Dolomite's Recursive Borrowing: A 60-Day ETH Leverage Case Study

Testing Dolomite: A 60-Day ETH Recursive Borrowing Experiment

I wanted to understand how a relatively newer protocol like Dolomite would perform under a classic recursive borrowing strategy for ETH, specifically during a strong bull run. While established giants like Aave and Compound are the usual go-to, I’ve been keeping a close eye on protocols showing consistent growth and innovative architecture—Dolomite caught my attention with its recent TVL surge to $0.15B and a healthy +14.7% 24-hour change, as of this writing.

The market sentiment in late 2025 felt undeniably bullish. Post-halving optimism, increasing institutional interest, and the looming prospect of a spot Ethereum ETF approval in 2026 created a ripe environment for strategies designed to maximize exposure to blue-chip assets. My goal was clear: amplify my ETH holdings without injecting fresh fiat, utilizing Dolomite's leveraged lending capabilities to ride the anticipated price appreciation. This case study covers my experience from November 15, 2025, to January 14, 2026.

The Setup

Starting capital: $20,000 (denominated in ETH) Time period: November 15, 2025 – January 14, 2026 (60 days) Strategy: Recursive ETH borrowing on Dolomite to increase effective ETH exposure. Risk tolerance: Medium-High (inherent in any leveraged position, but balanced against a strongly bullish market outlook). Goal: Capture significant ETH price upside, targeting a 2x-2.5x leverage multiple, while diligently managing the health factor.

The Strategy Explained

Recursive borrowing is a well-trodden path in DeFi for those looking to amplify their exposure to an asset. The core idea is simple: deposit an asset (ETH in this case) as collateral, borrow a stablecoin (USDC) against it, swap that stablecoin back into the original asset (more ETH), and then redeposit the newly acquired ETH as additional collateral. This cycle increases your total collateral and your total borrowed amount, effectively creating a leveraged long position on the underlying asset.

On Dolomite, the process is streamlined. After depositing initial ETH, I'd navigate to the 'Borrow' section, select USDC, and borrow up to a conservative percentage of the Loan-to-Value (LTV) ratio. The health factor—a critical metric indicating the safety of your loan—was my North Star. A health factor below 1.0 would trigger liquidation, so I aimed to stay well above 1.25, especially at the start. After borrowing USDC, I used a DEX like Uniswap or Curve to swap it back into ETH, incurring a small trading fee and gas. This new ETH was then immediately redeposited as additional collateral on Dolomite, allowing me to potentially borrow more stablecoins and repeat the process.

Why this approach?

The rationale behind this strategy was twofold. First, in a bullish market, leveraging your position significantly amplifies gains. If ETH climbs 20%, a 2x leveraged position theoretically yields 40% (minus costs). With a projected strong Q1 2026, this seemed like a compelling way to maximize returns. Second, Dolomite, while not as long-standing as Aave or Compound, has demonstrated robust performance and competitive rates. Its capital efficiency and growing liquidity, as evidenced by its recent TVL growth, presented an attractive platform for this kind of advanced strategy. I expected to achieve a higher effective APY than simply holding spot ETH, assuming the appreciation outpaced the net borrowing costs.

Week-by-Week Breakdown

For context, ETH started around $3,000 on November 15, 2025, and consistently trended upward during this 60-day period. This bullish momentum was crucial for the strategy’s success.

Week 1: Initial Leveraged Setup

• Action taken: On Nov 15th, I deposited 6.67 ETH (approximately $20,000). I then initiated the recursive borrowing. I borrowed $12,000 USDC against it (60% LTV, resulting in a health factor of 1.66). This $12,000 was swapped for 4 ETH, and then this 4 ETH was deposited back into Dolomite. My total collateral became 10.67 ETH. I then borrowed an additional $7,200 USDC against the new collateral, bringing my total borrowed to $19,200. This $7,200 was swapped for 2.4 ETH and redeposited. My final collateral for the initial setup was 13.07 ETH, with $19,200 borrowed. My effective ETH exposure was roughly 1.96x. My starting health factor settled around 1.22.
• Market conditions: ETH showed initial strength, closing the week around $3,150 (+5%).
• Portfolio value: $20,000 → ~$21,000 (net of initial gas, before ETH appreciation factored in).
• Notes: The entire setup cost about $120 in gas for deposits, borrows, and swaps—a common cost of doing business on Ethereum mainnet. Monitoring the Health Factor Calculator became a daily routine. Even a small drop in ETH could impact the health factor, so I had to be vigilant.

Week 2: Monitoring and Stable Growth

• Action taken: No new actions this week, just monitoring. I checked borrow and supply rates on Dolomite daily. Both remained relatively stable. A quick check on DefiLlama confirmed Dolomite’s TVL was still growing, indicating confidence in the protocol.
• Market conditions: ETH continued its upward trajectory, reaching approximately $3,300 (+5% from prior week).
• Portfolio value: ~$21,000 → ~$23,000 (pre-fees).
• Notes: My health factor naturally improved as the value of my ETH collateral rose, giving me more breathing room. This is the beauty of a bullish leveraged long.

Week 3-4: The Bull Takes Charge

• Action taken: Still no active rebalancing. The health factor was comfortable, sitting around 1.35-1.4. I briefly considered increasing leverage further but opted for caution, sticking to my initial 2x target. As I've seen go wrong in other cases, borrowing at max LTV during a volatile period is a common mistake.
• Market conditions: ETH saw a significant surge, hitting around $3,600 by the end of Week 4 (+9% from prior period).
• Portfolio value: ~$23,000 → ~$28,000.
• Notes: Borrow rates for USDC on Dolomite saw a slight uptick, likely due to increased demand for stablecoins as other users initiated similar leveraged plays. This highlighted the importance of keeping an eye on the Loan Cost Calculator for any sustained changes.

Week 5-6: Steady Ascent and Rate Management

• Action taken: With ETH approaching $3,900, I did a small, symbolic repay of $500 USDC to push my health factor even higher, to about 1.45. This wasn't strictly necessary but acted as a buffer against any sudden, unexpected dips or increased borrow costs. It cost me another $30 in gas.
• Market conditions: ETH maintained its strong upward momentum, settling around $3,900 (+8%).
• Portfolio value: ~$28,000 → ~$33,000.
• Notes: The net interest difference (supply APY on ETH vs. borrow APY on USDC) remained slightly positive, contributing a small, steady income on top of the principal appreciation. This is the "yield farming results" component of the strategy.

Week 7-8: Reaching the Target

• Action taken: As ETH neared $4,200, my initial target, I began unwinding the position. I repaid the $19,200 USDC loan in full, using some of the appreciated ETH. This involved a final set of transactions (repaying, withdrawing ETH), incurring another $80 in gas.
• Market conditions: ETH hit approximately $4,200 (+7% for the final period), achieving roughly 40% appreciation over the 60 days.
• Portfolio value: ~$33,000 → ~$35,700 (after repaying loan).
• Notes: The overall process was smooth, confirming Dolomite's reliability during a period of high network activity and strong price action. Knowing my liquidation price via a Liquidation Price Calculator beforehand was a huge stress reliever.

The Results

My initial $20,000 ETH investment, through the recursive borrowing strategy on Dolomite, netted approximately $15,524 profit in 60 days. This translates to an impressive 77.62% gain over two months, or an annualized effective APY of over 470%. Without leverage, the spot ETH holding would have yielded roughly $8,000 (40% of $20,000).

What Went Right

1. Market Timing and Sentiment: The most significant factor, without a doubt, was the strongly bullish market. ETH's consistent appreciation from $3,000 to $4,200 allowed the leverage to work its magic, amplifying gains exactly as intended. This strategy is fundamentally a bullish play, and the market delivered.
2. Dolomite's Execution: The protocol performed flawlessly. Transactions were smooth, rates were competitive, and the interface for managing positions was intuitive. For a protocol with a $0.15B TVL, it felt as robust as larger platforms, justifying my choice to explore a new DeFi lending protocol review.
3. Proactive Health Factor Management: By setting my initial leverage conservatively (around 1.22 health factor) and continuously monitoring the position, I avoided any liquidation scares. Even minor price dips didn't push me into the danger zone, typically considered below 1.1 health factor. Using tools like a Borrowing Power Calculator before initiating each recursive step helped me understand my limits.

What Went Wrong

1. Persistent Gas Fees: While necessary, the cumulative gas fees for multiple transactions (deposits, borrows, swaps, repays, withdrawals) added up to about $250. This is a recurring cost on Ethereum mainnet that eats into profits, especially for smaller positions or frequent rebalances. It reminds us that efficient protocols on layer-2s or alternative chains can sometimes offer better net yields for high-frequency strategies.
2. Opportunity Cost of Stablecoin: During the recursive steps, the borrowed USDC was briefly held before being swapped back to ETH. While minimal in a fast market, this fraction of time represented a small opportunity cost where that capital wasn't fully exposed to ETH's appreciation.

Would I Do It Again?

Absolutely, but with critical caveats. This Dolomite leveraged lending strategy was incredibly effective because of the prevailing bullish market conditions. I would strongly recommend it again only if similar market dynamics are in play—a clear upward trend for the underlying asset, strong overall market sentiment, and favorable borrow/supply rates. In a sideways or bearish market, recursive borrowing can swiftly lead to painful liquidations. It's a high-conviction, high-risk strategy that demands constant attention and an accurate read on market direction. For anyone considering it, understanding the mechanics outlined in our DeFi Lending Guide is non-negotiable.

Key Takeaways

• Leverage is a double-edged sword: It magnifies both gains and losses. In a bull market, it can be incredibly powerful; in a bear market, it's a fast track to liquidation.
• Health factor is paramount: Consistently monitor your position. Tools like our Health Factor Calculator are your best friend. Know your liquidation price cold.
• Newer protocols offer opportunities: While diligence is required, protocols like Dolomite can provide efficient and competitive avenues for advanced DeFi strategies. Don't be afraid to look beyond the top 5, but verify their security and track record.
• Gas fees are a real cost: Always factor in transaction costs. Multiple recursive steps mean multiple gas payments. Optimize your timing for lower gas if possible, or consider strategies on cheaper chains for smaller capital allocations.
• Market sentiment is everything for this strategy: This is not a set-and-forget strategy. It requires active management and a strong conviction in the asset's upward trajectory.

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Disclaimer: This content is for educational purposes only and should not be considered financial advice. DeFi protocols carry inherent risks including smart contract vulnerabilities, market volatility, and potential loss of funds. Always do your own research and never invest more than you can afford to lose.

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