Leverage
By using leverage, users can amplify their position with borrowed funds. This increases potential profit, but also potential losses and liquidation risk. Users are therefore advised to use leverage responsibly, and monitor highly leveraged positions carefully.
How leverage works
When opening a position with leverage, the user essentially borrows funds from the protocol to amplify his own exposure. For example: A user can open a position with a notional size of $100, but only deposit a collateral of $10. The user then effectively 'borrows' $90 from the vault. If the price increases with 10% and the user closes the position, the payout is $10 plus the collateral, and the $90 is returned to the vault. In this case the user has doubled the $10 collateral, after only a 10% change in the price. However, a 10% price shift the other way would have led to the user losing all the collateral.
Leverage limits
The maximum leverage depends on the market's margin parameter (initial margin). Upon opening a position, the following condition must be satisfied:
So if the margin is 0.01 (1%), the collateral has to be at least 1% of the notional size, and thus users can have up to 100x leverage. Different markets may have different margin requirements. After the position is opened, the effective leverage is governed by the liquidation threshold (liq_fee), fees accrued, and PnL as described here.