# Understanding Leverage

{% hint style="info" %}
Before reading this, please make sure that you [understand risk factor](/leverage/understanding-risk-factor.md) first
{% endhint %}

Leverage allows you to get **increased exposure** to an asset of your choice, all while being trustless, decentralized and predictable.

#### How it works

* Imagine you have 1 EGLD @ 15$ in your wallet, and you want increased exposure to EGLD
* You ask the XOXNO Lending protocol: *"Hey, I have 1 EGLD, but I would like exposure to 4 EGLD because I'm bullish on EGLD. What do I need to do to get the remaining 3 EGLD?"*
* The protocol now suggests you: *"You can have the 3 EGLD, but you need to take a flash loan to finance it. Choose what asset you want to borrow the 3 EGLD against"* 
* This is called a "Long". You 4x Long EGLD against an asset of your choice, for example USDC

#### Concrete example

* You want to 4x Long EGLD against USDC, providing 1 EGLD @ 15$ as initial collateral
* The protocol determines a swap route to get 3 EGLD from USDC, and finds a route to buy 4 EGLD with 45 USDC
* The protocol takes a flash loan of 45 USDC on your behalf, and swaps it for 3 EGLD
* You now end up with a position consisting of
  * 4 EGLD (1 EGLD initial collateral + 3 EGLD swapped)
  * 45 USDC (the flash loan that was taken to finance the 4 EGLD)
  * Risk factor: 

$$
\text{risk(position)} = \frac{\text{45 \* 1$}}{\text{4 \* 15$ \* 80%}} = 93.75%
$$

#### Summary

Leverage allows you to get increased exposure to an asset of your choice. If in above example you would not have leverage, you would end up with a position consisting of

* 1 EGLD @ 15$ (LT 80%) as collateral
* 11.25 USDC @ 1$ as debt
* The risk factor is 93.75% in both cases, but with leverage you have increased exposure to EGLD, meaning that
  * If EGLD surges 5% in price, you'll profit 20%
    * When closing the position, you repay 45 USDC and end up with 4\*15,75$-45\*1$=**18$** (instead of **15.75$**)
  * If EGLD drops 5% in price, you'll lose 20%
    * When closing the position, you repay 45 USDC and end up with 4\*14.25$-45\*1$=**12$** (instead of **14.25$)**


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