How does LiquidOps Enable Decentralized Leverage in the Arweave and AO Ecosystem?

Decentralized Leverage

Decentralized leverage in the context of lending protocols refers to the process of using DeFi lending platforms to borrow and increase exposure to an asset without needing a middleman, like a bank or an exchange.

How does it Work?

First, you deposit a collateral into a lending protocol, in exchange for collateral tokens (like oTokens), which represent your position.

Next, you borrow another asset (usually a stablecoin) using your deposit as collateral. The protocol keeps your loan protected by maintaining a collateralization ratio, making sure the loan stays protected with price drops and market changes.

You then use the borrowed asset to buy more of the original asset, and deposit that again as collateral. ​This cycle can be repeated several times, increasing your exposure to the original asset, creating decentralized leverage.

This strategy is often utilized by experienced traders and borrowers on lending protocols such as Compound or Aave, but can also be applied with LiquidOps.

How does LiquidOps Enable Decentralised Leverage in the Arweave and AO Ecosystem?

One of the most widely used use cases of lending and borrowing protocols is decentralized leverage. Experienced DeFi traders frequently use this process; let’s break down how it works.

For example, enabling leverage of the Arweave token with LiquidOps lending and borrowing:

First, a user would pledge collateral for a loan in Arweave, and then they would borrow a stablecoin, like USDA.

From the USDA loan, they would buy more Arweave tokens on a decentralised exchange like Botega, gaining more exposure to the Arweave token.

They would then sell the Arweave from the USDA swap once the price increases/decreases to their desired target.

Once sold they would then pay back the initial USDA loan and profit from the difference between the extra exposure in the USDA/Arweave swap from the original loan enabling a greater exposure to the Arweave example due to LiquidOps!