If I borrow against the same crypto is there still a risk of liquidation?

I’m using the aave platform and would like to borrow WETH using the same asset WETH as collateral. If I do this can I safely borrow at the highest permitted LTV rate (80%) without fear of liquidation since my collateral will always hold the same value against the borrowed asset since they are in fact the same? I assumed this was the case, but then I saw that the aave safe to risky slider labels it very risky.

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7 thoughts on “If I borrow against the same crypto is there still a risk of liquidation?”

  1. Almost zero risk of liquidation if you’re borrowing the same asset you are depositing for collateral. This technique is called folding or looping. Make sure to leave some wiggle room though as the variable APR on the loan could liquidate if left alone for like a year. But fluctuations in the market will not cause liquidations at all. If you keep the health factor to like 1.2 or so that’s PLENTY of wiggle room for folding (vs needing a health factor of like 3-4 when borrowing stables against crypto)

    To other posters wondering why you would do this, on many money markets including aave there are incentives making this a pretty profitable and safe play for get some good yields on decent collateral crypto such as BTC ETH and LINK or the gas token of whatever chain you’re on (AVAX FTM etc). Deposit collateral, borrow same asset, deposit that asset as additional collateral, allowing you to borrow even more rinse and repeat collecting additional apr with each loop. This obviously only works if the apr from depositing plus reward apr from borrowing outpace the apr on the loan itself you have to pay back

    Edit: Just saw that what you’re trying to do is not folding. I would not recommend your strategy you mentioned in the other comment as that would not protect your principal ETH at all, as it could end up locked out out of reach forever should you be unable to pay back the loan. There is no additional safety from using a money market vs just using your ETH directly for whatever trades you’re thinking about

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  2. You can do what you describing on alchemix without fear of liquidation. It is a self repaying loan, but the max loan amount is 25% for ETH.

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  3. No matter what platform you are on, you run the risk of liquation when you can no longer re-pay your loan.
    This can happen when the coin you are using as collateral drops in price, to the point where the value of that collateral no longer enough to repay your loan.
    Or the coin you’re borrowing increases so much you collateral can no longer cover your repayment.

    A strategy I use on impermax is to swap in and out of different loans. Taking advantage of dips.

    I deposit two coins to use as lp tokens, usually a stable coin and eth/matic/avax/btc.
    Whenever the non-stable coin increases in prices, I’ll borrow against the lp tokens. Borrowing the non-stable coin, then swap it for more stable coins. Using those coins to pay off the stable coin loan.
    Then when the non-stable coin drops I’ll take a loan against the lp tokens once again to buy stable coins, swapping them for the non-stable coin to rebuy and pay down the non-stable coin loan.

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  4. If you stay within the LTV, it’s virtually impossible. I don’t know how the smart contracts work, but to get liquidated the contract would need to do two separate calls to a price oracle (one for supply price, other for borrow price) and get to **radically** different numbers.

    It cost money to use Chainlink oracles so I can’t see why they’d call it twice rather than call it once and apply the price to both borrowing and lending.

    I was doing this for AVAX and MATIC (and looping them) when they were giving you more APY to supply than they were charging you to borrow. Basically can’t get liquidated.

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  5. Mostly, but discounting the token rewards, the borrow apr will slowly outpace the lending apr so that is something to be aware of, even if it will only matter over a long period of time.

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