T-2: Understanding Leveraged Yield Farming and Alpha Homora

T-2: Understanding Leveraged Yield Farming and Alpha Homora

This second part of the full information series on the upcoming Alpha Homora (vBSC) launch is to make sure users understand leveraged yield farming and Alpha Homora.

What is leveraged yield farming?

Leveraged yield farming is a concept innovated by Alpha Finance Lab. Alpha Homora, deployed on Ethereum in October 2020, is developed by Alpha Finance Lab and is the first leveraged yield farming product in DeFi.

Yield farming is a process in which users (or farmers) receive additional incentives (typically in the form of another token) for providing liquidity to a liquidity pool on a certain AMM protocol, such as PancakeSwap in this case.

For instance, if you were to provide liquidity of 1 BNB and 250 BUSD (assuming 1 BNB = 250 BUSD) to a BNB-BUSD liquidity pool on PancakeSwap, then you will receive rewards in another token (e.g. 10 Token A) in addition to a share of trading fees that the protocol gains (e.g. 10% APY), which you would normally receive for being a liquidity provider on any AMM.

Leveraged yield farming is a mechanism that allows farmers to lever up their yield farming position, meaning to borrow external liquidity and add to their liquidity to yield farm. As a result of having more liquidity to yield farm (e.g. borrow 2 more BNB, adding up to 3 BNB and 250 BUSD), leveraged yield farmers gain more rewards in Token A and a larger share of the trading fees than otherwise.

Benefits of using Alpha Homora (vBSC)

👉 For anyone who wants to yield farm with leverage → Alpha Homora is the only place that you can do that. Users can do so in a few simple steps.

👉 For anyone who wants to lend BNB → You can lend on Alpha Homora (vBSC) to receive high lending interest rate.

👉 For anyone who wants to yield farm (even without leverage) → Alpha Homora will perform and optimize the yield farming process for you.

👉 For all the yield farmers on Alpha Homora platform → You can yield farm with just 1 token (typically you would need to have roughly equal value of both tokens to yield farm, e.g. both BNB and BUSD). Alpha Homora will optimally swap the token you supply to another token to make sure you have equal value of both assets before performing the yield farming process.

To understand what goes on behind the scene on Alpha Homora, see the infographics below.

Risks involved

Alpha Homora has its own risks. Below outlines the risks users may face.

1.Yield farmers (1x position, no leverage) are exposed to impermanent loss risk.

  • See more about impermanent loss here.
  • Note: This is the same risk as participating in other yield farming or liquidity providing opportunities on AMM pools.

2. Leveraged yield farmers (more than 1x position) also take the risk of being liquidated because Alpha Homora will borrow BNB to yield farm on leverage for you.

  • Liquidation takes place when Debt Ratio (debt / position value) reaches Liquidation Debt Ratio, e.g. 80% for BNB-BUSD pool, which can take place when your position value falls.
  • Position value falls when the price of another token, such as BUSD in BNB-BUSD pool, drops significantly compared to BNB or BNB price increases significantly compared to BUSD.

3. Similar to lending risks elsewhere, BNB Lenders share the risk of debts accrued by underwater positions in case liquidators did not liquidate in time.

  • Note: This has not happened before.

About Alpha Finance Lab

Alpha Finance Lab is an ecosystem of DeFi products that will interoperate to maximize returns while minimizing downside risks for users. Each Alpha product focuses on capturing unaddressed demand in DeFi in an innovative and user friendly way.

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