💰 Cheat Looping: The DeFi Leverage Hack That Institutions Don't Want You to Know

Hey fam! 👋

Today we're diving into one of the most efficient leverage strategies in DeFi pioneered by Stephen TCG over at the DeFi Dojo—something that'll make you wonder why you've been doing manual loops like a caveman this whole time.

This is Cheat Looping, and it's basically the difference between building IKEA furniture with a screwdriver vs. a power drill. Same result, WAY less pain. 🔧⚡

🤔 The Problem: Traditional Looping is PAINFUL

If you've ever tried to build a leveraged position in DeFi, you know the traditional method is brutal.

The Traditional Loop Cycle:

Deposit collateral (let's say USDC)
Borrow against it (get ETH)
Swap the borrowed ETH back to USDC
Deposit that USDC as more collateral
Borrow more ETH
Swap again
Repeat... and repeat... and repeat... 😵‍💫

To hit 10x leverage? You're looking at 20+ transactions.

The Hidden Costs That Destroy Your Returns

Every single loop hits you with:

Swap fees (0.3% to 1% each time)
Slippage (especially painful in thin liquidity)
Price impact (moving the market against yourself)
Gas costs (not huge on L2s but still adds up)
Time (sitting there clicking buttons for 30 minutes)

By the time you're done looping to 10x leverage, you might have burned 3-5% of your principal just on fees and slippage. That's months of yield you need to earn back just to break even! 📉

The Liquidity Death Spiral:

Sure, there are automated looping tools like Contango or Oiler's multiply feature. But if you're working with anything except the deepest liquidity pairs, these tools can absolutely wreck you with price impact. You think you're getting 10x leverage but you're actually getting 8x leverage and a 15% haircut on entry. Not ideal.

🎯 Enter: The Cheat Loop

Cheat Looping is a completely different approach. Instead of looping a small amount multiple times, you use your ENTIRE portfolio capital to open ONE position at maximum leverage, then use the borrowed funds to seed your other positions.

It's not cheating in the moral sense—it's just so much more efficient than the standard method that it feels like cheating. 😏

The Core Concept (Simplified)

Let's say you have $50,000 and want to build 5 different positions of $10,000 each across various protocols.

Traditional Approach:

Open position 1, loop it 20 times → pay fees 20 times
Open position 2, loop it 20 times → pay fees 20 times
Open position 3, loop it 20 times → you get the idea... 💸

Cheat Loop Approach:

Deposit ALL $50,000 as collateral for position 1
Borrow the maximum allowed (let's say $45,000 at 90% LTV)
Use that $45,000 to open position 2
Position 1 is now at maximum leverage with ONE transaction
Repeat the process with position 2's borrowed funds

The Result:

Position 1: 1 deposit, 1 borrow = Maximum leverage achieved
Position 2: Funded entirely by borrowed capital from position 1
Position 3: Funded by borrowed capital from position 2
And so on...

The Efficiency Comparison

Traditional Looping to 11x:

Transactions: ~22 deposits + 22 borrows = 44 transactions
Swaps: ~22 swaps (each with fees and slippage)
Slippage exposure: HIGH (cumulative across all swaps)
Time required: 30-60 minutes of manual clicking
Total cost: 3-5% of principal 😬

Cheat Looping to 11x:

Transactions: 1 deposit + 1 borrow = 2 transactions
Swaps: 0 (after initial asset acquisition)
Slippage exposure: Negligible to ZERO
Time required: 2 minutes
Total cost: Basically nothing 🎉

See why it feels like cheating?

📊 Real-World Case Study: $usds on Oiler Prime

Let me show you how this actually works in practice with a real example from Oiler Prime.

The Setup:

Target yield: 36-40% APR on $usds
Goal: Maximize exposure without getting destroyed by swap fees

The Execution:

Step 1: Asset Acquisition Converted capital into $usds using Llama Swap, Oku Trade, or Sky. This is the ONLY swap needed for the entire strategy.

Step 2: The Cheat Loop

Deposited: ~$206,000 in $usds as collateral
Borrowed: ~$187,000 in USDC at maximum LTV

Step 3: The Math

Net Account Value (NAV): $206,000 - $187,000 = $18,600
Leverage Achieved: $206,000 ÷ $18,600 = 11x leverage
Transactions Required: 2 (one deposit, one borrow)

Step 4: Redeploy Borrowed Capital The $187,000 in borrowed USDC is now available to deploy into

OTHER protocols:

Morpho for different yield opportunities
Compound for stable rates
Additional Oiler positions
Wherever the best rates are at that moment 🎯

The Beauty of It:

Instead of having $206,000 locked in ONE leveraged position, you now have:

An 11x leveraged $usds position earning 36-40% APR
$187,000 in borrowed capital to diversify across multiple protocols
All achieved in like 2 minutes with basically zero fees

This is how institutions operate. This is capital efficiency.

🎓 Strategic Implementation: Portfolio-Level Thinking

Here's the key insight: Cheat Looping is NOT for single-position traders.

This strategy shines when you're managing a DIVERSIFIED portfolio. If you're just trying to long ETH with leverage, traditional looping or perps are probably better.

The Diversification Sweet Spot

Let's say you have $10,000 and want to spread it across 10 different positions ($1,000 each).

The Cheat Loop Cascade:

Position 1:

Deposit: Full $10,000
Borrow: $9,000 (90% LTV)
Remaining NAV: $1,000
Leverage: 10x ✅

Position 2:

Deposit: $9,000 (borrowed from position 1)
Borrow: $8,100
Remaining NAV: $900
Leverage: 10x ✅

Position 3:

Deposit: $8,100 (borrowed from position 2)
Borrow: $7,290
And so on...

You're basically creating a leverage ladder where each position is funded by the borrowed capital from the previous one.

The Requirements:

For this to work effectively, you need:

Sufficiently large capital base (at least $10-20k to make it worthwhile)
Multiple positions you want to open anyway (this isn't a single-trade strategy)
Understanding of LTV ratios across different protocols
Stomach for leverage (this creates interconnected risk)

Portfolio Rebalancing with Cheat Loops

This strategy is INCREDIBLE for rebalancing. Let's say you want to shift your portfolio allocation from 50% stables / 50% ETH to 70% stables / 30% ETH.

Instead of:

Unwinding 20 loops on your ETH position
Paying swap fees
Re-looping into stables
Paying MORE swap fees

You can:

Open new stable positions using cheat loops funded by borrowed capital
Let your ETH positions naturally deleverage over time
Minimize transaction costs by orders of magnitude

🚨 The Exit Strategy: Don't Get Trapped

Here's where most people mess up with cheat loops: they get in easy but getting OUT can be a nightmare if you're not prepared.

The Problem:

If your ENTIRE portfolio is illiquid leveraged positions, you can't exit without looping down, which means:

20+ transactions to unwind
Massive swap fees on the way out
Potential slippage eating your profits
Time pressure if you need to exit quickly

The Solution: Maintain Liquid Reserves 💧

The 20-25% Rule:

Always keep 20-25% of your portfolio in "effectively liquid" positions:

LP tokens on Beefy
LP tokens on SwapX
Stable yield farms with deep liquidity
Anything you can exit in 1-2 transactions

Why This Matters:

When you need to exit a cheat looped position:

Pull liquidity from your liquid reserves
Use that capital to pay down debt on your leveraged position
This deleverages you in 2-3 loops instead of 20+
You maintain capital efficiency while having an escape hatch

Example Exit Flow:

Let's say you have a $200k position at 10x leverage (so $20k NAV and $180k borrowed).

Without Liquid Reserves:

You need to swap borrowed assets back to collateral
Loop down 20+ times
Pay fees on every loop
Could take 30-60 minutes
Might lose 3-5% on exit

With 25% Liquid Reserves ($50k):

Pull $50k from liquid LP positions
Pay down $50k of debt
Your leverage drops from 10x to ~5x
Now you only need 5-7 loops to fully exit
Saves you massive fees and time
You keep your profits 🎯

🧠 Advanced Considerations

When to Use Cheat Looping

GOOD:

Portfolio rebalancing across multiple positions ✅
Opening multiple new positions simultaneously ✅
High-conviction plays where you want maximum leverage efficiently ✅
Markets with thin liquidity where swap impact would be high ✅

BAD:

Single position trading (just use traditional looping or perps) ❌
Small capital bases (<$5k makes it not worth the complexity) ❌
Highly volatile markets where liquidation risk is extreme ❌
If you don't understand interconnected leverage risks ❌

The Interconnected Risk Warning ⚠️

Here's the thing about cheat looping: your positions become INTERCONNECTED.

If position 1 gets liquidated, you lose the collateral. But that collateral was funding position 2, which was funding position 3...

This creates a cascade risk. It's not like having 5 independent positions. It's more like a house of cards where each level supports the next.

Risk Mitigation:

Use DIFFERENT protocols for each position (don't put everything on one platform)
Maintain those liquid reserves
Set up liquidation alerts
Consider using protocols with partial liquidations (like Euler v2)
Don't go to absolute maximum LTV—leave some buffer

The Math Behind Maximum Leverage

The theoretical maximum leverage you can achieve with cheat looping depends on the LTV ratio:

Formula: Maximum Leverage = 1 ÷ (1 - LTV)

90% LTV = 1 ÷ 0.10 = 10x leverage
80% LTV = 1 ÷ 0.20 = 5x leverage
95% LTV = 1 ÷ 0.05 = 20x leverage (extremely risky)

But remember: theoretical maximum ≠ safe maximum

Most experienced traders stay at 70-80% of maximum LTV to avoid liquidation risk. So if you CAN borrow at 90% LTV, you might only borrow at 70% for safety.

💡 Pro Tips from the Trenches

1. Start with Stable Pairs

Your first cheat loop should be with stablecoin pairs (USDC/USDT or $usds/USDC). This minimizes liquidation risk while you learn the mechanics.

2. Use Layered LTV Ratios

Don't use maximum LTV on every position. Try:

Position 1: 85% LTV
Position 2: 80% LTV
Position 3: 75% LTV

This creates a "safety gradient" where outer positions have more buffer.

3. Automation is Your Friend

Set up:

Liquidation price alerts on every position
Automated health factor monitoring
Portfolio tracking dashboards
Emergency deleveraging scripts (if you're technical)

4. Track Your Effective APY

The APY you see on the vault is NOT your effective APY at 10x leverage.

Formula: Effective APY = (Vault APY × Leverage) - (Borrow APY × (Leverage - 1))

Example:

Vault APY: 36%
Borrow APY: 8%
Leverage: 10x

Effective APY = (36% × 10) - (8% × 9) = 360% - 72% = 288% APY

But also 10x the liquidation risk. Risk/reward, always. ⚖️

🎯 The Bottom Line

Cheat Looping is basically the DeFi equivalent of institutional leverage techniques. It's how hedge funds and professional liquidity providers have been operating for years, just now available to retail through DeFi protocols.

The Core Benefits:

✅ Achieve maximum leverage in 1-2 transactions instead of 20+

✅ Eliminate cumulative swap fees and slippage

✅ Perfect for portfolio rebalancing

✅ Massive time savings

✅ Better capital efficiency across diversified positions

The Core Risks:

⚠️ Interconnected leverage creates cascade risk

⚠️ Requires larger capital base to be effective

⚠️ Complexity in exit strategies

⚠️ Need to maintain liquid reserves

⚠️ Higher liquidation risk if not managed properly