Introduction to the Protocol
Leveraged Yield Farming is a process in which users get to multiply rewards from traditional yield farming by borrowing assets to increase their positions on existing farms which they expect to be highly profitable.
But, before we dive into the workings of leverage yield farming, it is best to explain its three key concepts:
Yield farming is a process in which users earn rewards (sometimes in the form of another token) for providing liquidity to a liquidity pool on a certain AMM protocol, such as Trader Joe. By providing liquidity, users are subject to earn fees from trades in that particular liquidity pool, as well as incentives from platforms offering such farms
Leverage is a traditional financial concept brought to the crypto ecosystem, most typically in perpetual swaps, where the user "borrows" money temporally to buy or sell a certain asset at x2/x3 in their purchasing power, in exchange for paying interest to the lender (usually a platform as an intermediate). This allows users to profit multiplicative when the asset purchased rises in value (proportionally to the leverage requested)
On the other hand, this concept has been already fully developed by dapps such as Aave or Compound where the user get to earn incentives by lending assets to a liquidity pool which is later used by other users when borrowing assets. Borrowers are subject to interests on the money borrowed and thus need to supply a collateral to protect lenders from unrealized interest payments