Leverage
Using borrowed funds to increase exposure to an asset, amplifying both potential profits and potential losses.
Last Updated
2026-03-19
Related Concepts
What is Leverage?
Leverage is the use of borrowed money to increase your exposure to an asset. With 2x leverage, you borrow $1000 to combine with your own $1000 and buy $2000 worth of an asset.
How does Leverage work?
You deposit collateral, borrow against it, and use the borrowed funds to buy more assets. If the asset drops below a liquidation threshold, your position is automatically closed to repay the loan.
Most protocols limit leverage to 3-10x to cap risk.
Why does Leverage matter?
Leverage amplifies profits in rising markets but causes larger losses in falling ones. It is a high-risk strategy best suited for experienced traders with strict risk management.
Key features of Leverage
- Amplifies both profits and losses
- Requires collateral on DeFi protocols
- Subject to automatic liquidation if price moves against you
- Limited to
3-10xon most platforms
Examples of Leverage
A trader deposits 1 ETH ($2000) and borrows another 1 ETH to buy 2 ETH total at 2x leverage. If ETH rises to $3000 they double their money.
If ETH falls to $1000 they lose everything. If ETH falls to $1500 they are liquidated before the full loss occurs.