Basic Leverage — Solana User Guide
This will be a pragmatic guide on how to use leverage to operate between “never use leverage” and maxing out the leverage slider like a degenerate. I’ll walk through the market setup, have a guide on how to set it up, and how to break it down.
Current Conditions:
I’ve been operating on the idea that prices will move sideways throughout the summer and begin ramping up in the fall. If I’m correct then I should be acquiring more assets during this window and there has just been a lot of selling (July 4 ‘24).
I don’t want to deploy any more fiat so I’m going to take some leverage. Leverage is borrowing capital so that you can get more exposure to a position with less of your own capital.
How to set up the position:
Assumptions: You’ve got a wallet and have Sol in it.
Connect Wallet:
-Navigate to https://app.kamino.finance/
-“Connect Wallet” at the top right
-Select wallet provider
-Press “Connect”
Lend Sol:
-Navigate to the “Borrow / Lend” tab on Kamino
-Scroll down to the “Main Market” section
-Find the “Sol” asset row
-Select “Supply”
-Enter 100$ worth of Sol and press “Deposit”
-“Confirm” the transaction
Borrow USDC:
-Staying in the “Main Market” section
-Find the “USDC” asset row
-Select “Borrow”
-Enter 10$ and press “Borrow USDC”
-“Confirm” the transaction
Buy Sol:
-Navigate to https://jup.ag/
-Connect walet like you did on Kamino
-Make sure you’re on the “Trade” and “Swap” tabs
-Under “You’re Paying” select “USDC” and type in “10”
-Under “To Receive” select “Sol”
-Press “Swap”
-“Confirm” the transaction
Setup Review:
I had 100$ of Sol, but now I have 110$ of Sol.
I borrowed 10$ of USDC which has a dynamic interest rate. Assuming the interest rate is 20% and I plan to borrow for 6–12 months then I’ll owe between 11$-12$. The bet is that the Sol I bought with the USDC will be worth significantly more than what I will owe in that time frame and I can pocket the difference after repaying my loan.
The risk I’ve taken on is that I have borrowed 10$ with 100$ worth of Sol as collateral, which can fluctuate in value. This means my starting Loan-to-Value(LTV) is 10%
Kamino’s liquidation LTV is 75%. If the value of the Sol I’ve deposited drops by 86.66$ then Kamino will sell the Sol automatically to repay the person I borrowed the 10$ worth of USDC from.
The Sol I’m lending is receiving an interest rate. Assuming the interest rate is 4% and I lend those assets 6–12 months then I’ll receive 102$-104$ worth of Sol. The value of Sol isnt that stable, but it’s worth noting you get some interest here in your favor.
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How to close the position:
Assumptions: It is 6 months later and the price of Sol has doubled. I’m starting this process with 20$ worth of Sol in my wallet.
Sell Sol:
-Navigate to https://jup.ag/
-Make sure you’re on the “Trade” and “Swap” tabs
-Under “You’re Paying” select “Sol”
-Under “To Receive” select “USDC” and type in “11”
-Press “Swap”
-“Confirm” the transaction
Repay USDC:
-Navigate to https://app.kamino.finance/
-Select the “Borrow / Lend” tab
-Expand the “Main Position” drop down
-Identify the “Borrowed” section
-Select the three vertical dots to the right of the USDC asset
-Press “Repay”
-Enter “11”
-Press “Repay USDC”
-“Confirm” the transaction
Withdraw Loan:
-Stay within the “Main Position” drop down
-Identify the “Supplied” section
-Select the three vertical dots to the right of the Sol asset
-Press “Withdraw”
-Select “Max”
-Press “Withdraw Sol”
-“Confirm” the transaction
Review Close:
I started with 100$ worth of Sol. I ended with 213$.
200$ from the initial amount deposited into lending.
4$ from interest on the lending position.
20(sol value) — 11(loan + interest) = 9$ leftover from the leverage position after repaying the loan.
I made 13% more than if I had just sat on the Sol.
Let’s quickly review if the price of Sol went down 50% instead.
I started with 100$ worth of Sol. I ended with 45$.
50$ from the initial amount deposited into lending.
1$ from interest on the lending position.
5(sol value) — 11(loan + interest) = -6$ in the hole.
The really dangerous property of leverage is that if I use all my capital on a levered position and it goes negative then I don’t have any way pay off the loan. I can no longer sell the Sol for enough USDC to repay. Then I’m trapped, waiting for prices to go up, praying not to be liquidated.
Kamino has a “Repay with Collateral” feature, but this is rare for lending platforms.
Wrap Up:
I’ve met a lot of people who say “you should NEVER use leverage”. I use it responsibly and it acts as an accelerant as long as it’s used in conjunction with good decision making, risk management, and as part of a larger portfolio strategy.
The example I gave is with extremely small numbers and a conservative loan-to-value ratio, which is how anyone looking to explore with leverage should start. Once you’re comfortable, you can explore advanced ways to beat the interest rate you’re paying and higher LTVs.
Not financial advice, for educational purposes only.
