads your current state, computes your target state, and closes the gap. Entry, exit, and maintenance are all the same operation: state in, state out.

This is What We Built

Everything in this post describes how

Plug approaches automated looping. The state-based execution model. The flashloan-powered atomic rebalancing. The continuous maintenance that runs whether you're paying attention or not.

We built Plug to make looping viable for people who don't want to make position management their full-time job. Set your target health factor, allocate your collateral, and the system handles everything else. Entry. Exit. Rebalancing. All of it.

If you've read this far, you understand the mechanics. Try it yourself.

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