Strategies

Leverage

Financial Leverage

Using borrowed funds to amplify trading position size and potential returns

Definition

Leverage means using borrowed capital to hold a larger position than your own funds would allow, which multiplies both the return and the drawdown on your equity. DeFi offers three main routes. Looping on a money market means depositing collateral, borrowing a stablecoin, buying more collateral and repeating, which converges to a maximum exposure of 1/(1 - LTV) times your capital. Perpetual futures on venues like Hyperliquid or GMX give leverage directly, with a funding rate paid between longs and shorts to hold the contract near spot. Leveraged vaults and one-click loopers use flash loans to build the whole position in a single transaction. In all three, the number that matters is not the multiplier but the price at which you are liquidated.

Leverage means holding a bigger position than your money supports by borrowing the rest. It multiplies gains and losses, and it introduces a price at which the position is closed for you.

Example

With $10,000 of ETH and a money market allowing 75% LTV, repeated looping converges to $40,000 of exposure, or 4x. Run it at a more modest 3x instead: $30,000 of ETH collateral against $20,000 of debt. If the liquidation threshold is 82.5%, you are liquidated when 20,000 equals the collateral value times 0.825, which is a collateral value of $24,242 and therefore an ETH drop of about 19%. A 25% drop would have left you with $2,500 of equity from $10,000, a 75% loss, except that you never get there because liquidation and its 5% to 10% penalty arrive first. Meanwhile you are paying the borrow rate on $20,000 the entire time.

How it works

Either borrow against collateral and buy more of it, looping toward 1/(1 - LTV) exposure, or open a perp position that gives the same exposure directly with a funding rate attached. Either way a liquidation threshold sits below you.

Why it matters

It is the fastest way to lose everything in DeFi, and the mechanism is arithmetic rather than bad luck. Most blow-ups come from sizing against the maximum LTV instead of against a survivable drawdown.

What to check

Compute your liquidation price before opening. Check the liquidation penalty, whether the borrow rate is variable, which oracle prices the position, and for perps the current funding rate and how crowded your side is.

Risks to Consider

Liquidation adds a penalty of roughly 5% to 10% on top of the market loss, and it happens at the worst moment by construction
Borrow rates are variable on most money markets and can spike enough to turn a positive carry negative while you hold
Oracle-driven liquidations can trigger on a wick or a stale print that never reflected a real tradable price
Perp funding bleeds continuously when the crowd is positioned the same way you are, and cascading liquidations amplify the move against you

Common Questions

How much leverage is actually safe?

Ask instead what drawdown you need to survive. ETH has had multiple 50% drawdowns and several 20% single-day moves, so anything above roughly 2x on a directional ETH position is a bet that this cycle is calmer than the last ones. Leverage on correlated pairs is a different question entirely: looping an LST against ETH, where the two move together, can safely run much higher because the liquidation trigger is a depeg rather than a price move.

Looping on a money market or using perps?

Looping keeps you in spot, so there is no funding rate, but you pay a borrow rate, eat gas on every loop, and the position is harder to unwind quickly. Perps are cheaper to open and close and give precise sizing, but you pay or receive funding continuously and you are exposed to the venue. For a long hold with a clear thesis, looping usually costs less; for a short-term directional trade, perps are the cleaner instrument.

What exactly triggers liquidation?

The protocol's oracle price crossing the level where your debt exceeds the collateral value times the liquidation threshold, not your entry price or your own view of fair value. That means you can be liquidated by a brief wick on a thin market that the oracle picked up, and it means the safe way to size is to compute the trigger price first and then decide whether you can live with it. Health factor displays are a convenience; the trigger price is the number to write down.