# What is leverage
Stack is a very powerful tool, but it's important to understand the different financial opportunities it offers to benefit from all the features at their true potential. In this guide, we will present what leverage is, how it works on Stack, the benefits you can get by leveraging your assets, but also the risks of doing so.
## What is leverage
Stack is a **C**ollateralized **D**ebt **P**rotocol (CDP), meaning that you can borrow assets on Stack against another asset that you lock in a vault. On Stack, the loan that you take is denominated in $MORE, a stablecoin pegged to the U.S. dollar.
CDPs are in most cases used to leverage assets. This means that you will be able to
* deposit your collateral in the Stack vault
* borrow the $MORE stablecoin
* sell the stablecoin to buy additional collateral
* restart with the first bullet point
As an example, let's assume you use USTB as collateral. The leverage loop would look like this:
This loop cannot be repeated indefinitely though, as Stack as a few limitations. The main limitation is the LTV (**L**oan **T**o **V**alue ratio) that will depend on the collateral asset. For the USTB vault, the maximum LTV is 90%, meaning that the value of your loan can be up to 90% of the value of your collateral. As both USTB and MORE are pegged to the U.S. dollar, this means that in our example, you can borrow 0.90 MORE for each 1 USTB you deposit as collateral.
As an example, if you target a LTV of 80%, the value of your collateral and loan at each step of the loop would be as follows:
| Loop step | Collarteral Value | Loan Value | Leverage |
| --------- | ----------------- | ---------- | -------- |
| 1 | 100.00 | 80.00 | 1x |
| 2 | 180.00 | 144.00 | 1.8x |
| 3 | 244.00 | 195.20 | 2.44x |
| 4 | 295.20 | 236.16 | 2.95x |
You see that, with each step, your collateral grows, but the amount of money you can borrow is smaller and smaller. But in the end, your LTV always remains below the 80% target, especially if you end by adding USTB to your collateral and don't borrow anymore.
{% hint style="success" %}
With Stack, you don't need to leverage manually your assets, you can do it in a single click. Simply set the leverage level you want to achieve and Stack will
* mint the total number of $MORE tokens required to achieve the final leverage level
* swap all the borrowed tokens for the collateral tokens on Pearl
* deposit the new collateral in your vault
{% endhint %}
## Benefits of leveraging your assets
On the re.al blockchain, you will quickly notice that pretty much all tokens are yield bearing assets. This means that they earn yields from real world assets, and this yield is ported to the token in the form of balance or value rebases.
Continuing with our example, USTB is a token backed by U.S. treasury bills that earn token holders an average of 4.95% APR. In other words, if you hold 1 USTB on day 1 and keep this token in your wallet, after a full year and assuming the USTB APR remains the same, you will have 1.0495 USTB in your wallet without doing anything.
When the USTB is deposited in the Stack vault, the same rebase mechanism occurs too. Using leverage on Stack with the USTB vault presents then a very good opportunity to maximize the yield from USTB.
* without leverage, if you hold 100 USTB in your wallet, you will have 104.95 USTB after 1 year
* with a 5x leverage and 100 USTB on Stack, the APR of USTB is applied on 500 USTB, so after one year, the yield will be $24.75. You can then deleverage and get your 124.75 USTB after you closed your position, realizing a 24.75% APR.
{% hint style="warning" %}
The calculation above assumes that there are not fees associated to your loan. In reality, you will have to monitor your position to make sure the yield from your collateral is higher or equal to the interests of your loan to make sure your leveraged position is making money. More details in [the risks section](#risks-of-leveraging-your-assets).
{% endhint %}
Leveraging assets can also be seen as longing an asset. Indeed, you are selling stablecoins to buy another asset, so if you have faith that the token you use as collateral will increase in price, it may be a good idea to increase your exposure to this token.
{% hint style="success" %}
On re.al, you would then be able to leverage reETH if you think that ETH has the potential to grow in value. Also note that reETH is also a rebase token earning staking yields with a 3.27% APR as of writing this guide.
{% endhint %}
Assuming you monitor your Stack position properly and see that the value of your collateral position is growing faster than the debt, you will also notice that the LTV goes down. Stack will let you readjust the leverage level at any point in time to make sure you are maximizing your gains.
## Risks of leveraging your assets
If leveraging presents some good advantages, it also presents risks associated to fees on your loan, as well as liquidation risks if the asset you use as collateral goes down in value. Since there is (or will be) a complete section to explain liquidations, we will really focus on the risks associated to fees and interests in this guide.
### Upfront opening fee
Whenever you borrow on Stack, you will have to pay a flat opening fee of 0.50% of the loan you are taking. So, assuming you want to borrow 100 $MORE, the real amount of tokens you will be borrowing in 100.50 $MORE, that you will have to eventually repay.
But with leverage, you will be multiplying the amount you borrow. In the example we mentioned in [the benefits section](#benefits-of-leveraging-your-assets), we had
* a 100 USTB initial collateral position
* a 400 MORE loan transformed in USTB
This means that the opening flat fee of your leveraged position will be $2. With an APR on USTB of 4.95% and a 500 USTB collateral position, it will take roughly 30 days to "pay back" this flat fee.
### Borrowing fees
If leverage is a good way to multiply the yields on your collateral, it will unfortunately also apply the same multiplier on the interests of your loan. As of writing, the borrowing fee on Stack is 0.31%. This rate is applied on the total loan. So, taking again the same example of 400 MORE borrowed, your loan will effectively be 402 MORE and you will have to apply the 0.31% interests on this amount, meaning that after 1 full year, your will have to repay 403.25 MORE. The extra 1.25 MORE are coming from the interests.
Now, if you compare this to your initial 100 USTB, it corresponds more to a 1.25% interest rate. If you keep your loan for 1 year, that's 18 days of yields that will be dedicated to repay the interests of the loan, and that's assuming the interests stay at 0.31%. If that number goes higher, you will obviously have to pay more interests, lowering your final gains.
## Final thoughts
Leveraging is an amazing tool, especially when the collateral asset offers high yields. But it's absolutely not a "set and forget" strategy since you will have to keep an eye on your position to make sure that, at the end of the day, you are still making money. Thankfully, Stack offers all the tooling required to easily monitor this, including all the small details linked to opening a leveraged position, including
* value of the total loan
* opening fees
* borrowing fees
* final equivalent APR
There is nothing hidden in there, and if you are not happy with the product or if you feel you are not making the money you wanted because the interests are just eating all your yields, you can partially deleverage to reduce what you are paying in fees, or fully exit anytime.
---
# Agent Instructions: Querying This Documentation
If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.
Perform an HTTP GET request on the current page URL with the `ask` query parameter:
```
GET https://real-community.gitbook.io/re.al-community/stack/what-is-leverage.md?ask=
```
The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.
Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.