Understanding Leverage

Before reading this, please make sure that you understand risk factor first

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$)