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Leveraged positions on decentralized lending platforms

Author

Listed:
  • Bastien Baude
  • Vincent Danos
  • Hamza El Khalloufi

Abstract

We develop a mathematical framework to optimize leveraged staking ("loopy") strategies in Decentralized Finance (DeFi), in which a staked asset is supplied as collateral, the underlying is borrowed and re-staked, and the loop can be repeated across multiple lending markets. Exploiting the fact that DeFi borrow rates are deterministic functions of pool utilization, we reduce the multi-market problem to a convex allocation over market exposures and obtain closed-form solutions under three interest-rate models: linear, kinked, and adaptive (Morpho's AdaptiveCurveIRM). The framework incorporates market-specific leverage limits, utilization-dependent borrowing costs, and transaction fees. Backtests on the Ethereum and Base blockchains using the largest Morpho wstETH/WETH markets (from January 1 to April 1, 2025) show that rebalanced leveraged positions can reach up to 6.2% APY versus 3.1% for unleveraged staking, with strong dependence on position size and rebalancing frequency. Our results provide a mathematical basis for transparent, automated DeFi portfolio optimization.

Suggested Citation

  • Bastien Baude & Vincent Danos & Hamza El Khalloufi, 2026. "Leveraged positions on decentralized lending platforms," Papers 2601.14005, arXiv.org.
    • Handle: RePEc:arx:papers:2601.14005
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    References listed on IDEAS

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    1. Patriksson, Michael, 2008. "A survey on the continuous nonlinear resource allocation problem," European Journal of Operational Research, Elsevier, vol. 185(1), pages 1-46, February.
    2. Charles Bertucci & Louis Bertucci & Mathis Gontier Delaunay & Olivier Guéant & Matthieu Lesbre, 2025. "Agents' Behavior and Interest Rate Model Optimization in DeFi Lending," Post-Print hal-05420749, HAL.
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