Leveraged bToken Exposure

While Baseline's lending facility allows users to leverage bTokens for exposure to other assets, 'looping' provides a unique way to gain amplified exposure to the bToken itself. Looping involves repeatedly borrowing against bToken collateral to purchase more bTokens, creating a leveraged position that increases sensitivity to the bToken's price movements relative to the underlying reserve asset.

Looping Mechanics

To illustrate how looping works, let's walk through a simplified example. For clarity, we'll assume no additional costs such as slippage, borrowing fees, or swap fees.

Initial Position

• User owns 1,000 bTokens
• Market price: 1.20 USDC per bToken
• Baseline Value (BLV): 1.00 USDC per bToken

1. First Loop

   • User deposits 1,000 bTokens into the lending facility
   • Borrows 1,000 USDC (based on BLV)
   • Buys 833.33 bTokens at market price (1,000 USDC / 1.20 USDC per bToken)

2. Second Loop

   • Deposits the newly acquired 833.33 bTokens
   • Borrows another 833.33 USDC
   • Buys 694.44 bTokens (833.33 USDC / 1.20 USDC per bToken)

Final Holdings

• Total Collateral: 1,833.33 bTokens (from both deposit steps)
• Wallet Holdings: 694.44 bTokens
• Total Debt: 1,833.33 USDC

In total, the user now controls 2,527.77 bTokens with 1,833.33 USDC in debt. Note that despite the increased bToken holdings, the net value of the position remains the same (assuming no fees or price changes):

• Initial Value: 1,000 bTokens @ 1.20 USDC = 1,200 USDC
• Looped Value: (2,527.77 bTokens @ 1.20 USDC) - 1,833.33 USDC debt = 1,200 USDC

However, if the bToken price rises to 1.40 USDC, the looped position will have amplified gains:

• Initial Value: 1,000 bTokens @ 1.40 USDC = 1,400 USDC
• Looped Value: (2,527.77 bTokens @ 1.40 USDC) - 1,833.33 USDC debt = 2,027.77 USDC (over 4x the upside!)

Similarly, if bToken's price falls to 1.00 USDC, the looped position will have amplified losses:

• Initial Value: 1,000 bTokens @ 1.00 USDC = 1,000 USDC
• Looped Value: (2,527.77 bTokens @ 1.00 USDC) - 1,833.33 USDC debt = 694.44 USDC

Funding Decay vs. Interest Rates

Unlike Baseline loans, where users have to pay interest based on the amount borrowed, Baseline's looping facility uses a "rebasing" mechanism to charge fees on looped positions. In this system, the protocol automatically "shrinks" both collateral and debt over time, allowing users to maintain non-liquidatable leveraged exposure without any active management of the position.

The fee structure in looped positions is based on the net premium value of the position, not the borrowed amount. Fees are proportional to the bToken's premium at position closure, with higher premiums resulting in higher fees and vice versa. This aligns the cost of maintaining a looped position with the bToken's market performance.

BLV Accrual

Looped positions don't generate direct cash flows to the Afterburner for buybacks, but looping still positively impacts the BLV due to the supply reduction from "shrinking" user's collateral. Baseline's looping facility naturally creates deflationary pressure on the token, since its circulating supply is constantly being reduced. As such, the protocol-owned liquidity in the system can be shared across fewer tokens, naturally increasing the BLV of each remaining bToken over time.

Benefits and Risks of Looping