Leveraged Yield Farming
So, what is Leveraged Yield Farming?
Leveraged yield farming is a mechanism that allows users to lever up (multiply) their yield farming position, meaning to borrow external liquidity from other lending users and add to their farming assets.
This basically replicates being able to stake more assets than usually possible and thus, logically, earn more rewards. In exchange, users have to pay lenders a fee for using their money as staking fuel. This full-circle ecosystem already exists in traditional platforms such as Aave, with the exception that borrowed assets are directly staked into yield farms and so maintaining a certain level of control and security to minimize risks for the lending counterpart.
On Leveraged Yield Farming you can identify three different actors that interact with each other and create the foundation of the protocol. These are the lenders, the farmers, and the liquidators.
On simple words, the lenders provide the capital, the farmers borrow from this capital to open a leveraged position, and the liquidator bots monitor these positions to close them in case the risk of the loan is too high.
- Lenders: the lending users deposit the base assets on the lending vaults in exchange for a stable return. These assets are then offered to yield farmers for leveraging up their positions.
- Yield Farmers: the farming users borrow these base assets from the lending vaults, thus opening a leveraged position, allowing them to multiply the farming APR of the desired assets.
- Liquidators: the liquidation bots monitor the pool for leveraged farming positions and when equity collateral becomes too low, thus approaching risk of default, they close the position.