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Strengthen Your Financial Position with Leveraged Yield Farming
Decentralized finance space is growing very quickly and what else is growing with it is the people’s need to chase higher yields. Leveraged yield farming has become the most popular choice among DeFi users when it comes to maximizing the yield. Leveraged yield farming has superior capital efficiency compared to alternative DeFi products.
Let us briefly understand Leverage yield farming.
In yield farming, you loan your digital assets to others (called borrowers) through blockchain with the help of smart contracts. Later, borrowers return the loan along with interest in cryptos. So, you can technically earn more cryptocurrencies by lending your previously owned digital assets. Yield farming is more or less similar to depositing your money in banks. The difference is that you are depositing cryptos instead of fiat and depositing in DeFi protocols instead of banks.
In the case of leveraged yield farming, you borrow the assets to earn higher yields. The concept of leveraged yield farming is pretty simple, i.e. more tokens will yield more returns. It means that using leverage will multiply your yield. No doubt that you will have to pay the interest for the borrowed assets, but the capital efficiency of leveraged yield farming is still high.
Note that DeFi lending platforms lack capital efficiency. Leveraged yield farming offers undercollateralized loans where farmers and lenders can have higher APYs.
How does leverage yield farming work?
It involves two participants, i.e., lenders and the farmers (or borrowers). Here, the lender deposits the tokens within the lending pools, and the farmer borrows the tokens to yield farm with leverage.
Now, the question is, how lenders can have more yield in leveraged yield farming? Let us first understand the utilization of the lending platforms. In traditional DeFi lending platforms, the loans are collateralized. It means that you need collateral to borrow the tokens, limiting the borrowing power of a borrower.
Consider a scenario where a lending platform has 100 ETH, and the borrower can borrow only 10 ETH due to the limited collateral. So, here the utilization of the platform is 10%. But, in the case of uncollateralized yield farming platforms, the borrower might borrow 60 ETH, hence making the utilization of 60%.
Now, with the increased utilization of the lending platform, interest rates for the lenders also increase because of simple demand and supply logic.
The farmers or borrowers borrow the tokens to increase their farming positions and earn additional farming yields.
The leading platform for the leveraged yield farming: Alpaca Finance
Alpaca Finance is a lending platform that allows leveraged yield farming on BSC (Binance Smart Chain). With Alpaca Finance, lenders can earn stable yields, and borrowers can use uncollateralized loans to leverage yield farming positions to gain profits.
It improves the capital efficiency of the exchanges by connecting the LP borrowers and the lenders.
Alpaca Finance is one of the leading platforms for leveraged yield farming. If you are considering leveraged yield farming to earn higher yields, then the platform can be an excellent option to start with.
The undercollateralized yield farming models are proved to be an excellent option to earn more yields and that too, very safely, unlike other lending platforms. There are indeed some risks associated with leveraged yield farming, but the profits are unmatchable.
Leveraged yield farming can be said to be the most sustainable segment of the DeFi because the yield is generated from higher capital efficiency. It limits the usage of loaned funds within the protocol and hence, allows for under-collateralized loans. Leveraged yield farming can be the next massive thing in DeFi space because it has the potential to solve sustainability and capital efficiency-related problems of DeFi protocols.