Introducing Double-Sided Leveraged Yield Farming

This post was originally published on Alpaca Finance

Dear Alpacas,

Today, we’re very excited to introduce a powerful new feature that will give you many more options on how to farm, as well as the ability to create powerful strategies for hedging risk. Of course, we’re talking about double-sided leveraged yield farming.

We’re thrilled to be the first leveraged yield farming protocol on BSC to offer this feature. With this enhancement, you’ll be able to select which asset to borrow when opening leveraged yield farming positions on the following pairs:

  • BNB-BUSD (3x)
  • BNB-ETH (3x)
  • ALPACA-BUSD (2.5x for borrowing BUSD, 2x for borrowing ALPACA)

After we launch BTCB and USDT vaults soon, you’ll also be able to do this for BTCB-BNB, BTCB-BUSD, USDT-BUSD, ETH-BUSD, and more as of yet unannounced pairs.

This feature will go live on May 19th, 2021, 10 AM GMT.

On our Farm Page, you’ll be able to view how APR will change based on the asset you choose to borrow.

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When opening a position, after clicking on Farm as usual, you’ll notice that on supported pairs, you’ll be able to select which asset you’d like to borrow, as shown in the image below. The displayed Borrowing interest, and thus also Total APR, will change based on the asset you select to borrow.

📈What are the benefits of doubled-sided leveraged yield farming?

To understand how this new feature will benefit you, you must first understand your exposure to each asset at different leverage levels.

  • 1x leverage is the same as the standard farming you can do anywhere else. Above 1x, you’ll be borrowing an asset, which will allow you to multiply your farming position, providing you higher yields as well as bonus ALPACA rewards.
  • The asset other than the one you borrow will have leveraged long exposure so your equity value will increase when its price rises. This is the same as standard yield farming.
  • For the borrowed asset, at 2x leverage, you’ll have neutral exposure to that asset. This means at position opening, your equity value will be indifferent to a modest rise OR fall in the borrowed asset’s price; hence — neutral. (*For advanced users: Keep in mind though that large double-digit price moves can shift your exposure on the borrowed asset from neutral to slightly long or slightly short. So you will have to readjust your position to the starting parameters if you wish to reset to neutral. You can view examples of these shifts from a user’s experience here, or get an idea of how your exposures change and affect position value using our yield farming calculator.)
  • Above 2x, you will have a slight short on the borrowed asset, meaning your equity value will increase when that asset’s price falls, and your equity value will decrease when the price rises.
  • Below 2x, you will be long on both assets, but more long on the one you didn’t borrow.

Previously, when opening LYF positions, you were limited to borrowing only one type of asset. For example, if you wanted to leveraged farm BNB-ETH, you were forced to borrow BNB. As mentioned above and in our previous article, when your leverage > 2x, you are shorting the asset you borrowed. What this means in our example is that you are shorting BNB when leveraged farming BNB-ETH. This is a bit of an inconvenience if you have a view that BNB price will outperform ETH. Now, with our double-sided farming, that’s no longer the case.

If you believe, BNB will outperform ETH, then you can choose to borrow ETH instead and be long BNB while shorting ETH! To maximize your profits, if you have a choice of which asset to borrow, consider borrowing the asset OPPOSITE TO the one you are most bullish about. For example, in ETH-BNB, if you expect BNB’s price to rise more than ETH’s price, then borrow ETH.

In addition to being able to customize your positions by selecting which asset to borrow, this feature will allow for more sophisticated farming and hedging strategies.

For example, you’ll be able to farm at maximum leverage on a higher APY pair while also hedging neutral. One such pair you can do this on is BNB-BUSD, by opening two positions that borrow each asset, thus nullifying their exposures to become neutral. Below, we’ll give an example of such a setup. However, before continuing, make sure you understand how longing & shorting work by reading our previous article on the subject.

  1. First, you will open a BNB-BUSD position, borrowing BUSD at 3x leverage. For this example, you’ll add 1000 USD-worth of tokens as collateral.

Added collateral: $1000

Total position value: $3000 (borrowed 2000 BUSD)

Exposures:

  • BUSD: short 500 (effectively neutral because BUSD is pegged to USD and thus very unlikely to rise or fall. If you don’t understand why the short is 500 instead of 1500, then read this)
  • BNB: long 1500

2. Next, you’ll open another BNB-BUSD position, but this time, you will borrow BNB at 3x leverage, and you’ll add 3000 USD-worth of tokens as collateral.

Added collateral: $3000

Total position value: $9000 (borrowed 6000 BUSD)

Exposures:

  • BUSD: long 4500(effectively neutral)
  • BNB: short 1500

3. Now, let’s sum up the total exposures when combining the two positions above:

Added collateral: $4000

Total position value: $12000 (borrowed 8000 BUSD)

Total Exposures:

  • BUSD: long 4500 – short 500 = long 4000(effectively neutral)
  • BNB: long 1500 – short 1500 = 0 (neutral)

As you can see, with this type of strategy setup, you’ll have similar neutral exposure to what you would have on a stablecoin-stablecoin pair at position open. Yet, you’d be farming a higher APY pair, earning larger yields!

This is a strategy you can only achieve due to double-sided borrowing, and it’s something you can’t get on any normal yield farm, which forces you to suffer long exposure on both assets. At Alpaca though, we like to empower our herd with the most powerful farming tools; golden tractors and all that…

So now, enjoy farming in any way you like, fellow Alpacas.


Introducing Double-Sided Leveraged Yield Farming was originally published in Alpaca Finance on Medium, where people are continuing the conversation by highlighting and responding to this story.

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