What is Leveraged Yield Farming?

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DeFi users are chasing higher investment returns from platform to platform and network to network. Undoubtedly, leveraged yield farming is one of the popular choices among these experienced DeFi users to maximize their profits.

Yield farming grants users additional incentives for providing liquidity to a liquidity pool. For instance, leveraged yield farming is a mechanism that allows users to ramp up their yield farming position by borrowing funds, in order to multiply their yields. In other words, you borrow funds so you can invest more, and as a result, to earn more! But of course, you have to pay borrowing interests for the extra capital.

In addition, different from most of the traditional lending platforms, leveraged yield farming allows users to borrow undercollateralized loans. The undercollateralized lending model not only establishes higher capital efficiency for yield farmers but also for lenders. Moreover, it also creates a higher utilization rate of the lending pool, sometimes hitting more than 90%.

The higher the utilization rate of the lending pool, the more the lender gains. This means at 80% utilization, the borrowing interest paid to lenders will be much higher than that at 10%. However, if the interest rate is too high, lenders are more at risk when prices fluctuate. Thus, a reliable lending pool should maintain balance between risks and rewards.

If you are interested in leveraged yield farming, here are some primary strategies for you!

Leveraged Yield Farming Trading Strategies

Leveraged Long

If you have a bullish view on a token, you can consider farming it at more than 2x leverage, borrowing the token opposite your held token.

For example:

First, if you have confidence in ETH, you can open an ETH-USDT position, borrowing USDT at 3x leverage. For this example, you’ll add $1000 USD-worth of tokens as collateral.

  • Deposit: $1000
  • Total position value: $3000 (borrowed 2000 USDT)

$500 worth of the borrowed USDT will be swapped to ETH to make a 50:50 farming ratio.

Exposures:

As USDT is a stablecoin pegged to USD, and it is very stable in price, so the position of the stablecoin is effectively neutral.

  • USDT: short 500
  • ETH: long 1500

In this case, at 3x leverage, you will have 1.5x leveraged long on ETH.

Leveraged Short

Although corrections are regular parts of investing, leveraged yield farming offers you profit-making opportunities in a bearish market.

For example:

If you believe ETH will fall, you can short ETH by farming ETH-USDT while borrowing ETH at more than 2x leverage.

You can open an ETH-USDT position, borrowing ETH at 3x leverage

  • Deposit: $1000
  • Total position value: $3000 (borrowed $2000 worth ETH)

$500 worth of the borrowed ETH will be swapped to USDT to make a 50:50 farming ratio. In this case, you will have a short position on ETH.

  • ETH : short $500

Pseudo Market-Neutral Strategy (Delta-zero Position)

If you are conservative but still want to maximize your profit, you can achieve a delta neutral position by combining the strategies mentioned above. In this case, you need to borrow the exact worth of non-stablecoin and stablecoin assets in a leveraged position.

For example:

You want to farm on ETH-USDT, you have to open a position that borrows two assets.

Deposit $1000 worth of USDT and borrow $2000 worth of USDT with a 3x leverage

  • Deposit: $1000
  • Borrow: 500 USDT + 1500 ETH (since the total position will be $3000, $1500 will be used to long ETH)
  • Total position value: $3000

The exposures on ETH will be nullified. As we explained in the previous strategies, we can ignore the exposure of stablecoin.

  • ETH: long 1500 - short 1500 = 0

Conclusion

By using the above strategies, leveraged yield farming can accommodate many different market conditions. With smart usage of leverage customization, leveraged yield farming offers high earning potential, even on market-neutral positions, regardless of bullish or bearish market. Notably, Single Finance provides single-click leveraged yield farming strategies like Pseudo Market-Neutral Strategy, which we will explain more in future articles.

With Single Finance, leveraged yield farming platforms on DeFi are no longer limited to experienced users. By deploying the right strategies, we have lowered the barrier of entry so that even crypto newbies can gain substantial profits!