Leveraged Yield Farming Aggregator Advantages
At this point, it is well established that the cryptocurrency world wants financial solutions, without the drawbacks of the centralization of traditional finance. DeFi at its May 2021 peak had $88 Billion USD in total locked value (TVL), up from $2 Billion USD 1 year ago today. The cryptocurrency industry has pivoted to provide the best solutions for users who would like to take advantage of being able to borrow, lend and save in a decentralized manner.
Yield farming has become the major frontier in the world of DeFi, with large portion of the over $55 Billion USD TVL currently in the market dedicated to the activity. The proliferation of new yield farming products and participants in 2021 mirrors the boom of the ICO market in 2017, with users jumping on new tokens and projects in hopes of earning the best rewards. This consistent excitement in the space has created strong demand, raising the values of tokens used for yield farming and the projects building yield farming platforms.
So what exactly is yield farming and why is it so useful? It’s quite simple:
The cryptocurrency marketplace has moved away from using centralized exchanges or intermediaries to facilitate transfers. In it’s place has risen decentralized exchanges, banks and products for swapping tokens and coins- hence the term Decentralized Finance. You can imagine how much funding it would take to run a DEX (decentralized exchanges) or DeFi platform — these platforms require incredible amounts of liquidity to serve their users.
To solve this issue, they create liquidity pools to pool coins from others that can be used to settle transactions for their users. People who supply and stake liquidity to these pools are called yield farmers. Liquidity pools are smart contracts that have tokens staked to them, and where users can exchange or borrow tokens from. The transactions to using the liquidity pool produces a fee. In return for providing the initial liquidity, yield farmers receive a reward in the form of more of the currency they staked or different tokens that they can move to a different platform to increase their gains. The receive rewards proportional to what they staked.
Yield farming has boomed because it allows decentralized finance platforms and exchanges to run smoothly, it provides holders of cryptocurrency another avenue to earn money besides the appreciation of the value of the coins they hold and, it is a way to earn value in bear markets (depending on the token and the strategy used).
As you can imagine, yield farming has very high earning potential which is why it has become so popular. The high earning potential does come with higher risks with the more digital assets and yield farmer uses in their strategy, especially with non-stablecoins. Yield farmers tend to be very educated about cryptocurrency and the DeFi market to be able to withstand these risks.
The high demand in the sector has spawned several fantastic yield farming offers from DeFi protocols such as Curve, Uniswap and Pancakeswap. More recently, leveraged yield farming aggregators have been popping up, first with the introduction of Alpha Homora and continuing with Alpaca, Rabbit, Bagels and other similar protocols. Leveraged yield farming aggregators are platforms with several yield farming pools for different DeFi protocols in one place. They allow users to compare and access the pools all from one place, but with a twist — users can leverage their positions as well to borrow and earn more.
Leveraged yield farming aggregators have become essential to the growth of DeFi for 3 specific reasons:
1) They offer the chance for participants to earn more rewards;
2) They are able to provide higher amounts of liquidity to pools and;
3) Most importantly, they connect multiple functions of DeFi under one roof, making it easier for market participants.
Higher Earnings
Leveraged yield farming is quite simply yield farming with the ability to borrow tokens to bolster your position as well. Leveraged yield farming platforms also can auto-reinvest farmed tokens and earned trading fees. With more funds invested, potential returns for yield farmers are higher than they would be just investing their own tokens.
For example, if you were to invest 1 ETH and 500 USDT into an ETH:USDT pool, you’ll receive a reward (50 Token X) as well as a share of trading fees (15% APY). With leveraged yield farming, you could also borrow an additional 2 ETH using all of your funds as collateral. You’ll be able to invest 3 ETH and 500 USDT into the ETH:USDT pool, and you’ll receive a higher reward (let’s say 150 Token X) and a higher share of the trading fees at the same APY.
Of course, the risk with this method is that if the value of ETH drops precipitously you can be underwater with your loan. This method is extremely popular with yield farmers as they tend to be less risk-averse than other participants in the crypto-markets, and they can choose the amount of leverage that they want to take from low to high. Additionally, a lot of the risk can be mitigated with stablecoin based pools, which have much less volatility risk while still providing high profits. This can be a great tool during bear markets or when users do not want to participate in currency trading while still making strong profits in the crypto market.
More Liquidity to DeFi Platforms
Leveraged yield farming aggregators provide more liquidity to pools on a per-participant basis. If a yield farmer takes any amount of leverage into a pool, they automatically provide more liquidity to the pool then they would have if they didnt leverage. The more liquidity that DeFi pools have the more options the market has for loans, savings accounts, and other financial products.
The more money that is circulating within the DeFi market, the more demand that will be created for more DeFi products. Investment and innovation follows demand, and we will see the decentralized financial market as a whole benefit from the increased amounts of TVL in DeFi products.
All Under One Roof
Leveraged yield farming aggregators combine two aspects of DeFi under one roof: lending and yield farming. A large amount of assets borrowed from decentralized exchanges are used for the purpose of yield farming, especially in the case of stablecoins. A user would borrow from a marketplace with overcollateralized loans such as AAVE, and use their coin to yield farm on a platform like Curve.
Yield farming aggregators like Bagels will allow users to borrow funds directly on the same platform that they will be yield farming on. This gives lenders a nice built-in market for their assets, and gives borrowers a quick and user-friendly way to take leverage. These platforms connect lenders looking for higher interest rates with yield farmers searching for a higher yield farming APY. Additionally, the loans offered on aggregators are under-collateralized, making the process easier for borrowers to participate by allowing them to not need to stake more than the value of their loan.
Additionally, aggregators such as Bagels allow participants to yield farm pools on different blockchains, providing more options under one roof for users.
With these three advantages for users, its clear that leveraged yield farming aggregators provide distinct improvements on the yield farming experience, the lending experience and DeFi’s TVL as a whole.
