Risks

Leveraged yield farming can pump up your earnings, but it also comes with additional risks. It's crucial to understand these risks before you dive in.

Price impact

Opening a farming position includes swap to bring assets to equal value ratio. The swap changes token amounts in the pool and causes the price impact. The greater the swap size relative to the pool liquidity, the higher the price impact is. In low-liquidity pools you can lose a large portion of your capital due to the price impact.

How to mitigate:

• Open several smaller position instead of the large one. Allow some time for the prices to stabilize through arbitrage.

• Contribute the mix of assets that minimizes swapping. For example, when using 2x leverage, provide the non-borrowed asset.

Impermanent loss

Impermanent loss is an inherent risk of providing liquidity to AMM pools. When you put two assets into a liquidity pool, and the price of one asset changes significantly compared to the other, you might end up with less value than if you just held onto the assets outside the pool. The loss is called impermanent, since it can disappear if the price goes in the opposite direction. There are a lot of articles explaining this phenomenon, here is one of them.

How to mitigate:

• Choose to invest in a pool with a pair of price-correlated assets

Negative APY

Your debt value may grow faster than your position value. This can happen due to high utilization of the loan fund resulted in a higher borrowing rate or due to decrease in farming rewards in the liquidity pool.

How to mitigate:

• Keep an eye on your farming position. It may be wise to close it if the profits go negative.

Liquidation

When you farm with leverage, you run the risk of being liquidated if price of the borrowed asset appreciates against the complementary pooled asset. Axly needs to ensure that the farming position is always sufficient to cover the debt. That's why your position will be partially liquidated if its health goes below 0.

How to mitigate:

• Borrow the asset that is less likely to grow

• Pick the moderate leverage

• Keep an eye on your farming position. It may be wise to close it in case of unfavorable price move.

Smart contract risk

We do our best to prevent all possible attacks. However, the risk of exploit can never be fully eliminated. 3rd-party smart contracts like liquidity pools, farming and lending platforms also carry that risk.

Asset risk

Crypto assets are volatile and are subject to many risks, including but not limited to speculation, regulatory change, technology, and security risks. Any asset may be subject to large swings in value and may even become worthless.

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Bear in mind, DeFi is a sector where unpredictable events can take place out of the blue. Be careful and do not invest all your savings or assets that would be devastating to lose.