What is leveraged liquidity mining? How does it bring higher returns?

In DeFi, although the bigger the better, the beauty of high APY always attracts people’s attention. Moreover, no matter how high the yield of DeFi is compared with traditional finance, there is no shortage of DeFi users who are eager to maximize profits. They are pursuing higher returns between platforms and platforms, networks and networks. Therefore, it is not surprising that leveraged liquidity mining, with its capital efficiency superior to alternative DeFi products, has become a popular choice for experienced DeFi participants to maximize returns.

The concept behind leveraged liquidity mining is not as complicated as it might seem at first glance; if mining with liquidity X gets Y return, then mining with 5 times liquidity gets 5Y return. In other words, borrowing funds increases your position X, which means using leverage to double your income. Of course, this is not free; as with any lending platform, you must pay interest on the loan to use the borrowed funds. However, the highlight of leveraged liquidity mining is its capital efficiency-the ability to borrow more than the collateral you provide.

For anyone who has used DeFi lending platforms, you will know that a common problem of DeFi lending is the lack of capital efficiency; if you take out $1 as collateral, you may only be able to borrow 50 cents. So if you use these 50 cents to mine, will your income be less than the one dollar you used from the beginning? This limitation is prohibitive for many lending use cases. However, this is not the case for leveraged liquidity mining.

Unlike most traditional loan platforms, leveraged liquidity mining allows low mortgage loans. This higher capital efficiency not only means higher APY for miners, but also higher APY for lenders, because this low-collateralization model creates a higher utilization rate, which is most loan platform loan apy One of the main factors. The benefits are clear at a glance, that is, higher APY, which is why leveraged liquid mining platforms such as Alpaca Finance and Alpha Homora have accumulated billions of dollars on TVL, becoming the two most commonly used DeFi platforms.

However, increasing your mining status to earn multiple liquidity is just the easiest way to use leveraged liquidity mining platforms. There are advanced features and practices that allow users to create customized positions with their ideal risk profile, target return, and market bias. From long and short, to the use of market-neutral hedging strategies, all of this can be achieved through customized leveraged liquidity mining. The most important thing is that no matter what you do, leveraged liquidity mining-you always Both can get benefits!

Leveraged liquidity mining

There are two key participants in leveraged liquidity mining: (1) lenders who deposit individual tokens in loan pools to obtain liquidity, and (2) borrow tokens from these loan pools to take advantage of leveraged liquidity mining The miner of the mine.

What is leveraged liquidity mining? How does it bring higher returns?


In the leveraged liquidity mining agreement, the lender can find the highest return on a single asset in DeFi (above). As mentioned earlier, due to the increase in the overall utilization rate of the loan pool, such a high APY can be achieved sustainably. What is utilization?

If a lending pool has 1000 ETH and a borrower wants to borrow 100 ETH, then the utilization rate of this pool will be 10% (100/1000). The advantage of low-mortgage loans and leveraged liquidity mining is that each borrower can borrow more money, thereby achieving a higher utilization rate.

Taking the previous example as an example, if a traditional lending platform has 10 borrowers, and due to mortgage restrictions, each borrower can only borrow up to 10 ETH, then they will borrow 100 ETH in total. In a low-collateralized leveraged liquidity mining platform, these 10 borrowers may each borrow 50 ETH, creating a 50% (500/1000) utilization rate. A higher utilization rate is important for lenders, because most loan platforms have an interest rate model that tilts upwards at higher utilization rates, using the concept of supply and demand, that is, higher loan demand leads to higher Borrowing interest rate. This means that if the utilization rate reaches 50%, the loan interest paid to the lender will be much higher than 10%.

Through the low mortgage model, the utilization rate can sometimes reach more than 90%. At the same time, on the over-collateralized lending platform, the overall utilization rate of the platform cannot be higher than the weighted average mortgage rate of all assets. This is mathematically impossible. For example, if an agreement has 2 asset pools, each with a 50% LTV limit (you can borrow up to $0.5 for a deposit of $1 in collateral), then the overall utilization rate of the platform cannot exceed 50%. Leveraged liquidity mining does not have such restrictions and brings higher APY to users!

However, even though these loans are low-collateralized, this model used by modern liquid mining platforms has proven to be very safe for lenders, because unlike other lending platforms, borrowers cannot withdraw from the agreement. Of funds. Therefore, the use of funds and subsequent returns are strictly controlled by the agreement and its clearing mechanism to ensure that the lender recovers the funds. This is in stark contrast to traditional lending platforms, which allow borrowers to use funds anywhere.

What is leveraged liquidity mining? How does it bring higher returns?


Leveraged liquidity mining is similar to standard mining of LP tokens, but has additional functions. In standard mining, users deposit a pair of tokens at a ratio of 50:50 to “provide liquidity” for AMM (for example, ETH worth 100 USD and USDT worth 100 USD). This is necessary for the creation of LP tokens. Then users will receive LP tokens, and as transaction fees accumulate in these LP tokens, the value of these tokens will increase over time. Users can also hold some LP tokens in the mining pool on DEX to obtain additional token rewards.

In leveraged liquidity mining, users can borrow tokens to increase their mining positions, thereby obtaining additional mining liquidity. The process is simple: in the leveraged liquidity mining protocol, the user first deposits an arbitrary proportion of two tokens. Therefore, before the above example of ETH and USDT, users can only deposit one of the two, or a combination of the two, and the underlying protocol will perform optimal exchange in the background, converting the tokens into a 50:50 split for LP generation. Currency (this process is called Zapping ).

Then, in order to obtain leverage, miners can borrow one of the tokens with the maximum leverage (1.75x-6x, depending on the currency pair). 1x leverage means no leverage, such as standard liquidity mining. 2x leverage means borrowing as much money as you deposit as collateral; your total position value will be twice the value of your equity.

Once the leverage is selected and the position is established, the protocol will use an integrated DEX to convert all deposited and borrowed tokens to a 50:50 ratio, add them to the DEX pool as liquidity, and receive the received LP tokens are put into the subsequent mining pool. However, all of this happens in the background. For you, opening a leveraged liquidity mining position is just a click away.

Miners earn liquidity mining rewards from comprehensive DEX (such as CAKE), transaction fees and additional ALPACA rewards, and pay borrowing interest to earn a considerable net APY.

What is leveraged liquidity mining? How does it bring higher returns?

A screenshot from Alpaca Finance shows the yield breakdown of the CAKE-BUSD pair

Although the use of leverage can bring greater profits, there are also greater risks. Specifically, one of the issues that users are most concerned about when using leverage is liquidation risk.

Leveraged Liquidity Mining Agreement

The leveraged liquidity mining protocol has gained users in all the largest DeFi ecosystems.

The figure below compares the largest leveraged liquidity mining protocols on BSC, Ethereum and Solana.

Table 1. Comparative indicators of leading leveraged liquidity mining protocols among the 3 top DeFi chains (8/18/21)

What is leveraged liquidity mining? How does it bring higher returns?

The outstanding loan is related to the agreed income

Data as of August 18, 2021

Sustainability in a bear market

Another bright spot of leveraged liquidity mining is how it allows users to create advanced strategies through short selling and hedging. In other words, through clever use of leverage and position customization, users can generate high returns when holding short or even market-neutral positions. This means that leveraged liquidity mining can make you profitable in a bear market.

In addition to capital efficiency, this capability provided by leveraged liquidity mining solves another major problem of liquidity mining, which is sustainability; more specifically, liquidity mining lacks availability under various market conditions. Persistent.

In all other liquid mining platforms, you usually have to hold a long position in tokens to provide liquidity and liquidity for mining. This also means that in a bear market, when prices fall, gains may not offset the losses caused by holding tokens. Leveraged liquidity mining platforms are a way to solve this problem, and may become one of the few DeFi safe havens that can still be profitable during the bear market.

Leveraged liquidity mining in DeFi and its future

From the above analysis, it can be clearly seen that leveraged liquidity mining provides a unique opportunity to earn the highest income on DeFi encrypted assets. In addition, these strategies can range from conservative (mining stablecoins or hedging pseudo-triangular neutrals) to high-yield and high-risk speculative (long and short with leverage), thus attracting a wide range of users.

On its basis, since most of the benefits of leveraged liquidity mining do not come from the token rewards of the platform, but from higher capital efficiency, it can be said with certainty that leveraged liquidity mining is the most sustainable in DeFi One of the parts.

Leveraged liquidity mining is also one of the few types of platforms that allows mortgage loans. It can safely achieve this goal by restricting loan funds to be used for liquidity mining on integrated exchanges within the scope of the agreement. Although this use case may seem narrow at first glance, in practice, it accounts for most of today’s DeFi activities. Loan applications may be expanded in the future. It has no technical limitations, so once new sources of revenue emerge, the LYF protocol will be ready to seize these opportunities by providing users with on-chain leverage.

At present, the user base of leveraged liquid mining platforms is diversified and is not limited to those seeking risks. When users deploy funds with the right strategy, they can generate considerable profits under all market conditions and reduce risks! There are various ways to attract anyone, regardless of their risk profile, target return, or knowledge level.

In short, leveraged liquidity mining not only solves the main problems of capital efficiency and sustainability, but also currently provides mature products with high income potential. Therefore, we believe that leveraged liquidity mining protocols will continue to grow as a basic building block and DeFi LEGO.


Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-is-leveraged-liquidity-mining-how-does-it-bring-higher-returns-4/
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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