🐂 Bullish on a token you’ve just discovered?
Factor’s Leverage strategies enable you to turn any token’s potential upside or downside into amplified profits with a single transaction.
There are basically two options when it comes to Leverage strategies : Long or Short.
Leverage Long (🐂/📈/🔼)
Taking a leveraged long position means borrowing funds to increase your exposure to an asset that you believe will increase in value.
The goal is to profit from the asset’s price appreciation. If the price of the asset increases, your returns are magnified due to the leveraged position.
Example: If you believe the price of BTC will rise, you might take a leveraged long position by borrowing funds to buy more BTC. If the price goes up, you benefit from the price increase on the larger amount of BTC you hold.
Leverage Short (🐻/📉/🔽)
In contrast, taking a leveraged short position means borrowing funds to sell an asset at the current price and repurchase it at a discounted price in the future as you believe it will decrease in value.
The goal is to profit from the asset’s price decline. If the price of the asset decreases, you can buy it back at the lower price, repay the debt denominated in the bearish token, and pocket the difference.
Example: If you believe the price of ETH will fall, you might take a leveraged short position by borrowing ETH and selling it at the current price. If the price drops, you buy back the same amount of ETH at a lower price, return it to the lender, and keep the profit from the price difference.
In this article, we will be going in-depth into how you can easily multiply any % gains by the amount of leverage you select (i.e. a 10% price increase results in a gain of more than 10%) with Factor’s Leverage Long strategies.
*For an in-depth view into Leverage Short Strategies, click here.
Leveraging Long with Factor
Built for optimizing your capital efficiency, Factor’s Long strategies significantly increases your exposure to a token’s price appreciation resulting in more profits for the same initial capital.
Factor makes this possible through combining various DeFi building blocks:
- Lending and borrowing from lending protocols (e.g. Silo, Aave, Compound, etc.)
- Flash loans from Balancer
- Instant swaps via aggregators (e.g. OpenOcean, etc.)
Strategy Explainer: Need an even deeper dive?
Decision Tree: Want to know if a Long strategy is right for you?
Performance Model: Want to understand how market movements will affect your position’s performance?
Strategy Simulations: Trying to find the optimal strategy parameters to maximize your gains?
User Guides: Want to get started with creating a leveraged position?
Why Go Long On Leverage?
- Non-linear Gains: With leverage strategies, a 10% token gain is no longer just a 10% profit but multiples of your selected leverage multiplier. For example, a 4x leverage multiplier means that the same 10% token gain is now a ~40% profit (not including interest and fees).
- Capital Efficiency: By collateralizing your initial token to borrow more tokens, you gain significantly more price exposure to the collateralized token. For example, if you lend 1WETH as collateral and are able to borrow 3WETH, you know have 4x more exposure to any WETH gains.
- Additional Yields: Depending on the market conditions, lending pools sometimes pay significant Supply APYs (i.e. lending interest) for specific tokens. With leverage, you are supplying the whole leverage amount resulting in amplified lending yields.
What Are The Risks?
- Liquidation: When taking out a loan, lending pools specify a liquidation threshold at which your position is liable to becoming forced sold if the value of your collateral relative to debt drops below the threshold. This usually also incurs a liquidation fee hence always ensure that your position does not become undercollateralized.
- Borrow Costs: Depending on the token borrowed, lending pools also charge a Borrow APY (i.e. borrow interest) on the position’s debt amount. Only open a Long position if you believe the token upside is greater than the borrowing costs incurred [(leverage multiplier — 1) x Borrow APY].
- Non-linear Losses: The multiplier effect for Longs also occurs in the opposite direction as you are holding onto more of the bullish token in the case whereby the market moves opposite to what you expected.
How Is Leverage Created?
Lending and Borrowing
At the core of every Long strategy, you are effectively:
- Lending the token that you’re bullish on
- Borrowing a token whose value is stable relative to the lending token (i.e. stablecoins or base tokens)
As your debt value is stable, any increase in the lending token price means that the value of your collateral increases relative to your debt thereby resulting in additional profits. Price goes up, debt remains the same, the difference in price is realized as profits.
Adding Leverage
The reason for going through the process of borrowing in the first place is so that the borrowed debt can then be exchanged for more bullish tokens. This means that compared to your initial holdings, the loan enables you to hold additional bullish tokens worth the value of the borrowed debt.
Note that the loan only needs to be repaid when it is closed hence you are able to convert the full value of the borrowed debt into more bullish tokens.
Adding Even More Leverage
With additional bullish tokens in hand, you can add even more leverage by lending it back to the lending pool, borrowing more debt tokens, and swapping the debt for more bullish tokens. By looping through this cycle with decreasing amounts of debt, the position accrues more bullish tokens resulting in even more leverage.
Note that the availability of interest-free flash loans from Balancer enables the above process to be simplified significantly.
Putting It Together
When opening a Leverage Long position, the key conditions to pay attention to are:
- Long Strategy Breakeven Point (A): Interest is accrued when tokens are lent or borrowed from a lending pool. Your position incurs a borrowing cost if the interest on debt is greater than the interest earned on your collateral. This means that Long positions only become profitable when the bullish token price increase is sufficient to justify any borrowing costs.
- Long Strategy Outperformance Vs Hold Strategy (B): Due to any borrowing costs incurred, there is a point up to which a basic hold strategy will outperform a leveraged strategy. The leveraged strategy will be a better option only if the profits from holding additional bullish tokens outweighs the hold strategy value appreciation.
The chart below highlights the above two points conceptually:
Note that the more leverage taken, the steeper the gradient of the Long Strategy which results in a higher multiplier. This also applies in the other direction as can be seen in the bottom left quadrant.
Conclusion
Leverage Long strategies effectively allow you to amplify your gains if the collateralized token appreciates in value. It is a boosted wager that magnifies both the potential gains if the market agrees with you and potential losses if the market disagrees with you. As such, it is an extremely powerful trading tool that can be easily accessed via the Factor dapp.
At Factor, we are making complex DeFi strategies more accessible and efficient for the average user. Please visit our Docs if you would like to discover a world of infinitely composable and permissionless DeFi strategies.
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