Recursive borrowing is a financial strategy in decentralized finance where a user repeatedly borrows and lends the same collateral to increase their effective loan size or yield. This practice involves using borrowed funds as collateral for further borrowing, creating a chain of leveraged positions. It seeks to amplify returns or liquidity from an initial capital amount.
Context
The practice of recursive borrowing carries elevated risks, particularly during periods of market volatility, as cascading liquidations can occur. Discussions frequently address the systemic risks this activity poses to decentralized lending protocols and the broader DeFi ecosystem. Regulators are also scrutinizing such complex financial maneuvers due to their potential for market instability.
External oracle volatility introduced a critical state-manipulation vector, allowing an attacker to leverage mispriced collateral for recursive asset drain.
A multi-action smart contract logic error in a deprecated lending pool allowed an attacker to repeatedly bypass the solvency check, draining $1.8M in MIM.
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