What is Leveraging, and How Does It Work?
Leveraging is a tool that allows a trader to use borrowed funds to open and manage positions greater than their capital. Trading DeFi coins with leverage, when done right, can help you take up larger positions in a cryptocurrency of your choice and amplify profits. In crypto derivatives trading, the concept of leverage is slowly coming to the mainstream as more and more traders successfully make use of it.
When trading DeFi coins with leverage you can borrow additional funds, so you can open a bigger trading position. The additional money can come from a broker or even other traders on the exchange platform where you’re trading.
A common mistake many traders make is thinking margin and leverage are one and the same. While it’s true that the instruments are interrelated, and both involve borrowing funds, they have quite distinct features. The foremost difference? While margin stands for the amount a trader needs to deposit as collateral to keep a trading position open, leverage refers to the amount a trader can borrow to boost their open positions. So basically, margin indicates the amount used to create leverage, and it’s always relative to the degree of leverage a trader requires.
Leverage is often measured in ratios, since the ratio represents the borrowed capital vs. the initial margin.
Why Would You Use Leverage to Trade DeFi Coins?
Using leverage in trading DeFi derivatives opens up a whole slew of opportunities that won’t otherwise be available, namely:
- Even when the amount you have deposited in your account is minimal, you can achieve maximum exposure.
- You get to have increased profits; proportionate to your trading capital and your margin amount, of course.
- Short selling (profiting off of the declining price of a particular crypto) with a leveraged position is almost always sure to get you huge gains.
- Combining leverage trading with the ability to go long or short is a strategy that can help you to make it through all market conditions.
Moreover, on Delta Exchange, you can utilize two types of leverage, which are:
- Order leverage, and
- Position leverage
Order and Position leverages, despite being interrelated quantities, stand apart from each other. Let’s now take a look at where the differences lie between the two, and what advantages a DeFi derivatives trader can get out of using them, shall we?
Order Leverage and Position Leverage, What’s the Difference?
1. Order Leverage:
All open orders are margined with Order Leverage. In the Delta Exchange app, you can use the leverage slider in the order placement tab to set the Order Leverage, as shown below.
Some features of trading with Order Leverage include:
- You can set the Order Leverage for each contract separately.
- All open orders in a particular contract are margined at the same leverage, however. So if you change the level of leverage while placing a new order in a certain contract, the leverage of all your other open orders in that contract will be changed as well.
- When you update your Order Leverage, the leverage of your open positions is not influenced.
2. Position Leverage:
The Position Leverage, also referred to as ‘Effective Leverage’, is the leverage of your position at the current Mark Price. For instance, if a long position you hold turns out profitable, your position would accumulate some unrealized profits. These unrealised profits would reduce your effective leverage and there would be more difference between the liquidation price of your position and the current Mark Price. This effective leverage is called the Position Leverage.
Position Leverage can be calculated using the following equation:
Position Leverage = position value at current Mark Price / (Position Margin + unrealised profit and/or loss)
As you can see, Position Leverage can be altered by changing the position margin. If you increase Position Margin, your Position Leverage drops. On the other hand, if you decrease the Position Margin, Position Leverage hikes up. As evident in the figure below, on the Delta Exchange app, you can click on the pencil icon next to the Position Leverage number for a pop-up window that would allow you to add/ remove margin to/ from an open position.
Some features of trading with Position Leverage are:
- You can acquire a position by placing a number of orders at different Order Leverages. In that case, the Position Margin would be the sum of the Order Margins, and would be the primary factor to decide the Position Leverage.
- If the unrealized PnL (profit and/or loss) is 0 – as it generally is for a new position – the Position Leverage would be the same as the Order Leverage of the order that created said position.
- When the price moves in your favor, the unrealized PnL is positive, and therefore Position Leverage drops.
- Alternatively, if the price moves at your disadvantage, the unrealized PnL is negative and results in the Position Leverage heading up.
If you change the Order Leverage, it doesn’t affect the margin for a particular Position.
Which DeFi Coins Can you Trade on Delta Exchange With Leverage?
With the recent DeFi boom within the cryptocurrency space, trades of DeFi coins with leverage have the sure potential to turn out high profits. Here are some DeFi coins you can trade DeFi coins on Delta Exchange with leverage:
Ren (REN) is an open-source protocol that enables private, permissionless transactions between blockchains. In fact, REN is the only open protocol to provide access to inter-blockchain liquidity for all DeFi applications. Ren’s core product is RenVM, which brings interoperable solutions to DeFi. RenVM is a trustless, decentralized network that enables cross-chain functionality to DeFi applications.
Users can trade REN Protocol Perpetual Contracts on Delta Exchange, where REN can be traded against BTC and USDT with up to 10x and 20x leverage respectively. On Delta, you perform REN-BTC trading or REN-USDT trading. You can find further information and specifics of the REN-BTC & REN-USDT contract here.
Aave is an open-source and non-custodial protocol that sanctions the creation of money markets. Just like with any other DeFi project, users on Aave can borrow assets and earn interest on deposits; so this project allows users to gain passive income along with getting loans.
The Aave protocol integrates a special feature called ‘flash loans’ – which happens to be the first uncollateralized loan option in DeFi. With flash loans, users can take out loans instantaneously and easily without any collateral, given that the liquidity is returned to the pool within one transaction block. However, if that doesn’t happen, the whole transaction is reversed to undo the actions executed until that point. The various use-cases of flash loans include collateral swapping, self-liquidation, and arbitrage.
On Delta Exchange, users can trade AAVE (LEND) against BTC and USDT with up to 20x and 50x leverages respectively. On Delta, you can engage in AAVE-BTC trading and AAVE-USDT trading. You can find out more about the AAVE-BTC & AAVE-USDT contract specifications here.
The Kyber Network is a blockchain-based liquidity protocol that amasses liquidity from a broad range of reserves, enabling instant and secure token exchange in any DeFi application. The network enables the trade of tokens without requiring any exchange platforms and allows vendors to get paid in their preferred crypto coin despite accepting any cryptocurrency. Kyber Network Crystal, or the KNC, is an ERC-20 token that connects participants within the Kyber Network ecosystem.
KNC has recently upgraded to the Katalyst protocol which launched a DAO (Decentralized Autonomous Organization) called KyberDAO, which now allows KNC to be used for voting protocol governance decisions, making the exchange fully decentralized.
While all these DeFi coins provide exciting trading opportunities – especially when you use leverage, and can yield excellent profits, know that DeFi trades also come with high risks, including not limited to extreme price shifts and unfavorable market conditions. As a beginner, leverage trading can prove to be quite tricky. Worry not, though, because you can learn the basics of leverage trading and get some hands-on experience with Delta Exchange’s testnet! All you’d have to do is create an account, and practice with mock trades!