Let’s consider the example of Alice, who wants to open a 3x leveraged farming position on $ETH/$USDC to take advantage of the high yield rate. Here’s how she can proceed:
Alice needs to provide collateral, such as 100 $USDC, to borrow more from the lending pool and leverage her position. Extra Finance allows users to provide single or dual assets as collateral, so Alice can choose to provide either $USDC or $ETH, or both.
Alice selects the leverage factor she wants to apply. Extra Finance offers leverage ratios like 3x and higher, depending on the risk level of the underlying pools. The assets provided by Alice, along with the borrowed assets, are swapped into an appropriate ratio for the automated market maker (AMM) to accept and mint LP tokens. The swap(or ZAP) process is handled automatically by the protocol with the best route, and Alice’s position starts generating farming rewards.
Where do the rewards go? On Extra Finance, reward emissions are automatically converted and reinvested into LP tokens, maximizing the yield rate. Instead of having a separate claim button, the protocol periodically collects the rewards, leading to a continuous increase in the amount of LP tokens held by the user.
And finally, how is APR/APY calculated? If the farming APR of $ETH/$USDC on Velodrome is 20% and the borrowing interest of $ETH is 8%, then the APR of 3x leverage farming position = (20% * 3) - (8% * 2) = 44%, and the corresponding APY is around 54.05%! (under a monthly compound frequency)
Leverage farming and lending on Extra Finance offers several advantages:
Liquidity providers enjoy a multiplied APR. And users could implement different strategies (like long/short or delta-neutral farming) by borrowing different assets to leverage.
High APR for Lending.As there are at least one related farming pools that frequently borrow assets from the corresponding lending pools, it results in higher lending interest and utilization compared to typical lending protocols - these assets are in constant demand.
Amplify low-risk yield for stable & LST assets. Leveraged farming amplifies the low-risk stable pool farming performance. For stable pools like the $USD+/$DOLA or wstETH/WETH, as long as the paired assets remain pegged, the risk of liquidation is relatively low.
Risks to Be Aware Of
While Extra Finance helps yield farmers amplify their yield rate, users should be aware of the following risks:
Impermanent Loss: Farmers must understand the concept of impermanent loss, which occurs when the price of one token in the liquidity-providing position fluctuates compared to another token. The greater the difference, the higher the vulnerability to impermanent loss, resulting in less valuable assets upon withdrawal.
Liquidation: If the debt ratio (debt value/position value) of a farm exceeds the liquidation threshold, the position will be liquidated. This means that borrowed funds will be returned to the lender, and any remaining portion will be returned to the user. It is crucial to monitor the debt ratio and ensure it stays within safe levels to avoid liquidation. In the case of stable pools, as both paired assets are stablecoins/LST assets, the chances of liquidation are lower. However, in the event of a de-peg between the two assets, liquidation could theoretically occur.
By understanding how leveraged yield farming works on Extra Finance and considering the associated risks, users can make informed decisions to maximize their earnings. Leveraging a stable pool like $ETH/$USDC can provide attractive yield rates while depositing assets in the Lending Pool allows for steady passive income through lending interest. It is important to carefully assess the risks, such as impermanent loss and liquidation, and actively manage one’s positions to mitigate potential drawbacks and ensure a successful farming experience.