# Example

## Overview

Let’s imagine a scenario where a liquidity provider has lent out a ETH/USDC LP token on InfinityPools. The LP token is worth 1000 USDC and is deployed in a tight liquidity range centered at 900 USDC.

A trader, wanting to go long ETH with leverage, could then borrow that LP token and redeem it for 1000 USDC. Assuming the current market price of ETH is 1000 USDC, the trader could then swap the 1000 USDC for 1 ETH, minus fees and slippage (using a spot DEX of their choice). There are now three possible scenarios:

**Scenario A:**If the price of ETH goes up, the trader makes money and can swap back a part of the 1 ETH for 1000 USDC to pay back the LP token.**Scenario B:**If the price of ETH goes down to right above 900 USDC, the 1 ETH the trader holds is worth 900 USDC and the liquidity provider is expecting back an LP token worth 1000 USDC. The trader therefore needs to start out with 100 USDC (or ~0.11 ETH) in collateral in order to pay back the full LP token.**Scenario C:**If the price of ETH goes below 900 USDC, the liquidity provider is expecting back an LP token worth 1.11 ETH. The trader already holds 1 ETH and the remaining 0.11 ETH is worth, at most, ~100 USDC. Therefore, same as with scenario B, the trader needs to start out with 100 USDC or 0.11 ETH in collateral in order to pay back the full LP token.

The minimum collateral requirement for a trader borrowing an LP token worth 1000 USDC at the 900 USDC liquidity range is therefore ~100 USDC (~10x leverage). It follows that the closer the liquidity range borrowed is to the current market price of ETH, the more leverage it enables. For example, if the liquidity range borrowed was deployed at 999 USDC, the maximum loss / initial collateral required would be 1 USDC, which corresponds to 1000x leverage.

## Trade payoff function

The chart above shows the payoff functions for the trader and the corresponding liquidity providers, and excludes the interest rates paid. Interest rates paid by the borrower in this scenario would be ~1 USDC for a one day trade (~0.1% daily rate), assuming normal levels of volatility. In the case where the price of ETH drops below 900 USDC, the trader’s position remains open and the same payoff function continues to apply as long as the loan isn’t closed out.

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