Crypto whale uses leveraged DeFi strategy to build $38M position in tokenized gold

A crypto whale has used a five-year-old leveraged decentralized finance strategy to buy tokenized gold, even as bullion prices show signs of cooling after recent record highs.

According to blockchain data cited by Lookonchain on social platform X, the large wallet accumulated tokenized gold worth about $38.4 million over the past 20 days using looped borrowing on Aave, one of the largest lending protocols in decentralized finance.

Whale 0x8522 purchased 8,337 units of tokenized gold while borrowing heavily against stablecoin collateral, analytics firm Lookonchain discovered. 

Whale takes up leveraged gold exposure through looped borrowing

According to transactional data from deBank, the wallet borrowed USDe several times and swapped it into gold-backed token XAUt. Each transaction saw the whale borrow $11,600 worth of USDe and convert it into approximately 2.51 XAUt.

The address borrowed about $18.3 million in USDe in total from Aave, routed through decentralized exchange aggregator CoW swap.

Looped borrowing is a defi tactic that involves supplying an asset as collateral, borrowing against it, and then supplying the borrowed amount back into the protocol, which can be repeated several times.

For example, a user can deposit one unit of an asset into Aave, borrow up to a certain percentage based on loan-to-value limits, and then redeposit the borrowed amount.

A deposit of one ETH could become 1.75 ETH supplied and 0.75 ETH borrowed after a single loop. Several loops may magnify the exposure while also increasing liquidation risk if prices grow more volatile.

It is not known who was the first trader to use looped borrowing, but the strategy first came to the public’s attention during the yield farming boom of 2020, when governance token incentives made leveraged positions lucrative to the defi community. Some users had already experimented with similar mechanics after MakerDAO launched in 2017.

Today, looping is common in protocols such as Aave, Morpho, and Spark. Morpho has previously said that a majority of its volume comes from users who looped their assets.

Tokenized gold trades continue as bullion price bull run cools

The whale’s accumulation comes as global gold prices counted its first back-to-back losses on Thursday’s close to Friday morning US sessions, since the year began. Spot gold extended losses from the previous session, pressured by stronger US economic data and a silent week in geopolitics. 

Gold slipped 0.1% to $4,610.86 per ounce by 12:00 GMT, after touching a record high of $4,642.72 earlier in the week. Despite the pullback, the special metal is on track for a weekly gain of about 2% when the business week ends today.

US gold futures for February delivery slumped 0.2% to $4,615, while the greenback index hovered near a six-week high. US job data released earlier in the week showed initial jobless claims fell to 198,000 last week, well below economists’ expectations. 

A stronger dollar, by historical evidence, makes gold more expensive for overseas buyers.

“There was a lot of momentum in the gold market, which seems to have faded slightly at the moment,” said Julius Baer analyst Carsten Menke. He believes the recent US economic news created headwinds for bullion prices.

Gold demand in India stayed muted as record prices dampened retail buying. In China, bullion traded at a premium as demand was mostly steady in preparation for the Lunar New Year.

Meanwhile, people inside Iran told Reuters that protests had subsided since earlier in the week, which may have reduced the immediate demand for safe-haven assets.

Looking at other precious metals markets, silver dropped 1.6% to $90.82 per ounce, though it has retained enough profits to see out the week with a 13% uptick, having hit an all-time high this week.

“The silver market seemed very determined to reach ‍the $100 per ounce threshold before moving lower again,” Menke explained.

Platinum fell 3.2% to $2,332.70 per ounce, and Palladium slid 2.6% to $1,754.35 after hitting a recent low and is heading for a weekly loss.

Want your project in front of crypto’s top minds? Feature it in our next industry report, where data meets impact.