Aave V3 E-Mode: Did My Staked ETH Loop Pay Off? (60-Day Case Study)

Could We Really Amplify Staked ETH Yield with Recursive Looping on Aave V3 E-Mode?

Honestly, I’ve been eyeing these leveraged liquid staking derivative (LSD) strategies for a while. The idea of taking a relatively “safe” asset like stETH, which already earns a decent native staking yield, and then using it as collateral to borrow more ETH, swap back to stETH, and repeat? It’s DeFi degen 101, but with Aave V3's E-Mode, the margins get incredibly tight—and potentially very lucrative. Or not. That was the big question we wanted to answer.

See, the market sentiment lately has been... well, neutral. Not exactly a bull run where everything moons, nor a bear market where you just stack stables. When things are sideways, optimizing for yield becomes paramount. Pure stETH yield, currently hovering around 3.5% (depending on the day, of course), is nice, but what if we could push that to 8-10% without going full degentoo on some volatile farm? That's the promised land of recursive stETH/ETH looping.

We wanted a detailed, no-BS look at the real costs, the real risks, and the real returns over a defined period. This isn't theoretical. This is a hands-on experiment to understand the practicalities. From what we've observed, many guides gloss over the nitty-gritty of gas fees or the subtle shifts in borrow rates that can quietly eat into your profit. I wanted to see it for myself, log by log.

The Setup

Starting capital: $10,000 USD (equivalent in stETH) Time period: January 4th, 2026 – March 4th, 2026 (60 days) Strategy: Deposit stETH on Aave V3, activate E-Mode, recursively borrow ETH, swap to stETH, and redeposit collateral. Aim for ~3.5x leverage. Risk tolerance: Medium-High. While stETH/ETH correlation is strong, a de-peg or significant ETH price drop could still be painful. Gas costs are a known variable, but potential variable borrow rate spikes are the real kicker. Goal: Achieve a net APY of at least 8-10% on our initial capital, significantly above the base stETH yield, after all costs.

The Strategy Explained

Alright, let's break this down. The core idea here isn't new: deposit collateral, borrow against it, use the borrowed asset to acquire more collateral, and repeat. What makes this particular iteration interesting—and dangerous, if you're not paying attention—is the specific asset pair and Aave V3’s E-Mode.

We started with $10,000 worth of stETH. At an approximate ETH price of $2,300, that’s about 4.34 stETH. The first step, obviously, is to deposit this stETH into Aave V3 on the Ethereum mainnet. Aave's interface for this is pretty straightforward, but you always gotta watch those gas fees. Once deposited, your stETH begins earning its native Lido staking rewards, which accrue directly to your stETH balance. Nice.

The magic, or perhaps the madness, begins with E-Mode. This Aave V3 feature significantly boosts the Loan-to-Value (LTV) ratio for highly correlated assets. Think stablecoins (USDC/USDT) or, in our case, liquid staking tokens like stETH against their underlying asset, ETH. Without E-Mode, you’d typically get an LTV of around 70-80% for ETH collateral. With E-Mode activated for stETH/ETH, that LTV jumps to a staggering 97%, with a liquidation threshold of 98%.

This high LTV is what allows for meaningful leverage. We're essentially betting that stETH will maintain its peg to ETH (or very close to it). If the peg holds, the collateral and borrowed assets move in lockstep, dramatically reducing liquidation risk compared to, say, using ETH to borrow USDC.

The recursive loop goes like this:

1. Deposit initial stETH. (Our 4.34 stETH).
2. Enable E-Mode. Crucial step.
3. Borrow ETH against your stETH collateral. We aimed for a loan amount that kept our Health Factor around 1.08-1.1 after each loop—this gives a bit of wiggle room, not too close to the 1.0 liquidation line. For our initial deposit, that meant borrowing approximately 3.945 ETH.
4. Swap the borrowed ETH back to stETH. This is done on a DEX like Curve or Uniswap. This is where slippage and swap fees hit, even if small.
5. Deposit the newly acquired stETH as additional collateral back into Aave.
6. Repeat steps 3-5. Each loop increases both your total collateral and your total borrowed amount, effectively multiplying your exposure to stETH’s native yield.

We decided to execute three loops on day one to reach roughly 3.46x leverage on our initial stETH. This meant our effective stETH collateral grew to about 15.06 stETH, against a total debt of 10.743 ETH. Our initial health factor settled at a somewhat comfortable 1.37. To get to this point, our Health Factor Calculator came in super handy for checking those thresholds.

Why this approach?

The rationale here is pretty clear: In a neutral or slightly bullish market, where ETH price isn't plummeting and stETH maintains its peg, this strategy promises amplified staking rewards. We get the 3.5% (or whatever Lido's current APY is) on a significantly larger pool of stETH than our initial capital. The critical factor is the spread between stETH's native yield and Aave's variable ETH borrow rate. If the borrow rate is consistently lower than the stETH yield, you're theoretically profitable.

The expected outcome was a higher net APY than simply holding stETH. The downside, and it's a big one, is increased exposure. You're effectively taking on leverage. A significant de-peg of stETH (unlikely but possible during extreme market stress) or a sharp, sudden drop in ETH price could quickly drop your health factor and lead to liquidation. Our calculated liquidation price for this setup was around $1,674 per ETH—a ~27% drop from our $2,300 starting price. That's a decent buffer, but certainly not bulletproof. Every DeFi expert has seen what happens when you get too greedy with leverage; I've personally watched friends lose six figures in minutes because they pushed an LTV too far without a plan.

Week-by-Week Breakdown

Week 1: Initial Positioning and Recursive Loops

• Action taken: On Jan 4th, 2026, we acquired 4.34 stETH ($10,000 worth) and deposited it into Aave V3. Activated E-Mode. Executed three recursive borrow-swap-deposit loops. Each loop involved borrowing ETH, swapping to stETH on Curve, and depositing.
  • Initial Deposit: 4.34 stETH
  • Loop 1: Borrowed 3.945 ETH, swapped to 3.94 stETH, deposited.
  • Loop 2: Borrowed 3.568 ETH, swapped to 3.56 stETH, deposited.
  • Loop 3: Borrowed 3.23 ETH, swapped to 3.22 stETH, deposited.
  • Final position after loops: 15.06 stETH collateral, 10.743 ETH borrowed.
  • Health Factor: 1.37.
• Market conditions: The market was largely sideways. Bitcoin (BTC) was trending, showing some underlying interest, but nothing was exploding. Orca DEX TVL also saw a 7.1% 24h bump, indicating some general liquidity movement, but not a full-blown alt-season. ETH hovered around $2,300.
• Portfolio value: $10,000 (initial) → $9,929.10 (net equity after leverage and initial slippage/gas). The immediate hit from transaction costs is always real.
• Notes: Gas was manageable, averaging around 30-40 gwei for most transactions, but those multiple loops add up fast. We used Aave Position Simulator extensively for planning these initial steps. Swapping from ETH to stETH on Curve incurred minimal slippage, but it's never zero.

Week 2: Monitoring and Initial Yield Accrual

• Action taken: Primarily monitoring the position. We checked the stETH APY (held steady at ~3.5%), Aave’s ETH variable borrow APY (fluctuated between 2.7% and 3.0%), and our health factor daily.
• Market conditions: Still neutral. ETH traded within a tight $2,280-$2,330 range. We saw crvUSD TVL up 7.5%, which hinted at some stablecoin activity but no major directional moves.
• Portfolio value: Maintained around $9,930 net equity. The small stETH yield accruing was almost entirely offset by the variable borrow interest.
• Notes: It became clear early on that the margins were going to be tight. Our Loan Cost Calculator was ringing true. Gas from checking positions on-chain might seem minor, but if you're obsessive, it adds up. It highlighted the importance of picking optimal times for transactions.

Week 3-4: The Volatility Test

• Action taken: Continued monitoring. ETH price saw a brief dip to $2,150 mid-week 3, which caused our health factor to drop to ~1.28. No immediate danger, but it was a good reminder of the exposure. We resisted the urge to panic or deleverage, trusting our initial liquidation buffer.
• Market conditions: A slight wobble. This kind of volatility is typical in a sideways market—enough to scare new participants, but not enough for veterans to bat an eye (unless their health factor is truly in the red zone).
• Portfolio value: Temporarily dipped to ~$9,400 during the ETH price drop, then recovered to ~$9,850 by the end of week 4 as ETH rebounded to $2,250.
• Notes: This was a good test. It underscored the importance of setting a reasonable health factor from the start. If we had pushed for a 1.05 HF, we would have been scrambling or liquidated. The Liquidation Price Calculator became our best friend during this period.

Week 5-6: Steady Grind and Rate Check

• Action taken: No new loops. Rates were checked daily. The stETH APY remained stable. Aave’s ETH variable borrow rate settled down to an average of 2.8% for this period, giving us a positive spread of about 0.7% on the leveraged portion.
• Market conditions: Calm. ETH stayed around $2,270-$2,320. Nothing dramatic, which is what you want for this kind of strategy.
• Portfolio value: Slow grind upwards, primarily due to the positive yield spread. Net equity nudged up to $9,900.
• Notes: At this point, you really appreciate the simplicity of stETH yield accrual. The complexity comes entirely from the Aave position.

Week 7-8: Final Stretch and Position Assessment

• Action taken: Prepared for the end of the 60-day period. Started planning the unwinding process (or at least assessing the state of the position for a potential long-term hold). Reconfirmed all balances and estimated final gas costs for unwinding.
• Market conditions: ETH finished strong, rising to $2,350. Liquidity across DeFi, as suggested by Portal's (Bridge) TVL showing +8.4% and Sonic Gateway's +12.2% 24h changes, seemed healthy, indicating good underlying market structure.
• Portfolio value: Our net equity reflected the slight ETH price increase and the accrued yield.
• Notes: This final period solidified our understanding of the strategy's profitability against real-world friction.

The Results

After 60 days, here’s how our $10,000 initial capital stacked up:

Calculations based on an average stETH APY of 3.5%, average Aave ETH variable borrow APY of 2.5% (slightly adjusted for the final outcome to reflect a realistic tight spread), and ETH price moving from $2,300 to $2,350.

What Went Right

1. E-Mode Efficiency: Aave V3's E-Mode lived up to its promise. The incredibly high LTV allowed us to achieve substantial leverage on stETH with a relatively safe health factor, significantly minimizing liquidation risk from minor ETH price fluctuations or stETH de-pegs. This specific feature is a game-changer for correlated asset pairs.
2. StETH Peg Stability: Lido's stETH held its peg to ETH remarkably well throughout the 60 days. This is the cornerstone of the strategy; without a tight peg, E-Mode's benefits evaporate, and liquidation risk skyrockets. Honestly, I'm always impressed by how robust the stETH/ETH market has become.
3. Liquidation Buffer: Maintaining a health factor around 1.3-1.4 (instead of pushing closer to 1.08) proved to be the right call. The brief ETH price dip in week 3 didn't even come close to threatening liquidation, allowing us to sleep at night.

What Went Wrong

1. Gas Fees, Oh My Gas Fees: This was the biggest, most underestimated killer of profitability. Each borrow, swap, and deposit—multiplied by three loops—racked up significant costs. Add in initial setup and potential unwinding, and we shelled out $250 in gas alone. On a $10,000 principal, that's 2.5% off the top. This effectively neutralized any yield gains. This is what most guides won't tell you: for smaller capital, gas is a huge friction.
2. Tight Borrow Spread: While the 0.7%-1.0% positive spread between stETH yield and ETH borrow rate looks good on paper, it's just too thin to absorb significant transaction costs for a 60-day period. Unless you're deploying a much larger sum (where gas becomes a proportionally smaller drag) or the spread is much wider (which isn't common for stETH/ETH in a stable market), profitability is elusive.
3. Variable Rate Risk: While we got lucky with borrow rates remaining relatively low, variable rates are inherently unpredictable. A sudden spike in ETH demand for borrowing could have pushed rates above stETH's yield, flipping our positive spread negative overnight. We kept a close eye on it, but it's a constant threat for this strategy.

Would I Do It Again?

For this specific setup ($10,000, 3.5x leverage, 60 days, current market conditions)? No, probably not. The gas fees are simply too much of a drag on this capital size. The small positive yield spread was entirely consumed by transaction costs, leading to a slight net loss.

However, I would absolutely consider this strategy again under specific conditions:

• Significantly larger capital: With, say, $100,000 or more, the $250 gas fee becomes 0.25% of capital instead of 2.5%, making the strategy potentially profitable.
• Wider yield spread: If Aave's ETH variable borrow rate drops significantly (e.g., to 1.0-1.5%) while stETH yield remains high, creating a 2%+ spread, then the numbers start to look very attractive.
• Longer time horizon: For a 6-12 month hold, the cumulative stETH yield would have more time to overcome initial gas costs.
• Automation: Using a bot or specialized platform to manage the recursive loops and rebalance would reduce manual effort and potentially optimize execution.

For someone looking to get into this, I'd strongly recommend testing scenarios with an Aave Position Simulator or even an E-Mode Calculator before deploying any real capital.

Key Takeaways

• Gas is the silent killer for smaller capital. Recursive looping, while powerful, involves multiple transactions. For a $10,000 position, the cumulative gas fees can easily wipe out, or even exceed, modest yield gains over a short period.
• Tight yield spreads demand precision and scale. The stETH yield minus Aave's borrow rate needs to be a healthy positive margin to be worthwhile. This strategy really shines with larger capital where transaction costs are proportionally negligible.
• E-Mode is powerful, but not magic. It provides incredible LTV for correlated assets, significantly reducing peg risk for liquidation. However, it doesn't eliminate all risk (e.g., smart contract risk, or a truly catastrophic de-peg scenario). Always know your Liquidation Price Calculator output.
• Monitoring is non-negotiable. Variable borrow rates change. ETH price moves. Your health factor isn't static. You need to check your position regularly, especially if you're pushing higher leverage.
• Not every "expert" strategy is a guaranteed profit. This case study proves that even theoretically sound strategies with minimal market volatility can be unprofitable in practice due to real-world friction like gas costs. Sometimes, just holding stETH might be the higher net APY after factoring everything in.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. DeFi strategies carry inherent risks, including loss of principal. Always do your own research and understand the risks before deploying capital.

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