Leverage Cap

A leverage cap is the maximum amount of borrowed capital that a trader can use relative to their own equity in a position. It is a fundamental tool for managing the risk of loss in derivative trading.

By limiting leverage, protocols prevent traders from taking on excessive risk that could lead to rapid liquidations and market instability. The leverage cap is often determined by the volatility of the underlying asset.

For highly volatile assets, the cap is lower to protect the protocol. Traders must understand the leverage cap to calculate their maximum potential position size and risk.

It is a critical parameter that balances the desire for capital efficiency with the need for systemic safety. Exceeding the leverage cap is typically prevented by the protocol's smart contracts.