Leveraged Yield Farmer Risks
Since leverage yield farmers are also liquidity providers, the risk that comes with liquidity providing also exists here. This risk is called impermanent loss risk. This is when the price of one token inside the liquidity providing position increases in price in comparison to another token OR one token decreases in price in comparison to another token in your liquidity providing position. The larger the change, the more exposed you become to impermanent loss, which means less valuable asset at the time of withdrawal than at the time of deposit.
In addition, as leverage yield farming involves borrowing assets, the risk of liquidation is a possibility. This is when the value of the collateral asset is less than the value of the borrowed asset. For Homora V2, the LP token for liquidity providing is actually the collateral. For instance, since the price of your assets inside the liquidity providing position can change due to price fluctuation, therefore when the value of the total liquidity providing position decreases to a certain threshold, or a position that only has a small buffer between your collateral value and borrowed value, this allows liquidation to take place.
Homora V2 gives users ease with automating the swap mechanism. Hence, yield farmers don’t need to have equal value of both tokens in order to yield farming. When users want to open a leverage yield farming position, they can just supply a type of token and Homora V2 will automatically and optimally swap the asset to arrive at an equal value of both tokens before taking care of the yield farming process for our users. This can be easily achieved through the “Basic Farming Mode”.
However, users may face some risk of price slippage if they choose to commit “Advanced Farming Mode”. In this mode, Homora V2 allows users to borrow multiple assets, which users can decide how many percentage shares they want their borrowed assets to be in. If chosen not ideally, the price slippage can be too high. For instance, a user wants to supply $1,000,000 FTM to the FTM/ETH pool. He can choose to borrow only FTM token, only ETH token, or a combination of both.
In this case, the problem arises when this user, let’s say, decides to borrow $1,000,000 FTM (to achieve 2x), hence requiring $1M of FTM to be swapped into ETH, resulting in a high slippage trade since the DEX protocol that the yield farming action is taking place on requires liquidity to be provided for both 2 tokens instead of 1.
Regardless, with risks come solutions too. There are ways that users can protect their assets from the risks mentioned earlier. We have prepared you with the following solutions.
To protect you from impermanent loss, we recommend that users should open leverage yield farming positions on pools with tokens that their price moves in correlation with one another. The less difference in asset ratio, the less impermanent loss users face. Therefore, opening stable coin pools like USDC/ fUSDT would face limited impermanent loss. Or if you see that FTM moves in correlation to ETH, then opening a position on FTM/ETH can bear less impermanent loss than another position of USDC/FTM in which FTM definitely does not move in correlation to USDC since USDC is stable at $1.
Liquidation can be prevented by making sure the value of collateral assets is higher than the value of borrowed assets. To make this happen, users can supply more assets to the position hence increasing your position in LP token and increasing collateral or repaying the borrowed assets hence decreasing your leverage.
Lastly, to have lower price slippage while maintaining a high leverage level, users can commit to “Basic Farming Mode” so the DApp can automatically and optimally choose borrowed assets and proportions that minimizes trading slippage for you. However, if you choose to use the “Advanced Farming Mode”, the price slippage can be minimized as well, but requires in-depth understanding of how DEX protocols and liquidity providing work.