So you have some tokens.

DeFi post on how to use leverage against your high conviction investment.

You have invested in some digital assets that you are conviced will be worth more in the future. Most likely some L1s like $ETH, $MATIC, $FTM or some important protocol governance token like $CRV, $BAL, $AAVE. You think in a year these will be worth at least as much as they are worth now, and likely much more. So what should you do?

Well, those who've been annointed to the upper classes use a little thing called leverage. Investing in real estate? Just put 10% down since of course that will be worth more in the future and the bank doesn't need all that money now. Just pay a little bit extra over time, but not as much as your property appreciates. Paying 2% interest on an asset that appreciates at 10% per year is free money. And that extra 8% is on money you never had to behin with. It's on the entire value of the asset you paid 10% for. Essentially giving you an 80% return on your original capital.

Now, crypto isn't real estate so you can't quite get a loan for only 10% down. You have to have more in collateral than you take out. But that's ok, because you think even your shitcoins will outperform some grotesque housing development in Florida. But let's look at what you could do if you took out an over collateralized loan on something like Aave. For this example I will be using the Aave protocol and $MATIC for my token but it will apply for any combination.

Here's what to do:


1. Deposit tokens (MATIC) into Protocol (Aave) to start earning interest on them
2. Decide what you are going to "short" which will most likely be some stablecoin
3. Withdraw at a reasonable Loan to Value ratio, I use 50%
4. Swap to the thing you want to get extra exposure to
5. +Time
6. =Lambo

So long as the value of your collateral doesn't go below your liquidation value, you keep your assets (plus a little bit of interest) and you get to buy more less some interest on a stablecoin.

So what should that other asset be that we swap to? It depends on your outlook but I have optimized three scenarios.

1. Buy more of your token and redeposit
2. Farm the stablecoin your loan is in for higher yield than you pay in interest
3. Provide liquidity for your token and some stablecoin

Using some real world yields, I calculated what the expected returns would be for these scenarios given an expected appreciation on your deposited collateral.

Investment value of a position for a given token return after a year.

Given the yields of 30% for a MATIC-DAI position, 12% on a DAI-MAI position, and 1% for redepositing purchased MATIC into Aave we see the total value of your position given how well your underlying MATIC position does after a year for a $1000 initial investment. As we can see and as is expected, the better your token does, the better it is to have extra exposure to it.

What should be interesting for users though are these crossover points. So even if we expect your token to 🚀 🌕 there still might be a chance you're wrong and in order to both preserve capital and generate some excess returns (read #alfa) we see LPing a token/stable pool is pretty juicy. Let's zoon in on the lower end of the returns, just in case...

ENHANCE

Investment value zoomed in between a -90% and +10% return.
The red line being the roughly 50% loss that will liquidate your collateral.

As we can more clearly see now, farming stables has a very narrow window where it will be effective at all. And LPing seems even juicier. We can have more money than we started with even if our token collateral has a 10% loss.

That's pretty cool.

In summary, if you've got some tokens, deposit them, withdraw some stable, convert half back to your token, and provide some liquidity.