Leverage is a tool used in Yield farming to increase user exposure to a strategy. A user will borrow the vault's base asset from a lending pool, using their tokens as collateral and pledging to pay interest on the loan. This user is rewarded with more yield as they have provided more tokens in the vault.
Undercollateralized lending allows borrowers to access more funds than the value of their assets by not requiring equal collateral to the amount of the loan (borrow > assets owned). When utilized to increase a position in an investment strategy, this becomes leverage.
Yield farming with leverage requires two participants. Lenders and borrowers.
Lender: Deposit their single tokens into a lending pool. Borrowers can then come to this lending pool and borrow the lender's assets, paying a fee that gets distributed back to the lender. Through Rodeo Finance, lenders can receive very high APYs compared to traditional lending services because of the utilization of under-collateralized loans.
Borrower: Utilizes the single tokens in the lending pool as leverage for their positions.