Leverage
The use of borrowed capital to increase the size of a trading position beyond what the trader's own funds would allow. Leverage amplifies both gains and losses — a 10x leveraged position earns 10x the profit on favorable moves but also faces 10x the losses and can be fully liquidated by a relatively small adverse price movement.
“With 10x leverage, a $1,000 deposit lets you control a $10,000 position. A 5% price increase yields a 50% gain ($500), but a 10% drop liquidates your entire position.”
Liquidation
The forced closing of a leveraged position or the seizure and sale of collateral when a borrower's position falls below the required margin or collateralization ratio. In DeFi lending, liquidation occurs automatically via smart contracts when the value of collateral drops below a protocol-defined threshold, protecting lenders from bad debt.
Margin Trading
Trading with borrowed funds to amplify potential returns, using existing crypto holdings as collateral. The trader posts a 'margin' (collateral) and borrows additional funds from the exchange or protocol. If the position moves against the trader beyond the maintenance margin, it gets liquidated to repay the borrowed amount.
Perpetual Futures (Perps)
A type of derivative contract that lets traders speculate on a cryptocurrency's price with leverage, without owning the underlying asset or dealing with expiry dates. Unlike traditional futures that expire, perpetual futures use a funding rate mechanism — periodic payments between long and short traders — to keep the contract price anchored to the spot price.