Borrow to Leverage
Leveraging is the use of borrowed funds to increase your exposure to price changes. It can be applied to both short and long positions with the aim of amplifying your profits.
Using leverage amplifies both profits and losses and should only be attempted by an experienced trader.
To understand the leverage process, we recommend you review the walkthroughs on depositing and borrowing.
One-click leverage is not available in the Silo application although the team might consider adding such features in the future. If you want to leverage your positions, it must be done manually.
For this example, we will pretend you are conducting a leveraged long of ETH using USDC. Leverage long essentially means that you think ETH price is going to increase and you intend to accumulate more ETH and sell when the price increases.
Go to the USDC-ETH Silo and deposit ETH. Using ETH as collateral, you will now be able to borrow USDC.
Sell your USDC for ETH on a decentralized exchange (DEX) such as Uniswap or a centralized exchange (CEX) such as Binance.
At this point, your ETH position is leveraged up since you are holding ETH that you purchased with your USDC borrowings in addition to the ETH collateral you have used to borrow USDC.
Assuming the price of ETH increased and you want to cash out, sell your ETH for USDC on a decentralized exchange (DEX) such as Uniswap or a centralized exchange (CEX) such as Binance.
Repay your USDC loan in the USDC-ETH Silo using the USDC that you repurchased.
The amount of leverage you can have depends on the maximum loan–to-value (maxLTV) of the asset you are using as collateral. If the Max LTV of ETH is 80%, you can borrow 80% of your ETH collateral in USDC and sell the borrowed USDC for more ETH, effectively giving you a 1.8x leveraged ETH position.
The events of depositing collateral → borrowing token → repurchasing collateral using token → depositing collateral can be repeated to further increase your leverage. However, it is highly recommended that users maintain their Health Factor to avoid liquidations.
The above scenario assumes that your long position is successful and the value of ETH increases relative to your deposit price. Unfortunately, this is not always the case and there are a few risks involved with this strategy.
- 1.Closing your long: If the value of ETH actually decreases after you deposit it, you will need more funds to fully close your long position.
- 2.Liquidation: If the value of ETH decreases substantially and causes your Health Factor to exceed 1, your position may be liquidated and you will incur a hefty liquidation fee.
- 3.Borrowing cost: Since you are borrowing USDC, you will be required to pay a borrowing interest rate. This amount is added to the value of your loan and can push your Health Factor to the liquidation threshold.