Class rule for leveraged loops

Ketju does not approve this kind of structure, whatever the protocol’s quality, and makes no finding against the protocol itself. A class rule never chooses a client position or amount.

Scope

Recursive borrow-and-resupply strategies, leveraged yield farming, and loops of fixed-yield tokens that multiply exposure to rates, collateral values or liquidation thresholds.

The rule

Ketju does not approve a strategy whose advertised yield requires leverage or repeated re-pledging of the same collateral. A low-volatility label on the collateral does not remove the risk that a third party liquidates the position.

When the rule applies

• The target return depends on borrowed capital, recursive supply or leveraged principal-token exposure.
• A health factor, margin threshold or forced deleveraging can turn a price move into a client loss.

Research

How it works

The strategy supplies collateral, borrows against it, and supplies the loan again or buys another yield-bearing token. It repeats the cycle to multiply the carry. The profit is the leveraged spread after borrowing cost, fees and slippage. Small changes in rates, collateral price, oracle values or loan-to-value limits can erase that spread and push the position quickly toward liquidation.

Who controls it

The client depends on every protocol, oracle, market setting and automated service in the loop. Governance can change collateral factors and caps, and keepers or managers may rebalance. Third parties carry out liquidations to earn a bonus, and they have no reason to protect the client’s position.

Losses and incidents

Lending protocols are built to liquidate positions by force, so a liquidation is the system working as designed. In stressed markets, falling collateral, rising rates, slow oracles and congested transactions can turn a modest price move into a permanent loss of principal plus liquidation penalties.

Withdrawals

To withdraw, the holder must unwind each debt and collateral position in order. If the borrowed asset is scarce, the yield token trades at a discount or the market is paused, the strategy may be solvent on paper and still unable to close at the quoted value.

Comparison

An unlevered deposit in a market that Ketju approves gives a clearer source of yield, visible liquidity and no forced-sale threshold. Ketju can review a fixed-term instrument on its own when a client holds it unlevered to maturity. Leverage is what places a strategy under this rule.

Review triggers

• The strategy demonstrably becomes unlevered, with no borrowing, margin or liquidation.
• A separate mandate for experienced investors authorizes leverage and sets limits on collateral, health factor, automation and losses.

Sources

Each source shows its type, the date Ketju accessed it, and the claims it supports. “Primary” means first-hand or governing material; it does not mean that Ketju verified the source independently.

• Aave Help: Health factor and liquidations · primary · accessed 2026-08-14
  Supports: health factor, liquidation
• Aave V3 technical paper · primary · accessed 2026-08-14
  Supports: collateral, risk parameters, liquidation
• Pendle documentation: Standardized Yield · primary · accessed 2026-08-14
  Supports: yield tokenization, principal and yield tokens

Memos under this rule

Each memo listed applies this version of the rule. The depth of research on each protocol varies by memo; where a memo has named sources and fuller research, the memo shows them.