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Strategy
Feb 9, 2026
15 min read

Aave + Hyperliquid Strategy: Earn Yield on ETH Without Price Risk

Deep dive into the Aave lending + Hyperliquid short strategy. Learn about leverage loops, funding rates, net APY calculations, risk management, and step-by-step implementation for stable ETH yields.

Strategy Overview

The Aave + Hyperliquid strategy is one of the most popular delta-neutral yield strategies in DeFi. It combines:

LONG SIDE (Yield Source)

  • • Deposit USDC to Aave V3
  • • Borrow cbETH or WETH
  • • Loop up to 4-5x leverage
  • • Earn supply APY + incentive rewards
  • • Pay borrow interest

SHORT SIDE (Hedge)

  • • Open ETH-PERP short on Hyperliquid
  • • Match notional size to long exposure
  • • Use 2-4x leverage
  • • Earn/pay funding rate every 8h
  • • Neutralize price risk

Net Result: Stable 10-30% APY regardless of ETH price movements. If ETH crashes or pumps, your gains and losses offset.

This strategy is particularly attractive because Aave V3 offers high capital efficiency (up to 93% LTV on e-mode assets), and Hyperliquid typically has positive funding rates for shorts, meaning you get paid to hold the hedge.

Why Aave V3?

Aave V3 is the premier lending protocol with several advantages for delta-neutral strategies:

E-Mode (High Efficiency)

Borrow correlated assets (WETH, cbETH, wstETH) at up to 93% LTV instead of standard ~82%.

Impact: More leverage = higher net yields. 4-5x loops possible vs 3x on other protocols.

Deep Liquidity

$500M+ in USDC and WETH liquidity on Arbitrum/Base. No slippage on large deposits/withdrawals.

Impact: Scale to $100K+ positions without affecting rates.

Incentive Programs

Extra ARB, OP, or protocol token rewards on top of base APY.

Impact: Boost net APY by 2-8% depending on market/chain.

Battle-Tested Security

$10B+ TVL, 4+ years of operation, extensive audits by Trail of Bits, OpenZeppelin, etc.

Impact: Lower smart contract risk vs newer lending protocols.

Aave V3 on Arbitrum and Base offers the best rates and lowest gas fees for this strategy.

The Leverage Loop Explained

The "loop" refers to recursively borrowing and re-depositing to amplify your position size:

Loop Mechanics

1

Initial Deposit

Deposit $10,000 USDC to Aave. Collateral: $10,000

2

First Borrow

Borrow $8,200 WETH (82% LTV). Swap to USDC. Now you have $8,200 USDC to deposit again.

3

Loop Deposit #2

Deposit $8,200 USDC back to Aave. Collateral: $18,200

4

Loop Borrow #2

Borrow $6,724 WETH (82% of $8,200). Swap to USDC. Deposit again.

5

Repeat 2-3 More Times

Continue looping until you reach desired leverage (typically 4-5x).

FINAL POSITION

Total Deposited (Supply):

$45,000 USDC

Total Borrowed (Debt):

$35,000 WETH

Your Capital (Equity):

$10,000

Leverage Multiple:

4.5x

Why Loop?

Each loop amplifies your earning power:

  • More supply = More supply APY — Earn interest on $45K instead of $10K
  • More incentives — Rewards scale with TVL
  • Greater ETH exposure — $35K of ETH to hedge = larger funding rate earnings

Trade-off: Higher leverage = higher liquidation risk if ETH/USDC ratio moves against you. Keep health factor above 1.5.

⚠️ Important: The loop amplifies borrow costs too. You're paying interest on $35K of debt, not just $10K. Net APY = (Supply APY × Leverage) - (Borrow APY × Leverage) + Funding Rate - Fees.

Step-by-Step Implementation

Here's how to deploy the Aave + Hyperliquid strategy manually:

Step 1: Choose Your Chain & Assets

RECOMMENDED SETUP

Chain: Arbitrum (lowest gas, best liquidity)

Supply Asset: USDC (stable collateral)

Borrow Asset: cbETH or WETH (high LTV in e-mode)

Hedge Market: ETH-PERP on Hyperliquid

💡 Pro tip: cbETH has slightly better supply APY than WETH due to Coinbase staking rewards passing through to holders.

Step 2: Supply USDC to Aave

  1. Go to app.aave.com
  2. Connect wallet and switch to Arbitrum network
  3. Navigate to "Supply" section
  4. Select USDC and enter amount (e.g., $10,000)
  5. Enable as collateral (toggle ON)
  6. Confirm transaction

You're now earning ~4-8% supply APY on your USDC, plus any ARB incentives.

Step 3: Enable E-Mode

E-mode allows higher LTV for correlated assets (ETH category):

  1. Go to "Your Borrows" section on Aave
  2. Click "E-Mode" toggle
  3. Select "ETH correlated" category
  4. Confirm activation

LTV increases: Standard 82% → E-Mode 93%
This allows you to borrow more per dollar of collateral, increasing leverage potential.

Step 4: Execute the Loop

You can loop manually or use tools like DeFi Saver or Instadapp to automate:

MANUAL LOOP (4x LEVERAGE)

Loop 1: Borrow $8,200 cbETH → Swap to USDC → Deposit
Loop 2: Borrow $6,724 cbETH → Swap to USDC → Deposit
Loop 3: Borrow $5,514 cbETH → Swap to USDC → Deposit
Loop 4: Borrow $4,521 cbETH → Swap to USDC → Deposit

Final: $40,000 supply | $30,000 debt | 4x leverage

⚠️ Watch health factor: Keep it above 1.5 to avoid liquidation risk. Aave shows this in real-time.

Step 5: Open Short on Hyperliquid

Now hedge your $30K ETH exposure:

  1. Bridge $8,000-10,000 USDC to Hyperliquid (via official bridge)
  2. Go to app.hyperliquid.xyz
  3. Select ETH-PERP market
  4. Switch to "Short" side
  5. Enter size: 10 ETH (= $30,000 at $3,000/ETH)
  6. Set leverage: 3x (conservative for hedging)
  7. Order type: Market (for instant execution)
  8. Confirm short

Liquidation safety: With 3x leverage and $10K collateral, your short liquidates at ~$4,000 ETH (+33% move). Very safe buffer.

Step 6: Monitor & Rebalance

Check these metrics weekly (or use automated monitoring):

  • Aave health factor — Should stay > 1.5. If approaching 1.3, add collateral or reduce leverage.
  • Hyperliquid margin ratio — Keep > 50% to avoid liquidation.
  • Delta exposure — Long vs short notional should match within 10%. Rebalance monthly.
  • Funding rate — Track 7-day average. If persistently negative, consider switching assets or strategies.

Net APY Calculation

Let's calculate expected returns for a $10,000 position at 4x leverage:

Real-World Example (Arbitrum, Feb 2026)

POSITION DETAILS

Your Capital:

$10,000 USDC

Leverage:

4x

Total Supply (Aave):

$40,000 USDC

Total Debt (Aave):

$30,000 cbETH

YIELD SOURCES

USDC Supply APY (Aave):+6.5%
ARB Incentives (Supply):+2.1%
Gross Supply Yield ($40K × 8.6%):+$3,440/yr

COSTS

cbETH Borrow APY (Aave):-4.2%
ARB Incentives (Borrow - reduces cost):+1.5%
Net Borrow Cost ($30K × 2.7%):-$810/yr

FUNDING RATE (HYPERLIQUID)

Avg Funding Rate (7-day):+0.015% per 8h
Annualized (365 × 3 periods × 0.015%):+16.4% APY
Funding Earnings ($30K × 16.4%):+$4,920/yr

FEES & COSTS

Hyperliquid Trading Fees:-$30/yr
Gas Costs (Monthly Rebalancing):-$50/yr
Swap Slippage (Looping):-$40/yr

NET RESULT

Total Income:

+$8,360/yr

Total Costs:

-$930/yr

Net Annual Profit:

+$7,430

74.3% APY on $10K capital

⚠️ Important: This example assumes positive funding rates persist. If funding turns negative or Aave rates change, net APY will vary. Always monitor current rates before deploying capital.

Risk Factors & Mitigation

1. Liquidation Risk (Aave)

If your health factor drops below 1.0, Aave liquidates your collateral with a ~5% penalty.

LIQUIDATION TRIGGERS

  • • USDC depegs below ~$0.95 (reduces collateral value)
  • • cbETH/ETH premium expands (increases debt value)
  • • Oracle price manipulation (rare but possible)

Mitigation: Keep health factor > 1.5. Set up alerts at 1.8. Add collateral or deleverage if approaching 1.3.

2. Liquidation Risk (Hyperliquid)

Your short position liquidates if ETH price rises too much relative to your collateral.

EXAMPLE LIQUIDATION PRICES

  • • 3x leverage: Liquidates at +33% move (~$4,000 if shorted at $3,000)
  • • 5x leverage: Liquidates at +20% move (~$3,600 if shorted at $3,000)
  • • 10x leverage: Liquidates at +10% move (~$3,300 if shorted at $3,000) ⚠️ Risky

Mitigation: Use 2-4x leverage max. Maintain 30-40% collateral buffer. Add USDC if margin ratio drops below 60%.

3. Negative Funding Risk

If funding turns negative (shorts pay longs), your hedge becomes a net cost instead of a net benefit.

FUNDING RATE SCENARIOS

  • • Positive funding (+0.01% 8h): You earn ~13% APY (boost strategy)
  • • Zero funding (0.00% 8h): Neutral (no impact on APY)
  • • Negative funding (-0.02% 8h): You pay ~26% APY (reduces/eliminates profit)

Mitigation: Monitor 7-day average funding. If negative for 2+ weeks, consider closing position or switching to different asset/strategy.

4. Smart Contract Risk

Bugs or exploits in Aave or Hyperliquid could result in loss of funds.

Risk Level: Low (both are battle-tested), but non-zero. Aave has $10B+ TVL and 4+ years of operation. Hyperliquid is newer but has handled $50B+ in trading volume.

Mitigation: Only deploy capital you can afford to lose. Diversify across multiple strategies/protocols. Consider insurance protocols like Nexus Mutual for large positions.

5. Execution & Rebalancing Risk

Manual management = human error. Forgetting to rebalance, miscalculating sizes, or closing positions in the wrong order can introduce unhedged exposure.

Mitigation: Set calendar reminders for weekly health checks. Use position sizing calculators. Close short BEFORE closing long to avoid naked exposure. Or use automated protocols like Hedgeway.

When This Strategy Works Best

IDEAL CONDITIONS

  • High Aave supply APY (8%+ after rewards)
  • Low borrow costs (sub-5% with incentives)
  • Positive funding rates (10-20% annualized)
  • Stable/ranging markets (less liquidation risk)
  • High volatility (increases funding rates)

AVOID WHEN

  • Funding deeply negative (shorts pay >0.02% per 8h)
  • Low Aave yields (sub-5% net after borrow costs)
  • Extreme volatility (flash crashes risk both liquidations)
  • High gas fees (Ethereum mainnet during congestion)
  • Oracle failures (rare but monitor health)

💡 Pro tip: This strategy typically performs best during bull markets with high funding (everyone wants to long, so you get paid to short) and during DeFi incentive programs (protocols like Aave boost supply/borrow APY with token rewards).

Comparing Manual vs Automated

AspectManual (DIY)Automated (Hedgeway)
Setup Time2-4 hours (loops, bridge, hedge)60 seconds (one-click deploy)
MonitoringDaily manual checks requiredAutomated 24/7 monitoring
RebalancingManual monthly (gas-heavy)Auto-rebalanced (gas-optimized)
Protocol Fees0%0.5-1% APY
Gas EfficiencyLow (individual txs)High (batched operations)
Error RiskHigh (human error)Low (tested smart contracts)
Emergency ExitManual multi-step unwinding3-tier recovery system
Best ForLearning & small testsSerious capital & passive income

Conclusion

The Aave + Hyperliquid delta-neutral strategy is one of the highest-yielding stable return opportunities in DeFi. By combining Aave's lending loops with Hyperliquid's perpetual hedges, you can achieve:

  • 10-30% stable APY depending on market conditions
  • Near-zero price exposure via automated hedging
  • Full self-custody of all assets
  • Scalable from $1K to $1M+

Manual execution teaches you the mechanics and gives you full control, but requires constant monitoring and carries execution risk. For most investors, automated protocols like Hedgeway provide better risk-adjusted returns through gas optimization, 24/7 monitoring, and professional rebalancing.

Deploy Aave + Hyperliquid in 60 Seconds

Hedgeway automates the entire strategy: looping, hedging, rebalancing, and monitoring. Earn 10-30% stable APY with full self-custody.

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