DeFi Leverage Strategies
What is DeFi Leverage
DeFi leverage is using lending protocols to build positions larger than your holdings. The purpose is the same as margin trading on centralized exchanges, but the execution method is different.
CEX Margin: Exchange lends funds and sets multiplier DeFi Leverage: Deposit collateral → Borrow → Redeposit → Borrow again... (looping)
Looping
Basic Concept
Looping is repeating deposits and borrowing to build leverage.
Simple Example (2 loops):
- Deposit 1 ETH ($3,000) as collateral
- Borrow $2,400 USDC at 80% LTV
- Buy an additional 0.8 ETH with $2,400
- Add 0.8 ETH as collateral
- Can borrow again (0.8 × 0.8 = 0.64 ETH value)
Result:
- Initial capital: 1 ETH
- Total ETH exposure: 1 + 0.8 + 0.64 + ... ≈ 5 ETH (at max leverage)
- Leverage: ~5x
Maximum Leverage Calculation
Maximum Leverage = 1 / (1 - LTV)
| LTV | Maximum Leverage |
|---|---|
| 50% | 2x |
| 75% | 4x |
| 80% | 5x |
| 85% | 6.67x |
Caution: Using maximum leverage means even tiny price movements can trigger liquidation.
Manual vs Automated Looping
Manual Looping:
- Execute multiple transactions yourself
- High gas costs
- Time-consuming
Automated Looping (Protocols/Tools):
- DeFi Saver: One-click leverage adjustment
- Instadapp: Automated leverage strategies
- Built-in protocol features: Gearbox, Morpho, etc.
Leveraged Staking
ETH Leveraged Staking
A strategy utilizing stETH (liquid staking token).
Structure:
- Deposit ETH to Lido → Receive stETH (3-4% annual staking rewards)
- Deposit stETH as collateral on Aave
- Borrow ETH (pay interest)
- Deposit borrowed ETH to Lido again → Get more stETH
- Repeat
Profit Structure:
- Staking rewards (applied to entire stETH position)
- Borrowing interest (cost)
- Net profit = Staking rewards × Leverage - Borrowing interest
Example:
- Staking APY: 4%
- Borrowing APY: 2%
- Leverage: 3x
- Net profit ≈ 4% × 3 - 2% × 2 = 8%
stETH/ETH Depegging Risk
If stETH fails to maintain 1:1 parity with ETH (depegging), leveraged positions can be liquidated. In 2022, stETH depegged by more than 5%, causing numerous liquidations.
Gearbox Protocol
A protocol specialized for leverage.
How It Works
- Credit Account: Isolated account for leveraged trading
- Deposit Collateral: Deposit ETH, etc. as collateral
- Set Leverage: Up to 10x
- Execute Strategy: Only usable on allowed protocols
Features:
- Allowlist-based: Restricts scam tokens/protocols
- One-click leveraged long/short
- Various strategy integrations
Leveraged Farming
You can do leveraged yield farming with Gearbox.
- Provide liquidity to Curve pools with leverage
- Returns are amplified by leverage
- However, losses are also amplified
Leveraged Long vs Short
Leveraged Long (Betting on Price Increase)
Structure:
- Deposit ETH as collateral
- Borrow stablecoin (USDC)
- Buy additional ETH with USDC
- More ETH exposure
Example: 3x Long
- 1 ETH ($3,000) collateral
- 3 ETH exposure ($9,000)
- ETH +10% → Position +30% profit
- ETH -10% → Position -30% loss
Leveraged Short (Betting on Price Decrease)
Structure:
- Deposit stablecoin as collateral
- Borrow ETH
- Sell borrowed ETH → Secure stablecoins
- When ETH price drops, rebuy at lower price to repay
Example: 2x Short
- $6,000 USDC collateral
- Borrow 2 ETH ($6,000)
- Sell ETH → Additional $6,000
- ETH -20% → Rebuy at $4,800 → $1,200 profit
Leverage Risks
Liquidation Risk
Higher leverage means liquidation price is closer to current price.
| Leverage | Price Change to Liquidation (Approx.) |
|---|---|
| 2x | ~40-50% |
| 3x | ~25-30% |
| 4x | ~18-20% |
| 5x | ~15% |
Cryptocurrencies can move 20-30% in a day. High leverage is very dangerous.
Interest Accumulation
Borrowing interest continuously accumulates.
- Short-term positions: Minimal impact
- Long-term positions: Interest erodes profits
Compounded Risks
Leveraged DeFi combines risks from multiple protocols.
- Lending protocol risk
- DEX risk (when swapping)
- Oracle risk
- Smart contract risk
Safe Leverage Strategies
1. Conservative Leverage
Use maximum 2-3x only
Higher leverage carries too much liquidation risk. Even 2x provides sufficient return amplification.
2. Health Factor Management
Always maintain above 1.5
Use automatic alerts or automation tools like DeFi Saver.
3. Stop-Loss Plan
Set a stop-loss price before entering a position.
- Reduce position when specific price is reached
- Prevents emotional decisions
4. Graduated Entry/Exit
Don't use full leverage at once.
- Gradually increase from 1x → 1.5x → 2x
- Exit in stages as well
5. Use Correlated Assets
Asset pairs with high correlation like stETH/ETH have lower relative price movement and thus lower liquidation risk.
Leverage Tool Comparison
| Tool/Protocol | Max Leverage | Features |
|---|---|---|
| Aave + Manual Looping | ~5x | Most basic, high gas costs |
| DeFi Saver | ~5x | One-click, auto liquidation protection |
| Instadapp | ~5x | Multi-protocol integration |
| Gearbox | ~10x | Dedicated leverage protocol |
| Morpho | Varies | Efficient interest rates |
Leverage and Taxes
Leveraged positions can be complex from a tax perspective.
- Each swap may be a taxable event (varies by country)
- Whether interest costs are deductible
- Loss treatment upon liquidation
Professional consultation recommended.
Summary
DeFi leverage builds positions larger than your holdings through looping or dedicated protocols. Depending on LTV, up to 5-10x leverage is possible, but liquidation risk increases proportionally. Leveraged staking using stETH and similar tokens to amplify staking rewards is a popular strategy. Risk must be managed through conservative leverage, health factor management, and stop-loss planning. Leverage should only be used at levels you understand and can afford.
Next article: Types of Stablecoins - The Reserve Currency of DeFi