What is leveraged yield farming?
Leveraged Yield Farming is a tool that DeFi users use to maximize their profits and generate higher returns on their investments.
In yield farming, users are incentivized when they provide liquidity to the liquidity pools.
Think of it like a pot that you deposit tokens into. As you deposit more and more and fill the pot, you will be rewarded with tokens as APY. Furthermore, leveraged yield farming is a system that allows users to increase their yield farming position and multiply their yield by taking out loans.
All of this is based on the simple concept that borrowing allows you to invest more, resulting in higher returns, since the extra capital only requires interest to be paid.
This system allows for better capital efficiency for both yield farmers and lenders. This is achieved through higher utilization of liquidity pools, resulting in higher lender profits. Put simply, at 80% occupancy, the loan interest paid to lenders is much higher than at 10% occupancy, making it more profitable for lenders. However, with a high interest rate, lenders are at greater risk of borrower defaults if rates fluctuate.
How does leveraged yield farming work?
The leveraged return consists of two integral components:
Lender depositing tokens to earn income
To understand how lenders can get better APYs in leveraged yield farming platforms, we need to understand how the lending platforms are used. With traditional DeFi lending platforms, the loans are collateralised. That means you need collateral to borrow the tokens, which limits a user’s creditworthiness.
Let’s take a scenario where a lending platform has 100 ETH and the farmer can only borrow 10 ETH due to the limited collateral. The utilization of the platform would be 10%. With leveraged yield farming platforms, the borrower could borrow 60 ETH, which is 60% utilization.
This higher utilization is important for lenders as most lending platforms have an interest rate model that increases with higher utilization and is based on the concept of supply and demand, where higher demand for credit leads to higher lending rates.
Farmer borrowing tokens from these pools to use leverage to generate agricultural yield
In a leveraged yield farming protocol, users first deposit any percentage of the two tokens. So, using ETH and USDT as an example, users could deposit either one or a combination of the two. The underlying protocol performs optimal swaps in the background to turn the tokens into a 50:50 split for the LP tokens.
Then, to gain leverage, farmers can borrow the token up to maximum leverage (1.25x to 6x depending on the pair and protocol). The protocol then uses an integrated DEX to convert all deposited and borrowed tokens in a 50:50 ratio to create the LP tokens for farming. When you stop farming, simply return the borrowed tokens.
How to start leveraged yield farming for beginners
types of positions
Leveraged long
If you are bullish on a token, you may consider farming it with more than 2x leverage and borrowing the token versus your held token.
Leveraged short
Leveraged Yield Farming gives you an opportunity to profit in a declining market by using short selling as a tool.
Pseudo Market Neutral Strategy (Delta Zero Position)
If you want to play it safe and still maximize profit, you can achieve a delta-neutral position by borrowing exact value of non-stablecoin and stablecoin assets in a leveraged position.
Popular leveraged yield farming projects
Apricot Funding (Solana)
Apricot Finance is a next-generation financing protocol that supports farming with cross-margin leveraged returns. The goal is to protect consumers’ disadvantages while helping them maximize production. Users can deposit assets to earn interest, borrow assets for trading or cross-margin leveraged yield farming, and preconfigure when and how automated debt reduction occurs.
Quick swap (polygon)
QuickSwap is a Layer 2 Decentralized Exchange (DEX) and Automated Market Maker (AMM). It is a fork or clone of Uniswap, a leading AMM. Aside from the fact that the unicorns have been replaced by magical dragons, the interface is pretty much the same. The difference is that QuickSwap uses the Matic/Polygon Layer 2 platform while Uniswap uses the Ethereum network.
Alpaca Funding (BSC)
Alpaca Finance is one of the largest lending protocols offering leveraged yield farming on the BNB chain. It provides borrowers with undercollateralised credit for leveraged yield farming positions and increases their profits while helping lenders generate safe and consistent returns. Alpaca serves as a facilitator for the entire DeFi ecosystem, increasing the liquidity of integrated exchanges and improving their capital efficiency by matching LP borrowers and lenders. Because of this powerful feature, Alpaca has established itself as a key component of DeFi.
Do’s and Don’ts of Leveraged Yield Farming
DOS
- Done right, leveraged yield farming can be extremely profitable. It allows both lenders and farmers to increase their yield opportunities compared to the regular yield farming process.
- Leveraged yield farming can allow a user to grow profitably even in a bear market. It gives the user the ability to strategize intelligently and protect against market downturns through short selling and hedging.
- The leverage in this process increases capital efficiency for both the farmer and the lender.
prohibitions
- It’s a double-edged sword, and as the return increases, so does the risk.
- Incorrect predictions can result in you ending up paying a lot more than regular yield farming.
- In addition to market unpredictability, leveraged yield farming suffers from traditional yield farming risks, protocol vulnerabilities, hacks, and more.
Diploma
In summary, leveraged yield farming as a tool is of great use to those users who want to maximize their yields. However, with its advantages come various shortcomings, such as: B. high risk, protocol vulnerabilities, as well as the usual shortcomings of DeFi such as unpredictability and lack of regulations. If a user is willing to accept the high risks of this system, leveraged yield farming can serve as a tool that allows the user to expect huge returns on the initial investment made.
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