Looping is dead. Long live tranching.
Looping has been at the center of DeFi for the last 2 years. It's a great deal at first glance... higher yields while underwriting the same risks (albeit with leverage). If you are confident Ethena isn't going to blow up, well, you might as well loop that to get 15% APR.
But what's happened now is something that most loopers hadn't expected. They're earning -100% APR. Nothing has changed with Ethena. What's changed is the borrowing rates...leaving loopers stuck in deeply unprofitable positions. This is painful!
A single weekend (like this past one) can wipe out months (or years) of returns, from a risk that most folks aren't even underwriting. This all comes from rates being unpredictable... a looper can't know when Aave's rates will skyrocket or when they'll get stuck and be wiped out. You're not just underwriting Ethena. You're underwriting the constantly changing borrowing market.
So what now?
People still want 15% yields, and they're going to get them somehow. But looping as a vehicle is broken.
Tranching is what replaces it. Take any yield source, split it into a secure senior and a first-loss junior, and the junior gets looped-like returns without any borrow-rate exposure. No getting stuck. No negative carry.
This is exactly why Royco is built the way it is.
The proof is live. Participants in the junior tranches of Avant, Neutrl, AutoUSD, Smokehouse USDC, SyrupUSDC, and USDai have been earning 1.2-5x the underlying yield source, without the tail risk that just collapsed looper portfolios. And there are a lot more pools going live soon.
For folks thinking about portfolio construction, feel free to DM - happy to chat about the advantages of tranching.