Rehypothecation

In DeFi, rehypothecation means a protocol or user reuses collateral that’s already locked or staked somewhere else, effectively stacking leverage on top of the same underlying asset.

For example:

1. You deposit ETH into Lido and receive stETH (a liquid staking token).

2. You use that stETH as collateral on Aave to borrow USDC.

3. Someone else might take that USDC, buy more ETH, stake it again, mint more stETH…

Rehypothecation in Uniswap v4

Uniswap v4 hooks enable a form of rehypothecation by allowing liquidity providers to earn additional yield on their deposited tokens without compromising the pool’s functionality.

How it works:

1. Liquidity Deposit: When users add liquidity to a pool, the hook can intercept the tokens using beforeAddLiquidity and afterAddLiquidity callbacks.

2. External Deployment: The hook automatically deposits these tokens into external yield-generating protocols (like lending platforms, staking contracts, or other DeFi protocols).

3. Swap Execution: Before each swap, the hook uses beforeSwap to withdraw tokens from the external protocol, allowing the swap to execute normally.

4. Re-deposit: After the swap completes, afterSwap re-deposits the tokens back into the yield-generating protocol.

This creates a seamless experience where LPs earn both trading fees from Uniswap and additional yield from external protocols, while maintaining full liquidity for trading.

WIP.