Extra Finance Deep Dive
Published in Vesper Finance.
Extra Finance is a leverage yield farming protocol built on Optimism.
Overview
What Is Extra Finance?
Extra Finance, driven by its community, aims to give users a way to dive into leveraged yield farming through different pools on Optimism. They are able to pull this off using applications such as Velodrome, a DEX, and liquidity protocol.
Users get to pick their style — whether that’s reinvesting, staying neutral, or engaging in long/short farming. And with the option to boost their positions at least up to 3x leverage (or more depending on the pool), they can tweak their strategies to fit their comfort level.
On top of that, Extra Finance also acts as a lending protocol. Users can drop funds into their lending pools and earn some interest on the side, creating more opportunities for passive income.
How Does It Work?
To get how Extra Finance works, let’s first break down what leverage yield farming (LYF) really means and why it’s an essential component of their protocol.
Leverage Yield Farming
LYF is like a boost button for users wanting to up their returns in a liquidity pool. It works through funds getting used as collateral to borrow different types of stable and non-stable coins. This can then be used to buy more tokens, which are then thrown into the pool, increasing the overall value. This bumps up the returns that go back to the user. It’s a popular DeFi strategy to get the most out of your capital without requiring additional collateral. This way, you can really stretch your assets from that boosted position.
But, like all things that involve capital, there’s a catch. With LYF, there’s the danger of your assets getting liquidated to cover any debts (since you’re borrowing to get that higher APY). Plus, there could also be impermanent loss. Picture holding two assets on a DEX, like a crypto and a stablecoin. If the crypto’s price drops compared to the stablecoin, you could face a loss from that price gap.
Extra Finance
As mentioned above, on Extra Finance, users have the opportunity to increase their potential returns through leveraged farming on pairs such as ETH-USDC. To jumpstart this process, you will first need to deposit collateral, which might include assets such as USDC, ETH, or even a mix of both (Extra Finance supports single or dual assets as collateral).
Following this, you can select the desired leverage level. This choice is tailored to each user’s individual risk appetite. Given its design, Extra Finance offers a range of leverage ratios, adjusted based on the risk associated with the underlying liquidity pools. After setting the leverage, Extra Finance swaps the assets — those you own and those you’ve borrowed — into the right ratio for the AMM to accept. This swapping is an automated process, ensuring that assets are routed in the most efficient way. Furthermore, you can simplify this process by utilizing one-click farming templates (long/short/neutral). Regardless of how you customize your farming position, you can always use the yield farming simulator to view the estimated amount you will earn before opening a position.
Once your position is locked in, the farming rewards will start to pour in. Rather than the traditional manual claim process, Extra Finance proactively reinvests your rewards. This approach means the rewards get consistently channeled back as LP tokens, which keeps bumping up the yield rate and optimizes returns.
Lastly, APR/APY is determined by comparing the farming APR of your selected pair with the borrowing interest. This leveraging approach can amp up the effective APR, which in turn shapes the corresponding APY, taking into account regular compounding intervals.
Tokenomics
Within Extra Finance lies their token, EXTRA, which can be locked in exchange for veEXTRA (their governance token). Earning EXTRA is straightforward and only requires users to contribute liquidity and, in turn, receive rewards through emissions. But there’s a way to boost these rewards. By choosing to lock in their EXTRA tokens, users can obtain veEXTRA, a concept known as vote escrow. If this sounds familiar, it’s because the idea was popularized by Curve Finance.
This vote-escrowed period can stretch up to a full year, or 52 weeks. The dynamics of it are linear: locking 100 EXTRA for the maximum period yields 100 veEXTRA, whereas doing so for a quarter of that time, say 13 weeks, results in 25 veEXTRA. The essence is that longer lock-ins translate directly to higher voting power.
However, owning veEXTRA isn’t just about voting power, it’s also a ticket to more perks. Holders can gain access to increased leverage options up to 7x in select yield farming pools, front-of-the-line access to high-demand lending pools, and a sneak peek into upcoming features (including access to strategy vaults). But, at its core, veEXTRA encompasses governance, enabling holders to help shape Extra Finance’s future by voting on community proposals.
Rewards-wise, APR comes from two places: protocol fees and the EXTRA token incentives. The protocol fee gathers various tokens into the treasury, which are then used to buy back EXTRA tokens from the market and handed out to those holding veEXTRA. There’s also a chunk of EXTRA tokens meant for the community that gets directed to veEXTRA holders in the future.
Summary
Extra Finance offers a specialized experience for DeFi users on Optimism, focusing primarily on leveraged yield farming. Through applications like Velodrome, it provides varied strategies from reinvesting to long/short farming. And please be well noticed that leveraged products involve significant risks due to their inherent nature, please use it at your own discretion.
Regarding their tokens, EXTRA and veEXTRA help further enhance the experience. By locking EXTRA, users not only increase their rewards but also gain a say in the protocol’s direction. The reward structure, rooted in protocol fees and token incentives, ensures that holding veEXTRA is both lucrative and influential.
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