Over the last few months, one of the most popular ways to participate in DeFi has remained liquidity provisions. When we talk about AMMs (Automated Market Makers) like Uniswap or SushiSwap, we have a pool with assets that anyone can permissionlessly trade. Dumbing it down, it’s as simple as having 1 APPLE token + 1 ORANGE token in a liquidity pool, which dictates 1 APPLE = 1 ORANGE in price.
As a liquidity provider (LP), we enable greater liquidity for trading among these tokens which has a hugely positive impact on DeFi. Trading is one of the most basic use cases in DeFi and so because of this, LPs are some of the unsung heroes of DeFi. In exchange for providing liquidity, the most basic incentive is that LPs earn a proportional amount of the trading fees. For example, if you own 1% of liquidity in the ETH-WBTC LP in SushiSwap, you earn 1% of the 0.25% fee paid by every trader in this pool. (Btws, SushiSwap charges 0.3% but 0.05% of this fee is added to the SushiBar pool in the form of LP tokens for the relative pool.)
Many protocols have developed yield farming (aka liquidity mining) program to incentivize LPs to add liquidity which can benefit their native token and DeFi application. The problem with all of this is that when we act as LPs in a pool, we are at risk of incurring impermanent loss.
Due to the volatility of asset prices and arbitragers, LPs often do not receive the exact amount of assets upon withdrawal, which can sometimes negate the upside of being an LP earning rewards and trading fees. This problem refers to the dollar value of the assets an LP withdraws being typically lower than if they had not provided liquidity and simply held the assets. This dollar value shortfall is known as impermanent loss. The “loss” is said to be impermanent because if asset prices return to the level during withdrawal the loss is eliminated. If you want to explore impermanent loss more, check out this video I made for Zapper FAQs and try simulating impermanent loss using Croco Finance.
Once one understands the risk of impermanent loss alongside the importance / upside of being an LP, then it should be obvious that amplifying and automating profit-taking on yield farming rewards as an LP will have lots of demand in DeFi. Yield farmers already take risk by lending liquidity to protocols but the need to take profit on those rewards costs time and gas.
Additionally, using low leverage (2X) to open a larger LP position while maintaining the same exposure to the underlying tokens, means that you can earn multiples more of yield farming rewards! The key is borrowing an asset and swapping it for the proper LP token at a lower borrowing rate than the rate of return I can expect while yield farming.
Enter Alpha Homora–a leveraged yield farming and leveraged liquidity providing protocol. Yield farmers can get higher farming APY and trading fees APY from taking on leveraged yield farming positions. By taking leverage, Alpha Homora borrows ETH on the users’ behalf to yield farm. In return, ETH lenders to Alpha Homora can earn high interest on ETH.
For leveraged yield farming pools (all pools under Yield Farming Pools section that support more than 1x leverage), the APY comes from yield farming APY on leverage +…
Hi! My name is Lark Davis!
I’m a cryptocurrency investor with years of experience and I’ve been making consistent profits in the crypto space.
I’m passionate about helping others do the same, so I run multiple educational channels on crypto investing.
