Intro
Investments have long been a popular way to generate passive income. Moreover, as new technologies grow and develop, new investment options appear, which in turn lead to even greater profits. Many people around the world continue to choose crypto assets as an investment because it has the proper level of security and decentralization. Since cryptocurrency is still gaining popularity in 2024, there are a huge number of different investment strategies that can help users achieve high rewards.
Yield farming is a fairly popular strategy among crypto investors, which allows them to place their crypto assets in DeFi protocols to receive rewards. Due to the average level of risk and fairly high profit, yield farming is quite popular, however, there is a type of farming that allows you to increase the overall APY of your investments. Today’s article from Notum will help you understand what leveraged farming is, how it differs from traditional farming and what distinctive features it has. In addition, we will look at best yield farming crypto platforms and talk about investment strategies for receiving high rewards.
How to Invest in Leveraged Farming on Notum
Before moving on to leveraged farming, it is important to understand the basics of how yield farming works. In simple terms, yield farming is a way of earning rewards by placing your crypto assets in decentralized finance protocols. This way, investors deposit their cryptocurrency where it can bring the most rewards.
In yield farming, investors can directly lend their assets to another user, however, the most popular option is to deposit cryptocurrencies into liquidity pools.
By contributing assets to pools, users receive additional tokens that can also be used in the crypto space for additional income. Thus, yield farming is an excellent investment strategy because it allows users to access multi-channel income, decent profits and does not require a large initial capital. You can read more about this strategy here.
Understanding Leveraged Farming
Leveraged farming is an investment strategy based on the use of borrowed funds to maximize the profitability of farming. This strategy is based on users using borrowed crypto assets to increase the size of investments in farming processes, thereby increasing rewards.
During leveraged farming, investors use borrowed funds to participate in farming liquidity, which allows them to gain access to a larger volume of assets and increase their chances of receiving high returns.
In order to take part in leveraged farming, the user needs to select a platform and make a deposit, which will be used as collateral for obtaining a loan. After this, the investor uses the funds received to participate in liquidity farming, where his profit increases due to the use of additional funds.
«If yield farming with X yields you Y returns, then yield farming with 5X yields you 5Y returns. In other words, borrowing funds to ramp up your position X, aka using leverage, multiplies your yields» - Defiant.
However, when using this investment strategy, it is important to remember that at the end of the loan period you need to return the borrowed funds with interest in order to avoid loss of the deposit. So, while leverage farming can help you significantly increase your profit potential, it also comes with a high level of risk.
- Risk Level: High
- User Involvement: Medium - High
- Potential Returns: Variable, Potentially High
- Automated or not: Not Automated
- Potential Risks: Smart-Contract Risks, Protocol Changes, Market Volatility
- Common Platforms: Alpaca Finance, Extra Finance
Why Invest in Leveraged Farming?
Undoubtedly, leveraged farming is a fairly attractive investment strategy that allows investors to maximize their profits and investments. It is suitable for users who have already dealt with crypto loans and understand how yield farming works.
However, with high rewards come high risks, which is important to remember in order not to lose your investment. Only by checking the potential advantages and disadvantages of this strategy you can understand whether it is a good solution for you.
Pros:
- High profitability. Using loans can increase your potential profit from yield farming, since you will be able to invest a larger amount than what you have.
- Portfolio diversification. Borrowed assets also allow you to diversify your portfolio to take part in different projects, even if your initial capital is not that decent.
- Wide range of strategies. While using leveraged funds, investors can choose more complex strategies and deals that require more investment than what they have.
- Availability. Unlike traditional investment opportunities, where the user must meet certain requirements, leveraged farming is more accessible and allows any person who owns cryptocurrency to get a loan and start investing.
Cons:
- High level of risk. The use of borrowed funds in leveraged farming still does not guarantee any profit. Moreover, in case of choosing an unprofitable investment strategy, the user will still have to repay the loan with interest in order not to lose his deposit.
- Active user involvement. Unlike investment strategies such as liquid staking, which do not require the active investor’s participation, farming requires asset management. The lack of certain knowledge and experience in this case can lead to the loss of both owned and credit funds.
- Interest rates. As with traditional lending, crypto loans have interest rates that can be quite high and can make the strategy unprofitable in case of the market fluctuations.
- Market volatility. As you know, most crypto assets are volatile, which increases the risks associated with borrowing funds.
Today we will pay attention to two popular leveraged yield farming platforms - Alpaca Finance and Extra Finance, and also talk about several investment strategies for receiving rewards.
Leveraged Farming with Alpaca Finance
Alpaca Finance is the largest and most popular platform of leveraged DeFi products, allowing users to earn stable and secure rewards. It supports two blockchains - BNB Chain and Fantom, and allows users to receive undercollateralized loans for leveraged yield farming.
- TVL: $58,650,000
- Average APY: Up to 222.62%
- Risk Level: Medium-high
- Blockchains: BNB Chain, Fantom
- Foundation Date: 2021
The platform's main goal is to optimize the use of capital in DeFi to eliminate the volatility often associated with yield farming. Alpaca Finance solves this problem by using the liquidity layer from integrated exchanges, thereby connecting investors and liquidity pool borrowers.
Its user-friendly interface, high rewards and undercollateralized loans make the platform the best option for users who want to start their journey in leveraged farming.
Source: Alpaca Finance
Investment Strategies on Alpaca Finance
BNB / USDT on BSC
Total APY - 14.00%, TVL - $12,65m
This investment strategy on Pancake Swap DEX allows users to farm BNB and USDT assets to earn rewards that range from 13% to 15% APY on average. This pool operates on the Binance Smart Chain and has a fairly high TVL, which makes it a relatively safe investment solution.
Source: Alpa Finance
USDC-USDT on BSC
Total APY - 4.82%, TVL - $21,41k
The USDC-USDT liquidity pool is a less volatile investment strategy as it consists of two stablecoins - USDC and USDT on Binance Smart Chain. Rewards for providing liquidity to this leveraged stablecoin farming strategy usually range from 4.5% to 5% APY.
Source: Alpa Finance
Alpaca Finance Strategies: Pros & Cons
Pros:
- Leverage and Undercollateralized Borrowing. The main advantage of the platform is the ability of investors to leverage their assets and borrow against them on Alpaca Finance, which in turn can significantly increase potential profits. Undercollateralized loans, in turn, makes the borrowing process even more accessible.
- Yield Farming Opportunities. Alpaca Finance offers users a large number of strategies for yield farming, which allows them to earn fairly large rewards by depositing their assets into liquidity pools.
- User-Friendly Interface. The platform has a fairly simple and intuitive interface, which makes it a convenient investment option for both beginners and experienced users.
Cons:
- Market Volatility. Since cryptocurrency is quite volatile, the value of assets placed or earned on the platform may fluctuate significantly and lead to certain losses.
- Smart Contract Risks. Most DeFi platforms, including Alpaca Finance operate through smart contracts, which means any vulnerabilities in these contracts can pose risks, leading to hacks or exploits.
- Supported Blockchains. At the moment, Alpaca only supports BNB Chain and Fantom, which may be a disadvantage for users looking for a platform with a large number of networks.
Why Invest?
Alpaca Finance is a popular DeFi platform that offers users everything they need for comfortable leveraged farming with potentially high rewards. Despite its high risks associated with market volatility and smart contracts, Alpaca has a number of advantages that make it an excellent choice for crypto investors looking to maximize profits.
Leveraged Farming with Extra Finance
Extra Finance is another fairly popular lending & leveraged yield farming protocol. It is built on the Optimism blockchain and is completely community-driven. The main advantage of Extra Finance is that it integrates the main decentralized exchanges on Optimism, which gives users access to a large number of leveraged farming pools.
- TVL: $23,920,000
- Average APY: Up to 629%
- Risk Level: Medium-high
- Blockchains: Optimism
- Foundation Date: Mar 23, 2023
The protocol invites users to use personalized farming strategies, which include long/short farming, reinvesting and market-neutral options. Thus, Extra Finance provides users with enough flexibility and ability to earn high earnings on the platform. Moreover, users can also choose between high-yield and stable pools depending on their preparation and chosen risk level.
Source: Extra Finance
Investment Strategies on Extra Finance
WUSDR / USDC on Optimism
Total APY - 10.37%, TVL - $1,61m
This investment strategy on Optimism allows users to deposit their WUSDR and USDC assets into a liquidity pool to earn rewards with an average APY of 10-11%. The WUSDR/USDC liquidity pool has a fairly high TVL, which protects users from liquidity risk.
Source: Extra Finance
USDCE / VELO on Optimism
Total APY - 49.09%, TVL - $2,96m
USDCE/VELO is a high-yield farm on Optimism, allowing users to earn around 48-50% APY. The pool consists of USDCE and VELO assets and also has a TVL of almost 3 million, which reduces risks and gives users more security.
Source: Extra Finance
Extra Finance Strategies: Pros & Cons
Pros:
- Customized Leveraged Farming Strategies. Extra Finance gives users the opportunity to personalize their farming strategies and choose the option that best suits them. Thus, investors can use market-neutral, long or short opportunities with measurable risk exposure.
- Auto Compounding. Another distinctive feature of the platform is the ability to automatically convert and reinvest emissions into LP tokens, thereby optimizing the yield rate.
- Yield Farming Simulator. Extra Finance allows users to view the impact of price fluctuations on the cost of capital and expected returns under various settings, which can help them make the right decision.
Cons:
- Market and asset volatility. Leverage yield farming on Extra Finance can be risky as it involves borrowing funds to invest in a volatile crypto market.
- Difficulty of use. Although Extra Finance has a fairly simple and intuitive interface, the large number of strategies and investment options can be confusing for beginners and users with little experience.
- Smart contract vulnerabilities. Any platform running on smart contracts is susceptible to various bugs that can lead to negative consequences, such as loss of assets.
Why Invest?
Extra Finance is a lending & leverage farming platform that has a large number of different unique features, such as LST & stablecoin accelerator, auto compounding, yield farming simulator and much more.
Despite some complexity of use and risks inherent in most DeFi platforms, Extra Finance is an excellent investment solution for those wishing to participate in leveraged yield farming.
Notum’s Verdict
Leveraged farming is a popular investment strategy with a medium-to-high risk level, offering users options to optimize income through the use of borrowed funds. However, while it can lead to potentially large rewards, it also comes with significant risks as the user is borrowing crypto assets to invest in farming.
Alpaca Finance and Extra Finance are popular leveraged farming platforms offering users many unique features for investment and income generation. Although they both require active user involvement, both Alpaca Finance and Extra Finance are easy to understand and offer multiple liquidity pools with varying levels of risk. However, before you start investing, it is important to do your own research and choose a platform and strategy that minimizes risks and brings you maximum profit.
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Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.