4.2 Leveraged borrowing

Example 1: Leveraged Borrowing

Assume you have $10,000 worth of collateral (C) in a leveraged yield farming protocol. The protocol allows you to borrow up to 2x leverage, meaning you can borrow an additional $20,000 (L) against your collateral.

If the yield farming strategy generates a 20% annual return (R), your potential returns would be calculated as follows:

Without leverage: Earnings = C * R = $10,000 * 0.20 = $2,000

With leverage: Total Value = C + L = $10,000 + $20,000 = $30,000 Earnings = Total Value * R = $30,000 * 0.20 = $6,000

In this example, leveraging your position allows you to earn $6,000 instead of $2,000, resulting in higher potential returns. However, it's important to consider the associated risks and costs, such as interest on the borrowed funds and the potential for liquidation if the value of your collateral drops significantly.