Trading strategies

Leveraged yield farming can be used for different investing purposes. One of them is holding with leveraged yields. Let’s say, you believe that SOL will outperform; you can express your belief with the leveraged SOL 2X, but you may not like the idea of leverage. That’s where LYF comes to help — you can farm at 2X leverage by borrowing a token different from the token you are holding. If you have $1,000 SOL, you can consider borrowing $1,000 USDC, and start to SOL-USDC farming at 2X leverage. Or you may borrow another token, say, AVAX, and do LYF SOL-AVAX at 2X. An investor hasn’t levered up his holding token but is farming at levered yields. When he withdraws his LYF position, he’ll return the borrowed token.

Though holding with leveraged yields will magnify your return, it has the risk of impermanent loss. If the token you’re holding appreciates in value over a short period, you’ll experience an impermanent loss, that’s you would do better if you just held token instead of the farming. But if you do LYF for a long period, 2X returns can make up for an impermanent loss. Note that if you do LYF with token-token (other than stablecoin) pair the change in the price of the borrowed token would also cause an impermanent loss. In our example above, if AVAX appreciates significantly, it’ll result in impermanent loss too. But again, farming at 2X lever can offset this loss. Therefore, think of holding with leveraged yields as a long-term strategy.

Another trading idea you can express through LYF is leveraged long. If you have a strong conviction that SOL (any token for that matter) will perform well, you can do LYF > 2X leverage with SOL-USDC. Say, you have $1,000, and you decide to borrow $2,000 USDC to lever up to 3X. To make a 50:50 proportion, $500 out of your $1,000 borrowing will be swapped to $500 SOL. Now, you have $1,500 SOL which means that you’re 1.5X leveraged long on SOL.

You can do this with non-stablecoin token too. If you want to borrow $2,000 AVAX, and do LYF with SOL-AVAX pair, $500 AVAX will be swapped to $500 SOL. By holding $1,500 SOL you’ll be 1.5X leveraged long on SOL. But there’s a risk. When part of AVAX borrowing is swapped to SOL, it means that you’re shorting AVAX. This means that you’ve a short position in AVAX. Whenever you are doing LYF with >2X leverage, you’ll have a short position in the borrowed token. You may consider doing LYF with a stablecoin to minimize this risk.

If you thought that you can do leveraged short with LYF, you’re right. The way of doing it is to deposit a stablecoin, borrow the token that you want to short, and farm the token — stablecoin pair at >2X leverage. If you believe that SOL price will fall, you can deposit $1,000 USDC, and borrow $2,000 SOL. $500 out of your borrowing will be swapped to USDC to create a SOL-USDC position. Thus you’ll have $1,500 in SOL short position.

You can also benefit from leveraged yield farming even if you don’t have an exposure to the market direction. Pseudo delta-neutral yield farming allows you to do it. Think of this strategy as a combination of the leveraged long and leveraged short. First, you create a leveraged long position on an asset, and then you do a leveraged short position on the same asset. Since you’ll earn returns regardless of the market direction, it’s delta-neutral. But sometimes your position can move away from neutral as prices change; that’s why it’s called pseudo delta-neutral farming.

Say, you want to do pseudo delta-neutral farming with SOL-USDC pair. First, you deposit $1,000 SOL, and borrow $2,000 USDC which means you have a 3X leverage. You’ll be farming SOL-USDC with $1,500 SOL and $1,500 USDC; thus, you’ll be long $1,500 SOL.

Then, you’ll deposit $3,000 USDC and borrow $6,000 SOL, $1,500 of which will be swapped to USDC. You’ll be farming with $4,500 SOL and $4,500 USDC, and you’ll short $1,500 SOL. Your long and short SOL positions will cancel out, and you’ll be earning return on your $4,000 ($1,000 + $3,000 that you have deposited) which is near neutral.