How Crypto Leverage Works on Solana

This crypto basics article focuses on how crypto leverage works with looks at Solend, Mango Markets, 01 Exchange, and Drift Protocol.

Note: This article is not financial advice. Hubble Protocol does not endorse any tokens or platforms mentioned in this article.

Key Takeaways

  • Users can access leverage to increase their exposure to the market.
  • It's possible to manually or automatically leverage short or long.
  • Leveraging positions can be extremely risky.

Welcome to the next installment of Hubble’s Crypto Basics series on lending. This article will cover the basics of how crypto leverage works.

All leverage depends on borrowing and lending, so for primers on how these work in crypto, check out these previous articles:

Leverage trading crypto increases users' exposure to a position. The more leverage one takes, the more one can amplify their exposure to the market. Likewise, the more leverage one takes, the faster one can lose their deposit.

Always do research before participating in decentralized finance (DeFi) and using DeFi for leverage. This article is not financial advice.

Looping: How to Manually Leverage Crypto Positions

Leverage is made possible by borrowing crypto, which means users have to also deposit more crypto than they borrow. If users want to manually leverage their crypto positions, they can deposit tokens on Solend and borrow crypto against the value of their collateral.

A user's collateral is what ensures they will repay their loan. If users borrow too much, and the value of their collateral drops, then their collateral will be forfeited to repay the loan.

When manually leveraging a position, users can watch their liquidation threshold shrink with each manual loop, so manually leveraging positions is an instructive introduction to leverage. As users borrow, deposit, and leverage, they can see how much borrowing for leverage can affect their liquidation risk.  

Leverage Trading Crypto Long with SOL on Solend

  • Deposit SOL on Solend.
  • Borrow stablecoins. The closer users borrow to their borrow limit, the more they can leverage–and the closer they advance to their liquidation point.
  • Swap stablecoins for SOL on Jupiter
  • Deposit SOL on Solend
  • Borrow more stablecoins, and repeat. Notice how the protocol allows users to borrow fewer stablecoins with every loop.

Every repetition of this process increases leverage on SOL. It increases exposure to SOL price movements by multiples, so if SOL’s price rises, users can multiply their profits from that increase in price.

However, if SOL starts falling in value, users can lose everything they’ve deposited if they cannot top up their balance and increase their deposit. If users expect that SOL will fall in value, then it’s a bad idea to leverage long; otherwise, it’s possible to leverage SOL short if expectations are that the token will decrease in value.

Leverage Trading Crypto Short with SOL on Solend

Users can manually short crypto with leverage by using Solend. All they have to do is repeat the looping process to gain leverage, but instead of borrowing stablecoins, borrow SOL:

  • Deposit stablecoins
  • Borrow SOL
  • Swap SOL into stablecoins
  • Repeat

If SOL drops in value, then users can acquire cheaper SOL and keep the remaining stablecoins as the difference. In contrast, if SOL rises in price while setting this position, users can be liquidated. When looping, users can lose everything deposited, since they have used their borrowed funds as collateral.

How to Auto-leverage Trading Crypto with Fewer Clicks

Users can manually leverage trade crypto, or they can auto-leverage trading crypto on crypto perpetuals markets. There are several crypto perpetual futures protocols on Solana that minimize the steps it takes to leverage a position, whether users want to go long or short.

To begin trading crypto with leverage on these protocols, users need to open and fund an account. Opening and funding an account can be done permissionlessly and only requires connecting a crypto wallet.

Mango Markets Offers Powerful Tools for Powerful Leverage

On Mango Markets, Solana perps are offered with 1x to 20x leverage, depending on the asset. Users can also access leveraged spot trading with a maximum 5x leverage on volatile assets.

Leverage is not adjustable on Mango Solana trades. If users want to leverage SOL, they’ll need to accept 20x leverage in this go-big or go-home style of trading.

01 Exchange Lets Users Adjust Their Leverage and Access Power Perpetuals

01 Exchange is another protocol for trading crypto perpetuals on Solana. Users can choose to leverage a position up to 10x on 01 Solana leveraged trading for assets from the ecosystem and other major tokens like AVAX, APE, and NEAR.

01 Exchange also offers power perpetuals, which allow users to hedge their position against loss. Power perpetuals are different from other crypto perpetuals in that they resemble options and can hedge exposure to negative market movements.

Drift Protocol Revamps the Platform for Return to Mainnet

In May of 2021, Drift Protocol experienced a bug where users with a Drift trade account could redeem more collateral than they were entitled to. This bug was found during the LUNA meltdown stress test, and Drift decided to refund users, pause trading, and overhaul the platform before launching again.

The next version of Drift promises to bring several innovative features, such as just-in-time (JIT) and hybrid liquidity, to Solana derivatives trading. While it’s not possible to use Drift Protocol at the moment, users can sign up for updates on the future launch.

Crypto Leverage Necessitates Over-collateralization and Liquidations

Leverage trading crypto introduces the risk of liquidation. A liquidation occurs when the value of collateral approaches 1:1 with the value of debt. When this happens, collateral will be forfeited at a liquidation threshold that prevents the protocol from losing money.

If users take on leverage for crypto trading, they can be liquidated if an asset drops:

  • 2x leverage: 50%
  • 3x leverage: 33%
  • 4x leverage: 25%
  • 10x leverage: 10%
  • 20x leverage: 5%

These percentages do not factor in fees and rates that can push a position closer to its liquidation threshold. Remember, leverage can be a hell of a drug, and users should never take on leverage with more than they can afford to lose.

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