Introduction to Leveraged Yield Farming

What is Leveraged Yield Farming?

Leveraged Yield Farming (LYF) is a key feature of Extra Finance, which allows users to amplify their returns on investments by borrowing additional funds to invest in a liquidity pool. This is achieved by using the funds as collateral to borrow stable/non-stable coins, which are then used to purchase additional tokens. These tokens are then added to the liquidity pool, increasing the overall value of the pool and providing additional returns to the user.

Practically, LYF is one of the most efficient ways to maximize your capital efficiency. It requires no additional asset as collateral, which means you can enjoy the full earning amplification from the leverage. And also, a well-designed LYF strategy can greatly reduce the effect of impermanent loss (IL).

Example from Luca

To make those points clear, let’s take an example: Luca has $1000 ETH and $1000 USDC. He deposit and stake those tokens into the ETH-USDC pool to enjoy a 20% APR liquidity farming return. However, he is not satisfied with a 20% return regarding long-term volatility. So he starts to reinvest his earning interest into the pool. The reinvesting can help boost the 20% APR to reach a maximal …… 22.1% APY (The formula for an upper limit of compound APY is $e^{APR}-1$, ignoring the gas fee and taking the reinvest interval to be very short). This looks bad, if you also take the gas fee into account (and the rising energy fee to charge your laptop), you might even end up with a lower than 20% APR.

So, how can we help poor Luca? Right, with LYF. Now Luca finds a protocol called Extra Finance and starts to play with it. He opens a 3x leverage position (with $2000 ETH and $2000 USDC borrowed) and invests in the same pool. Let’s take the effective borrowing interest rate as 5%, the total APR now is 3*(20%)-2*(5%) = 50%. And the compound APY will reach 64.8%! A huge difference, right?

(Boring math here. To be rigorous, the ideal compound APY can be calculated by the following formula:

$$APY=e^{l\times APR-b-g}-1$$

where we label $l$ as leverage ratio, $b$ as borrowing interests against initial value, $g$ as the ratio of gas fee against initial value, and $e$ is the Euler’s number.)

Now Luca is happy with the APY, but another issue begins to bother him — the infamous impermanent loss (IL). With 3x leverage, not only the return but also the potential IL will be larger. IL is a long-standing problem with AMM, many tried to solve but yet no perfect solution. However, with LYF and a smart strategy, you can actually turn this disadvantage into an advantage. Luca predicts the price of ETH will keep rising in the next three months (this Luca is smart), so instead of borrowing the equal value of two assets ($2000 ETH and $2000 USDC), he decides to remain the same leverage rate (3x) but only borrow USDC ($4000 USDC). Why is that? Because borrowing more USDC than ETH is actually creating a long position of ETH!

(Boring math again. In Luca’s case (initially with an equal amount of both assets), the ideal long profit rate with LYF can be calculated by the following formula:

$$Long=l\sqrt{\frac{p}{p_0}}-(l-1)$$

where we label $p$ as the current price of ETH and $p_0$ as the initial price when opening position.)

What advantages does Luca’s strategy provide? 1. it greatly compensates the IL loss on both side (no matter whether prices rise or drops) and 2. it outperforms the others at a large price range.

Apart from Luca’s strategy, there are much more possibilities to customize the return curve with LYF. With different leverage rates and borrowing combinations, a LYF position can be created to adjust any market condition.

What can Extra Finance help?

Extra Finance makes LYF easy to access for everyone. It allows users to farm up to 3x leverage, providing users with the ability to maximize their returns in a safe and secure manner. The platform also offers a variety of liquidity pools to choose from, and various strategy combinations to reach your earning goal.

Note: Leveraged yield farming can be risky, as it involves borrowing funds to invest in a volatile market. Users should conduct thorough research before making any investment decisions.