In this article, we’ll cover the basics of leveraged yield farming on Solana. This is the most advanced topic in our series on yield farming, so you might benefit from our introductory and intermediate articles if you're starting out:
- The Basics of Yield Farming in Crypto
- How to Start Solana Yield Farming as a Beginner
- What are the Best Yield Farming Strategies on Solana?
- Video: Yield Farming with Raydium
This article is not financial advice. Participating in decentralized finance (DeFi) through leveraged yield farming can increase the complexity of entering, tracking, and managing your position, so it’s highly recommended that novice users proceed with caution.
On the other hand, leveraged yield farming provides a lot of bells and whistles that can help active users earn yield in any market. Even in down times, leveraged yield farming positions can be adapted to meet the circumstances and yield profits.
Multiply Your Token Rewards with Leveraged Yield Farming
Ever found an amazing yield farming opportunity and wished you had more capital on hand? Disappointed that DeFi lending relies on over-collateralization and isn’t capital efficient? Tired of waiting for the market to “come back” to start yield farming again?
If you replied yes to these questions, leveraged yield farming might be right up your alley. Protocols like Francium, Apricot Finance, and Tulip Protocol provide yield farmers access to their money markets in order to ramp up their yield farming positions.
Each of these projects allows users to deposit tokens for lending, and they are then utilized to facilitate leveraged yield farming. Since the protocol–not the user–handles the yield farming position (borrowing, depositing liquidity, and auto-compounding rewards), loans can be under-collateralized to maximize capital efficiency as there is zero risk of unpaid debts.
Leverage maximizes exposure to a strategy that can increase the equity that can be withdrawn, increases yield farming gains, and minimizes downside in case of liquidation. Borrowing assets to leverage yield farming allows users to multiply their initial position or follow different strategies based on where they think market values are going.
Adjust Your Leveraged Yield Farming Strategies to Maximize Capital Efficiency
With leveraged yield farming, you can more easily find a way to profit in nearly every kind of market condition, since you can take farming positions that are long, short, or delta neutral.
Yield farming is a DeFi primitive that emerged during the last bull market, and since the summer of 2020, every yield farmer has tried to find their own optimal strategy. Usually, you provide liquidity on an automated market maker (AMM), stake your LP token, and then you receive token rewards on top of the fees earned from being an LP (liquidity provider).
This is what we can now call Yield Farming 1.0, or vanilla yield farming, and it’s not the most efficient way to spread capital during certain market conditions.
Vanilla yield farming APYs can be enhanced with vaults that auto-compound rewards back into your LP position, and you can take it upon yourself to borrow the assets being farmed if you want to augment your position “by hand,” but as mentioned before, DeFi lending isn’t very capital efficient, and the process can be time-consuming.
The fees for executing each of these transactions can also eat into your bottom line. However, thanks to Solana’s scalability and low cost per transaction, leveraged yield farming is a breeze. Getting started with leveraged yield farming on Solana is relatively simple, and protocols are working to make the experience more user-friendly with every update.
How to Start Leveraged Yield Farming for Beginners
Francium, Apricot, and Tulip each provide templates for setting up a leveraged yield farming position. This is an incredible tool to help beginners get the hang of things, and from these templates, you can adjust which assets to borrow and in what proportion in order to better leverage your farming for the foreseeable future.
There are absolutely no guarantees that the strategy you think will work will be the most capital efficient in the long run, but leveraged yield farming at least gives you the opportunity to more easily follow through on your convictions about the market instead of resorting to multiple protocols and jumping in and out of positions the hard way!
In the next sections, we’ll show you what it’s like to take various positions on three of the major protocols that offer leveraged yield farming on Solana. They’re not the same, as each protocol takes a slightly different approach to the templates provided.
Longing Leveraged Yield Farming Positions
In these positions, you will be borrowing stablecoins and swapping them for the token you want to long. Here’s an example from the Tulip garden on a 2x leveraged long SOL position.
Notice how only USDC is borrowed. It’s swapped into SOL to create a long position.
If you look at the graph estimating future price action, the farm profit follows a similar trend line to holding. Impermanent loss (IL) sets in at the higher and lower ends of price action.
Now, let’s look at what a 3x leveraged long position can look like.
Here, we have more exposure to SOL, but the liquidation threshold has moved much further up the chart toward the current price. Notice how the profits from SOL’s price appreciation outpace profits from holding.
Shorting Leveraged Yield Farming Positions
When you short a position, you’ll borrow the token you believe will depreciate in value during the course of your farming. Here’s an example of what it looks like to 3x short SOL on Francium.
The graph shows that profits increase with the depreciation of SOL’s value. This is because the SOL for this position has been borrowed, and when it’s time to return this SOL, we should have more of it since the AMM will rebalance the LP position, and by doing so, it will essentially DCA (dollar cost average) into more SOL.
This position borrowed 127.81 SOL. If this leverage short position is unwound after SOL drops in value, then there should be more SOL on hand to return than was originally borrowed.
If the value of SOL increases, on the other hand, this position could face liquidation.
Neutral and Pseudo-Delta Neutral Leveraged Yield Farming Positions
Apricot allows you to choose a neutral template that borrows both assets. This is not the same thing as “longing both sides,” which requires first borrowing stablecoins and then swapping for two volatile assets you believe will appreciate in value.
The same values shown in the examples before have been lent on Apricot in order to participate in leveraged yield farming on its platform: 1,841.25 USDC and 11.76 SOL. Notice the size of the position that can be taken with a neutral template strategy.
This position only leaves about a 10% buffer before a liquidation is triggered, but there is quite a bit more capital being used to yield farm than what was originally on hand!
In a pseudo-delta neutral position, the ratio of borrowed assets is tweaked a bit to accommodate a crab market with some leeway for price depreciation. Notice how the graph reacts when USDC/SOL is borrowed at a 25%/75% ratio.
Yield Farming and Users Have Evolved With Leveraged Positions
Historically, yield farming has been prone to attracting toxic liquidity, the practice of farming a new project for rewards and withdrawing liquidity within the first 48 hours, dumping tokens along the way. This has proven to be an unsustainable model for the DeFi community, for obvious reasons.
Nearly all of the leveraged yield farming opportunities provided in these examples can be taken advantage of for longer than 48 hours without taking advantage of the system. Tokens have to be lent out before they can be borrowed for leverage (someone has to hold them), and this seems to cut out the opportunity for shitcoin farming.
Some vocal members of the DeFi community have noted that yield farming is dead, but maybe it’s just taken a new, more mature, form. It’s a far cry from ponzinomics.
Users who take advantage of leveraged yield farming to participate in sustainable practices for earning yield are exposing themselves to possibly greater risks and possibly greater rewards, but they’re also increasing the capital efficiency of providing liquidity through traditional AMMs (concentrated liquidity is a different ball game).
While leveraged yield farming might look incredibly degen, it’s really more closely aligned with realistic goal setting and sustainable DeFi than yield farms built for the sake of yield farming.
Users who spend the time to tweak the parameters of their leveraged yield farming positions have the possibility of discovering strategies that could yield net positives even outside the frenzy of a bull market and with great capital efficiency.
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