Note: This article is not financial advice. The Hubble protocol does not support any of the tokens or platforms mentioned in this article.
The central theses
- Leveraged yield farming is an advanced and high-risk DeFi strategy.
- Users can optimize LYF positions according to their market prospects.
- It is possible to take short, long or delta neutral positions with LYF.
This article covers the basics of leveraged yield farming on Solana. This is the most advanced topic in Hubble’s series on yield farming, so users might benefit from these introductory and intermediate articles as they get started:
This article is not financial advice. Participating in decentralized finance (DeFi) through leveraged yield farming can increase the complexity of entering, tracking and managing positions, so novice users are strongly advised to proceed with caution.
On the other hand, leveraged yield farming offers many bells and whistles that can help active users generate yields in various market conditions. Even during downtime, leveraged yield farming positions can be adjusted to manage market conditions and generate returns.
Multiply token rewards with leveraged yield farming
Have you ever found an amazing yield farming opportunity and wished there was more capital for the position? Disappointed that DeFi lending relies on overcollateralization and isn’t capital efficient? Tired of waiting for the market to “come back” to start yield farming again?
Users who answered yes to these questions may find some benefits in participating in leveraged yield farming. Protocols like Francium, Apricot Finance and Tulip Protocol alleviate several pain points in yield farming by giving yield farmers access to their money markets to expand and adjust their positions.
Each of these projects allow users to deposit tokens for lending and these are then used to facilitate leveraged yield farming. Because the protocol – not the user – handles the yield farming position (borrowing, depositing liquidity, and automatically compounded rewards), loans can be undercollateralized to maximize capital efficiency as it mitigates the risk of unpaid debt.
Leverage maximizes exposure to a borrowed token strategy, proportionally increases returns from farming, and can minimize downside in the event of liquidation. Borrowing assets to leverage yield farming allows users to multiply their starting position or pursue different strategies based on where they think market trends are headed.
Adjust leveraged yield farming strategies to maximize capital efficiency
Leveraged Yield Farming makes it easier for users to find a way to successfully participate in yield farming in almost any market condition. Borrowing for leverage allows users to take agricultural positions that are long, short, or delta neutral.
Yield farming is a DeFi primitive that emerged during the last bull market and since the summer of 2020, each yield farmer is trying to find their own optimal strategy. Typically, they provide liquidity on an Automated Market Maker (AMM), stake their LP token, and then receive token rewards on top of the fees they earn as an LP (Liquidity Provider).
This is now essentially Yield Farming 1.0 or Vanilla Yield Farming and it is not the most efficient way to allocate capital in certain market conditions.
Vanilla Yield Farming APYs can be expanded with vaults that automatically convert rewards back into an LP position, and users can take it upon themselves to borrow the farmed assets if they want to expand their position “by hand”, but as mentioned, Overcollateralised DeFi lending is not very capital efficient and the process can be time consuming.
The fees for executing each transaction can also negatively impact the bottom line. However, thanks to Solana’s scalability and low cost per transaction, leveraged yield farming is a breeze. Getting started with leveraged yield farming on Solana is relatively easy, and protocols work to make the experience more user-friendly with each update.
How to start leveraged yield farming for beginners
Francium, Apricot, and Tulip each provide templates for setting up a leveraged yield farming position. This is a useful tool for helping beginners stay on top of things, and these templates allow anyone to customize what assets to borrow and at what ratio to get better use out of their farming for the foreseeable future.
There is absolutely no guarantee that the strategy a user believes will be the most capital efficient over the long term. However, leveraged yield farming protocols at least allow DeFi users to more easily enforce their beliefs about the market without having to resort to multiple protocols.
In the next few sections, this article will explain what it’s like to take different positions on three of the main protocols that offer leveraged yield farming on Solana. There will be some differences between projects as each protocol takes a slightly different approach to the templates provided.
Longing for leveraged yield farming positions
In these positions, users borrow stablecoins and exchange them for the token they want to buy. Here is an example from the Tulip Garden of a 2x leveraged long SOL position.
A 2x long leveraged position
Note that only USDC is borrowed. It is swapped from the log into SOL to create a long position.
Looking at the chart estimating future price action, the “farm profit” follows a similar trend line as the hold. Impermanent Loss (IL) sets in at the top and bottom of price action.
Well, here’s a look at what a 3x leveraged long position can look like.
A 3x long leveraged position
Here there is more exposure to SOL, but the liquidation line has moved much further up the chart towards the current price. Notice how operating profit from SOL’s price appreciation exceeds holding profits.
Shorting leveraged yield farming positions
When users short a position, they are borrowing the token that they believe will decrease in value as they farm. Here is an example of what it looks like to short SOL to Francium 3x.
A 3x short leverage position
The chart shows that operating profits increase as SOL depreciates. This is because the SOL was borrowed for that position and when it comes time to return that SOL there should be more of it in the position. As the price of SOL goes down, the LP position on an AMM is rebalanced due to arbitrage, and by doing so it essentially becomes DCA (Dollar Cost Average) into a heavier SOL position.
Details of how assets are borrowed and swapped for a leveraged short position
This position borrowed 127.81 SOL. If this leveraged short position is liquidated after SOL has declined in value, there should be more SOL to return than was originally borrowed.
On the other hand, if the value of SOL increases, this position could be liquidated.
Neutral and pseudo-delta neutral leveraged yield farming positions
Apricot allows users to choose a neutral template that borrows both assets. This isn’t the same as “craving both sides,” which requires first borrowing stablecoins and then trading them for two volatile assets that you think will appreciate in value.
The same values shown in the previous examples were awarded to Apricot to participate in leveraged yield farming on its platform: 1,841.25 USDC and 11.76 SOL. Note the size of the position that can be taken with a neutral template strategy.
A neutral position on Apricot
This position only leaves a buffer of about 10% before triggering a liquidation, but quite a bit more capital is used to render the farm than was initially available!
In a neutral pseudo-delta position, the asset-borrowed ratio is adjusted somewhat to reflect a crab market with some room for price depreciation. Notice how the chart reacts when USDC/SOL is borrowed at a 25%/75% ratio.
A pseudo-neutral leveraged position
Yield farming and users have evolved with leveraged positions
In the past, yield farming was prone to attracting toxic liquidity, farming a new project for rewards and withdrawing liquidity within the first 48 hours, discarding tokens in the process. This has proven to be an unsustainable model for the DeFi community for obvious reasons.
Almost all of the leveraged yield farming opportunities provided in these examples can be used for more than 48 hours without using the system. Tokens have to be borrowed before they can be borrowed for leverage (someone has to hold them) and this seems to rule out the possibility for shitcoin farming.
Some vocal members of the DeFi community have stated that yield farming is dead, but perhaps it has just taken on a new, more mature form. It’s a far cry from Ponzinomics.
Users who use leveraged yield farming to participate in sustainable revenue-generating practices may be exposing themselves to greater risk and potentially greater rewards, but they are also increasing the capital efficiency of providing liquidity through traditional AMMs (concentrated liquidity is another matter). Game).
While leveraged yield farming may look incredibly deviant, it really is more aligned with realistic goal setting and sustainable DeFi than yield farms built for yield farming.
Users who take the time to tweak the parameters of their leveraged yield farming positions have the opportunity to discover strategies that could yield net positives even outside of the hustle and bustle of a bull market and with great capital efficiency.
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