Alpaca Finance’s two-way lending A powerful tool for resolving leveraged liquidity mining exposures

Step into Alpaca Finance’s two-way lending strategy and learn how to mitigate leveraged liquidity mining exposure.

Alpaca Finance is the largest leveraged liquidity mining platform on BSC.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

It allows users to use their own assets as margin and borrow assets such as BUSD, BNB and ETH from the Alpaca vault to form LPs, which are then invested in Pancake Swap for liquidity mining and gaining revenue.

Thanks to the advantages of relative price stability and low liquidation risk among USDC, USDT and BUSD, stable coin liquidity mining is most suitable for this model.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

However, for mainstream coins, which have high price volatility, the use of leveraged liquidity mining is not only subject to liquidation risk, but may also lead to “short-selling”, which further magnifies losses.

For example, User A wants to use 3x leverage for liquidity mining of BNB-BUSD pairs, and he borrows $200 worth of BNB with $100 worth of BUSD as margin.

In order to match the two assets, the smart contract automatically sells a portion of the borrowed BNB for $50 worth of BUSD, thus forming a BNB-BUSD LP worth $300 ($150 each for BNB and BUSD).

However, since the user’s liabilities are denominated in BNB, the portion of BNB that is sold will become the user’s exposure.

In the future, if the price of BNB rises, the user will have to buy BNB at market price to pay off the debt when the position is closed. This “sell low, buy high” operation will cause the user to take some losses.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

To address this issue, Alpaca Finance went live with a two-way borrowing feature. That is, users can freely choose to borrow BNB or BUSD for leveraged liquidity mining when opening a position, thus hedging the risk exposure that comes with opening a position.

Let’s use another example to understand the significance of this feature.

Let’s say: BNB is priced at 100 USD for 1 and BUSD at 1 USD for 1; user B holds 1 BNB and 100 BUSD and he wants to gain from the liquidity provided for the BNB-BUSD trade.

What is a single lending strategy? It is when User B sells 1 BNB for 100 BUSD, uses 200 BUSD as margin, uses 3x leverage, and borrows 4 BNBs to open a position worth $600. At this point he has an exposure of 1 BNB shorted.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

The two-way borrowing strategy, on the other hand, is for User B to open two different positions with 1 BNB and 100 BUSD as margin, respectively, using 3x leverage.

Position 1 is to open a position worth $300 by borrowing 2 BNBs with 100 BUSD as margin. To match the two assets, the smart contract automatically sells 0.5 BNB in exchange for 50 BUSD, so position 1 has an exposure of 0.5 BNB short.

Position 2 is opened by borrowing 200 BUSD for 1 BNB as margin and opening another position worth $300. To match the two assets, the smart contract automatically sells 50 BUSD for 0.5 BNB, so position 2 has an exposure of 0.5 BNB long.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

Obviously, the dollar value of the positions is the same for both strategies, but the exposures are different.

If the two-way lending strategy is used, the exposure of position 1 and position 2 will cancel each other out; if only the one-way lending strategy is used, the user will be exposed to the risk of shorting 1 BNB.

Two-way lending strategy to open positions in practice

  1. http://app.alpacafinance.org/farm” to enter this website, then find the BNB-BUSD pair and click “Farm” to enter the position opening screen.
Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

Open position 1 and borrow BNB with BUSD as margin, using 3 times leverage. Note that only BUSD is invested when borrowing BNB.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures
  1. Scroll down the page to see the preview position details.

In the example, I borrowed 0.54BNB with 100BUSD as margin, but only 0.40BNB is in the actual LP position, so I shorted 0.14BNB in position 1.

Finally, click “APPROVE” and “Farm 3.00x” to confirm the opening of the position.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

Open position 2 and borrow BUSD with BNB as margin, using 3 times leverage. Note that only BNB is invested when borrowing BUSD.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures
  1. Scroll down the page to see the preview position details.

Only 0.27BNB was invested in position 2, but the actual LP position has 0.40BNB, so 0.13BNB was made long in position 2 to offset position 1.

Finally, click “Wrap BNB & Farm 3.00x” to confirm the opening of the position.

Note that the sum of the two positions may be slightly short or long due to the difference in trade sliding, fees and the number of decimal places displayed, but overall they are approximately equal.

Alpaca Finance's two-way lending A powerful tool for resolving leveraged liquidity mining exposures

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/alpaca-finances-two-way-lending-a-powerful-tool-for-resolving-leveraged-liquidity-mining-exposures/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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