Trading via lending protocols - the how and the why


Lending protocols such as Aave, Spark, Compound and others offer a great way to create low-leverage positions that can be easy to maintain and very affordable to keep open in the long term compared to something like perpetual-based protocols. Let’s look at how this works and discuss the pros and cons.

By: DeFi Saver Loading...

Trading via lending protocols - the how and the why

Ever since the inception of onchain lending protocols, people quickly realised they can be used to long (or short) different supported assets by creating leveraged positions. For example, when Maker first went live with its single-collateral version of DAI, many users realised they could use it as an onchain, non-custodial way to long ETH, simply by using ETH to borrow DAI and using that DAI to get extra ETH.

A lot has happened since that initial version of Maker went live in December 2017, though. Countless new protocols have been launched, including many perpetual-based ones, fully onchain. But I’d argue there are multiple use cases where lending protocols will still be the better choice.

The how

How does it work? Well, it’s pretty straightforward, really, though maybe not immediately intuitive.

For example, if we’re talking about Maker, let’s imagine for a moment that ETH is at $2,000. What you do is deposit 5 ETH at a total value of $10,000, borrow $5,000 DAI and then use that DAI to acquire extra ETH to deposit back into the position.

This is a process that many call “looping” because traditionally, you had to execute multiple deposit-borrow-swap-deposit loops to achieve your target leverage level.

Today, there are a few apps that handle the whole process for you in one transaction, through the use of flash loans, such as DeFi Saver, the app we’re talking about today.


The why

The main reason you’d do this is because you believe that a market is set to move in a specific direction and are looking to profit from that actually happening. However, this article won’t include any suggestions or thoughts on where the market is headed; that’s not the goal here.

So, the actual reasons why you’d want to create a leveraged position this way is because it would be affordable to keep it open for a long time (no high funding rates that perps have) and because all trades happen on the open secondary market (DEXs) with the actual underlying assets/tokens being swapped (no derivatives & oracle and price manipulation risks).

How DeFi Saver makes this easy

Ever since our initial MakerDAO integration (into what was CDP Saver back then), DeFi Saver has been focused on making onchain trading as easy and convenient as possible.

This included wrapping multiple actions (e.g. those loop cycles) into single transactions, integrating a number of different lending protocols that support different assets (Aave, Compound, Spark, Morpho, Liquity), as well as integrating different liquidity providers to ensure users get the best possible swap rates (0x, 1inch, Paraswap and Kyberswap aggregators are currently integrated).

Steps to create (and manage) a leveraged position using DeFi Saver

If all of this makes sense and you're looking to get started, here's a brief overview of the actual steps to get set up. Alternatively, consider bookmarking this for future use.

Step 1: Creating a leveraged position

Creating a position that's long (or short) on the asset you want is very straightforward in DeFi Saver. Your first step would be to figure out what protocol you want to use. Aave, Compound, Spark, Maker, Liquity, and Morpho are supported (at the time of writing), and all might have different LTVs, liquidation thresholds, and penalties or other protocol quirks to consider.

But once you've made your choice, there'll be a Create option available for each of the mentioned protocols, and that screen will look something like this:


In essence, you enter your starting collateral, target leverage level and the app does the rest for you in the background.

Note that the asset you want to long should be the asset you use as collateral. On the other hand, if there's an asset you want to short, you'd want it to be your debt asset (and have a stablecoin as your collateral).

💡Extra tip: You can try all of this in the simulation mode that's present in the DFS app. That lets you try any of the available features without having to make any onchain transactions or using real money.

Step 2: Managing your position

Depending on the timeframe you're aiming for or the leverage level you selected (i.e., how risky the position is), you may need less or more active management along the way. I want to highlight three tools that I think make management much easier:

  • Position health notificationsAs the name suggests - you can configure notifications (to be received via telegram or email) that are sent when your position's health ratio changes. Tip: consider setting up multiple thresholds so that you best understand the level of urgency.
  • Leverage management & other position adjustmentsAny positions you open through DeFi Saver can be actively managed, meaning that you can supply more or withdraw some collateral, pay back some debt, or borrow more at any point. But more interestingly, you also have access to two signature DFS features: Boost and Repay. These allow you to leverage more or to partially unwind your position (potentially to protect it from liquidation). 
  • Automation optionsFinally, for periods when you have to (or want to) step away from your keys for a longer time, there are multiple automation options you could use. Most notably, there are auto-repay and stop loss to consider as protection from liquidation. But there's also a take profit feature available to help you do just that in case the market moves in your direction while you're not keeping track.

Step 3: Closing the position

At the point where you decide to close your position (if you haven’t set up an automated stop loss or take profit), you’ll have two options to choose from:

  1. Unwind the position and leave your collateral within the protocol
  2. Close the position and withdraw everything

The first option could be something you’d want to do either if you’re looking to re-open the position after the market goes through a correction from your expected path or maybe if you want to leave the supplied assets deposited so they’re earning the supply APY (if the protocol has rehypothecation, as Aave does).

Either way, it’s very clear-cut. In this case, you’d just want to use the max Repay option, which would use just enough of your collateral to fully clear the debt:


The second option would be to just fully close the position and withdraw the collateral. The act of unwinding the position and withdrawing your remaining assets is something you can also do in one transaction using DeFi Saver, with the convenient Close option available in each of our protocol dashboards.


💡Final tip: Before you deploy your assets into any of these protocols, look into different networks you can use. For example, at the time of writing, Arbitrum is an increasingly popular L2 network in the Ethereum ecosystem, that features great liquidity and massively lower transaction costs than mainnet. We’d definitely encourage comparing the transaction fees between different networks using our DFS Stats activity dashboard.