> For the complete documentation index, see [llms.txt](https://nx-finance.gitbook.io/nx-academy/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://nx-finance.gitbook.io/nx-academy/nx-101/module-2.1-leverage-basics.md).

# Module 2.1｜Leverage Basics

## **Beginner’s Guide: What is Leverage in Finance?**

Leverage is a financial tool that allows you to amplify your potential returns—or losses—by using borrowed funds or assets. Think of it as using a lever to lift something heavier than you could on your own. While leverage can maximize profitability, it also comes with risks that need to be managed carefully.

### **Daily Life Example of Leverage**

Imagine you want to buy a house worth $500,000, but you only have $100,000 saved up. To buy the house, you take out a mortgage (loan) for the remaining $400,000. This is leverage—you’re using borrowed money to own an asset worth more than what you could afford outright.

| Scenario              | House Value | Equity (Ownership) | Change in Equity  |
| --------------------- | ----------- | ------------------ | ----------------- |
| Initial Purchase      | $500,000    | $100,000           | -                 |
| House Value Increases | $600,000    | $200,000           | +$100,000 (+100%) |
| House Value Decreases | $400,000    | $0                 | -$100,000 (-100%) |

### **What Happens in This Example?**

* **If the House Increases in Value:** Let’s say the house’s value rises to $600,000. Your equity (your ownership) grows from $100,000 to $200,000—a 100% increase on your original $100,000 investment.
* **If the House Decreases in Value:** If the house’s value falls to $400,000, your equity drops to $0, as the entire $400,000 loan would still need to be repaid.

## Leverage in Finance

In financial markets, leverage allows investors to control larger positions with less capital by borrowing funds. This is common in stock trading, cryptocurrency, and yield farming.

* Leverage Ratio: The multiplier effect of leverage. For example:
  * A 5x leverage ratio means you control $5 for every $1 invested.
  * A 10x leverage ratio means you control $10 for every $1 invested.
* Benefits:
  * Amplified returns with a smaller initial investment.
* Risks:
  * Magnified losses if the market moves against your position.
  * Potential liquidation if collateral value drops below a certain threshold.

<br>

### Example of Leverage with NX Finance

NX Finance allows users to utilize leverage through its Fulcrum Strategy. Let’s break down an example:<br>

Scenario:

* You deposit $1,000 and use 3x leverage.
* The platform borrows an additional $2,000 on your behalf.
* Your total investment becomes $3,000.
* The APR of the interest-bearing asset is 50%.
* Borrowing APR is 20%.

### Step-by-Step Breakdown

| **Component**         | **Amount ($)** |
| --------------------- | -------------- |
| Initial Deposit       | 1,000          |
| Borrowed Funds        | 2,000          |
| Total Investment      | 3,000          |
| Yield from Investment | 1,500          |
| Borrowing Cost        | −400           |
| **Net Profit**        | **1,100**      |

Without leveraging:

* Yield from a direct deposit of $1,000 at the same APR:

$$
1,000\times50%=500\text{ USD annually}
$$

By leveraging at 3x:

* You’ve increased your net profit from $500 to $1,100 — more than double.