Leverage Limit

A leverage limit is a protocol-defined cap on the amount of borrowed capital a user can obtain relative to their collateral. By setting these limits, protocols control the risk exposure of their users and, by extension, the protocol itself.

These limits are typically determined by the volatility of the collateral asset; more volatile assets have lower leverage limits. This is a critical tool for maintaining systemic stability.

If a user could take on unlimited leverage, the protocol would be extremely vulnerable to even minor price fluctuations. Leverage limits ensure that users maintain a reasonable buffer and that the protocol's risk management model remains effective.

They are a fundamental aspect of responsible lending and derivative platform design. Users must understand these limits when assessing their own risk tolerance.