Looping is one of the most capital-efficient strategies onchain, and one of the most fragile. The mechanics are straightforward: deposit a yield-bearing asset, borrow against it, swap back into more of the asset, and repeat to lever up the yield. The catch is that it multiplies the downside just as cleanly as the upside.

Looped positions sit close to their liquidation threshold by design, so a small move can wipe them out. A brief depeg in the collateral or a stale or manipulated oracle price can push a position underwater in minutes.

And the loss isn’t always a clean liquidation. Sometimes the position can’t be exited at all, because unwinding it is unprofitable or the market is frozen, so the loss sits unrealized and compounds.