Introducing leverage vaults on Hedge

Hedge
4 min readJun 30, 2022

Get up to 4x exposure in just a few clicks powered by Jupiter Aggregator

Nothing in this post constitutes professional and/or financial advice, nor does any information here constitute a comprehensive or complete statement of the matters discussed or the law relating thereto.

What is leverage?

Simply put, leverage is when you borrow capital to invest in more of the collateral than you can afford to increase the returns on your investment.

You can dramatically increase your investment returns if the price goes up, however if the price goes down, you could also lose it all.

Points to Remember

  • Leverage is when you borrow funds to amplify returns
  • Higher risks and higher rewards. It’s possible to lose your entire investment using leverage so be sure to understand all risks involved.

How it works

Imagine you have 10 SOL in your wallet and you are confident that the price of SOL is going to go up. You can’t afford to go buy more SOL, but you want to effectively increase your position size.

Hedge will help you use your 10 SOL as collateral to borrow an extra 30 SOL to give you an effective 4x exposure to the price of SOL.

Step 1: Deposit into a Hedge vault
Using Hedge, deposit 10 SOL into a new vault.

Step 2: First Leverage
While viewing your vault, click “Leverage Mode”

Move the slider to 1.8x (this is the most you can do in a single fold — where fold is a series of loan, buy, deposit transactions). Press the submit button and approve the transactions.

Adjust the slider to 1.8x leverage for the first iteration of leveraging

After all the transactions confirm, you’ll notice you now have approximately 18.3 SOL in your vault. At this point your 10 SOL deposit has 1.8x exposure to the price of SOL.

Step 3+: Repeat Step 2 to Gain Additional Leverage
With each iteration of step 2, you can increase your leverage by up to 0.8x.

Example vault after being leveraged up 4x.

After 4 iterations, you can see the example vault above is now at 4x exposure and shows the collateral held in the vault is now ~40 SOL.

A 4x exposure is equivalent to a collateral ratio of 133% which, depending on the vault type, could be close to the minimum collateral ratio so be sure to keep this in mind to avoid liquidation. This can be calculated from the following formula:

cr = collateral ratio, l = leverage multiple

At this point, if the price of SOL increases by $1, my return will have been $4 relative to my initial position value.

Hedge leverage vs Perpetual Swap
Other options for leverage include perpetual swaps that are best suited for short term leverage due to the funding rates - funding rates are recurring payments to traders that are long or short to make up for the contract market and spot price differences.

Funding fees can reach rates as high as 100% APR so keeping a position open for 1 year may not be capital efficient since by then most of the invested principal will be gone. Thus opening up a long term leverage position on Hedge may end up being more capital efficient.

Fees

When using the leverage feature you will be exposed to fees on Hedge as well as any swap.

For Hedge’s flagship SOL vault, there’s a 0.5% loan initiation fee with 0% ongoing interest. Other vault types may have different parameters. Depending on the swap route that is used (the cheapest swap route found via Jupiter), the swap provider will charge a swap fee as well.

Deleverage

When the time comes that you want to back out your leverage, you can do the process above in reverse to lower your exposure and repay the debt against your collateral. This will automatically sell collateral to repay debt in USH.

Powered by Jupiter Aggregator

This feature is powered by Jupiter Aggregator (jup.ag), Solana’s go-to order routing service. This is how Hedge can guarantee you get the best price for the swaps that power leverage.

What’s Next + Feedback

We’re very excited about launching leverage on Hedge. The feature is new and we’re looking for feedback from you!

Please reach out to us on Discord or ask us questions on Twitter. We’d love to hear from you, what you think, and what additional features you’d like to see.

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Hedge

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