Leveraged yield farming explained

What is leveraged yield farming

Leveraged yield farming is a way to increase potential returns on yield farming using borrowed assets.

In traditional yield farming, you provide a pair of tokens to a liquidity pool in a decentralized exchange (DEX/AMM), and in return, you earn trading fees and additional rewards in an incentive token.

In leveraged yield farming, you amplify this process by borrowing assets to provide more liquidity to the pool.

Example: When you open a farming position of $100 with 3x leverage, Axly appends another $200 utilizing the loan fund, so a total of $300 added to a liquidity pool brings 3 times more rewards than $100.

Of course, it’s not for free; you have to pay interest for the borrowed asset.

How it's done

Setting up a leveraged farming position is a breeze. Choose a pool, contribute assets (either one or both, in any proportion), select your leverage, and decide which asset you’d like to borrow. For a step-by-step walkthrough, check out our guide.

Axly takes care of everything else:

  • Takes out a loan for you in the loan fund

  • Converts assets to equal value ratio

  • Provides liquidity to the pools and stakes LP tokens

  • Regularly claims and compounds farming rewards

  • Keeps an eye on the health of your position, and if necessary, liquidates a part of your debt in a timely manner.

Example: Let's say the exchange rate stands at 1 WAVES = 2 USDT. You decide to enter a leveraged farming position in the WAVES/USDT pool with 3x leverage, depositing 50 WAVES and borrowing USDT. Here's how Axly acts:

  • Takes out a loan of 200 USDT for you (as you’re depositing an equivalent of $100 and want to contribute $300 to the pool)

  • Converts 50 USDT for WAVES

  • Provides a total of 75 WAVES and 150 USDT into the pool (Note: fees are omitted in this example for the sake of simplicity).

Long and short exposure

First, let's break down the financial aspects of your leveraged farming position:

  • Position value: This is the value of your liquidity in the pool.

  • Debt value: This is the value of the borrowed asset.

  • Equity value: This is your position value minus your debt value.

Understanding how market movements will impact your equity value requires grasping that you have a long position in the pooled assets and a short position in the borrowed asset. Your net exposure is the difference in value between these two positions.

Example: Let’s say you have 75 WAVES + 3000 XTN in WAVES/XTN pool and 4000 XTN borrowed. Here’s how your initial position breaks down:

  • You have a long position in 75 WAVES, meaning that your equity value rises when the price of WAVES goes up.

  • You have a short position in 1000 XTN (since you have 4000 XTN borrowed but 3000 XTN pooled), meaning that your equity value increases when the price of XTN goes down, and decreases when the price of XTN goes up.

Which mix of assets you initially contribute doesn't matter; it only influences swap fees incurred when Axly converts assets before adding to the pool. However, the asset you borrow plays a significant role in how your position performs. It's a wise move to borrow an asset you're less optimistic about. For more insights, check out Earning strategies.

Note that your initial exposure is likely to change over time. That is because when prices move, amounts of your assets in the pool follow. For example, if the WAVES to XTN rate grows, the pooled WAVES amount can decrease, but the pooled XTN amount increases.

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