“Give me a lever and I’ll lift the world for you!” Thus said Archimedes; What would he think if he saw how his beloved principle today finds so many applications in the financial world?

“Give me leverage and I’ll make you rich… but more poor. Too poor.” This is how the famous saying can be interpreted today.

Undoubtedly, leverage – ability borrowing money to get more exposure to a particular asset – represents a great opportunity. Let’s take an example: let’s say the price of Ethereum doubled overnight, turning your €1,000 into €2,000. Great!

But wouldn’t it be better if we could earn €10,000 instead of €1,000? Leverage does just that: it allows you to borrow the missing €9,000, risk €10,000 and increase your potential earnings tenfold. The problem is that it also increases potential losses tenfold.: A negative 10% move in the opposite direction of your position will be enough to burn all the capital. In fact, a 10% contraction in a capitalization of €10,000 corresponds to your entire €1,000 portfolio.

So is leverage good or bad?

Neither one nor the other. Leverage is just a tool, a kind of megaphone that can increase the results of your strategy; but it goes without saying, without the right strategy, leverage can be detrimental.

Now let’s explore how this applies in the world of DeFi: not only in trading platforms, but also and above all Efficient Agriculture. In a recent article we discussed the possibility of earning additional rewards from commissions collected, for example by providing liquidity. Now imagine if you could get the same price with steroids!

Using leverage in Yield Farming means: borrow capital and use it to maximize rewardsthanks to this strategy it can multiply and return many zeros.

The procedure is very simple: all we need is a platform that allows us to Farm Efficiently with the capital and leverage we want to invest. At this point you will need to follow these steps:

1. Select the “pool” where you want to do Yield Farming. In other words, you will have to choose one among the many suggested crypto pairs.
2. Invest your capital.
3. Choose the leverage to use, normally the maximum value is 3.
4. Wait and collect the results.

It’s all seemingly easy, but there are actually two risk factors to consider:

1. The volatility of the borrowed asset: if this increases, so does the value of the debt and the risk of liquidation. This is the biggest risk when trading with leverage. In fact, each platform uses defense systems that are activated when certain thresholds are reached. When the debt exceeds a certain percentage of the open position, the system will automatically liquidate it, hurting you.
2. The so-called temporary lossor temporary losses: Occurs when the ratio between two assets changes, it doesn’t matter whether the asset you invest or the other is increasing or decreasing.

In conclusion, Leveraged Yield Farming is undoubtedly a powerful strategy for increasing income, but it also requires a great deal of preparation and above all Attention in position management. In view of the risks, we advise inexperienced users not to use this tool: instead, it is better to invest in peace and reap the benefits later.