How to choose an asset for Leverage?

YLDR lets users create leveraged Uniswap V3 positions.

As mentioned in "this article" leveraged position is created by using borrowing assets. Users usually have an option to choose an asset for borrowing.

So, how users should decide which asset to borrow to create leverage?

Let's have a look at the example.

Let's assume the user has an ETH/USDC position on Uniswap V3. Suppose, his liquidity is distributed equally between Ethereum and USDC and the user does not have any additional hedges.

TLDR:

1. If you are bullish on Ethereum then choose USDC to borrow for leveraging

2. If you are bearish on Ethereum or want to hedge your position then choose ETH to borrow for leveraging

It means that his total value in USDC equivalent will increase if the price of Ethereum goes up. And if the price of Ethereum decreases its total value in USDC will decrease. The user's PNL is the same as in the screenshot below.

PNL of non-hedged position. Source: https://www.desmos.com/calculator/669zg1rmvb

If the user uses USDC to leverage the position

Then his PNL does not change. But as the initial Uniswap position is leveraged it means that the user will earn more if the price of Ethereum goes more and loses more if the price of Ethereum decreases.

The more position is leveraged the more exposure to the price of Ethereum.

If the user uses Ethereum to leverage the position

In this scenario, the PNL graph will change. Because the user borrowed Ethereum, it means that the debt value will increase if the price of Ethereum goes up and decrease if the price goes down.

Then if the user uses 2x leverage for his position he will get approximately the position on the screenshot below. You can see that in this scenario the final position distributes the risk between rise and fall of the Ethereum price. If you think that price of the Ethereum will not change then you might want to use Ethereum to leverage your initial position.

PNL of 2x leveraged position and Ethereum used as a collateral.