DeFi Recursive Lending Risks

DeFi recursive lending involves repeatedly depositing collateral to borrow assets, which are then deposited again to borrow more, significantly increasing leverage. While this allows users to amplify their yield, it creates extreme sensitivity to price changes.

A small decrease in the value of the collateral can lead to a massive liquidation event across the entire chain of positions. This practice is often used to maximize exposure to yield-bearing assets or governance tokens.

It is one of the most dangerous behaviors in the decentralized finance space due to its potential for rapid, catastrophic loss. Protocols have attempted to limit this by setting lower loan-to-value ratios or capping borrowing limits.

However, the inherent flexibility of smart contracts makes it difficult to fully prevent. Understanding these risks is crucial for anyone participating in advanced DeFi strategies.