Recursive Borrowing

Recursive borrowing is a strategy in decentralized finance where a user deposits collateral into a lending protocol to borrow an asset, then deposits that borrowed asset back into the same or a different protocol as collateral to borrow again. This cycle is repeated multiple times to artificially increase leverage on a position, often to farm yield or amplify exposure to an asset's price movement.

While it maximizes capital efficiency, it significantly increases liquidation risk because a price drop in the underlying collateral can trigger liquidations across all layers of the borrowed positions. It relies on the composability of smart contracts to chain these transactions seamlessly.

This mechanism effectively turns a single unit of capital into multiple units of borrowed exposure. It is a core driver of leverage in DeFi markets.

Users must carefully monitor their health factors to avoid cascading liquidations. The strategy is often used in yield farming to multiply rewards.

It highlights the interconnected nature of liquidity pools. It is a high-risk practice requiring sophisticated risk management.