SolFarmer’s Education — Leveraged Yield Farming

3 min readAug 14, 2021

Hello SolFarmers! Since the launch of leveraged yield farming (LYF), there has been a lot of interest in the product, with over $11 million lent out and over $8.5 million borrowed concurrently in more than 1600 unique positions.

We at SolFarm decided to launch some articles to help SolFarmers better understand the functions behind yield farm and how to minimize your risk.

The Basics

Leveraged Yield Farm is made up of 2 main participants, the borrower and the lender.

The Lender deposits their assets into SolFarm’s lending pool to earn a variable deposit rate based on pool utilization and the interest rate curve. Accrued interest is automatically compounded and there is no management required from the lender’s side.

As with any yield farming, there are well defined pros and cons when it comes to lending. For the pros, you get a low risk yield with virtually no active management required. On the other hand, the annualized yield is unpredictable due to constantly varying interest rates based on utilization, and high utilization where you cannot withdraw your funds until loans are repaid.

Common risks for lending are smart contract (platform/counterparty risk) and untimely liquidations. Smart contract risk could result in an exploit leading to partial or full funds being drained. Liquidation risk would involve a loan not being liquidated in a timely matter, causing a shortfall in the loan. Note that SolFarm liquidates at a 85% LTV ratio, which leaves about a 15% buffer to liquidate. Current profits from liquidation go to an insurance fund.

At the moment, SolFarm only supports lending for leveraged yield farms and the funds do not leave the platform.

The Borrower supplies and borrows against their collateral. They are required to maintain a set loan to value ratio, otherwise collateral will be liquidated to clear the loan. This is done to maintain an orderly market and retain Lender’s confidence in the lending market.

While leverage offers the potential for increased gains, the risks grow too and become more multifaceted.

There are two primary risks to leveraged yield farming: liquidation risk and directional risk. Liquidation risk is when you are not able to maintain the required LTV, resulting in a forced closure of your position to repay the loan. Any remaining collateral will be returned to you once the loan has been satisfied and the liquidation bounty has been taken out.

Directional risk is based on the asset you have borrowed. For example, when Pepe supplies USDC and borrows RAY to farm in RAY-USDC LP, he is effectively short on RAY. This is because in token lending the borrower is required to return the exact amount of tokens to the lender. If RAY’s price rises, then some of the RAY in the LP will be sold for USDC; resulting in impermanent loss. This means the borrower will have less RAY than borrowed, and will therefore have to buy back at a higher price. This will affect the LTV ratio and can end up causing a liquidation if left unmanaged.

We have adapted some modeling from Alpaca Finance to suit SolFarm users. You can browse the sheets here and find any relevant modeling to apply to your needs. You can also use impermanent loss calculators like these.