Strategy 3 : Farming with Leverage : Holding Long & Short Position

Understanding Long / Short

Some Farmers may not be familiar with the concept of Long / Short. Participants who believe that a Token will appreciate hold Long Position, and Participants who believe that a Token will depreciate hold Short Position. Therefore, in a Bull Market, Participants who hold Long Position gain profit, while in a Bear Market, Participants who hold Short Position gain profit. Applying this concept of Yield Farming, it can be understood that Farmers are holding Long Position in both assets they are depositing to Yield Farm.

With Leverage, however, Farmers can decide for themselves whether to take Long/Short Position on the assets they are depositing. This can be done through utilizing Leverage Multiple. When Leverage Multiple is above 2.0x, Farmers can expect the same effect as holding Short Position on their Borrowed Asset. For Leverage below 2.0x, Farmers can expect the same effect as holding Long Position on both their Equity and Borrowed Asset. For 2.0x Leverage, Farmers are holding Neutral Position. Please find below an example to help comprehension of this process. (For better understanding, please have "Borrowed Asset that must be Returned" in mind)

Assumptions :

1. 1 WEMIX = 10 KLAY

2. 1 WEMIX = 10 KLAY at all times. In real life, the exchange ratio of the two assets would constantly be changing

3. All the Farm Yields and Borrowing Interest will be neglected

1) Leverage Multiple > 2.0x

1. Jennis's Equity : 100 WEMIX | Leverage = 3.0x | Borrowed Asset : KLAY

   • Jennis opens Farming Position at 3.0x Leverage, borrowing 2,000 KLAY

   • Jennis's Farming Position Value : 100 WEMIX + 2,000 KLAY

   • Equal value of WEMIX and KLAY must be deposited to open Farming Position : 500 KLAY is swapped to 50 WEMIX

   • Jennis's Farming Position : [150 WEMIX : 1,500 KLAY]

2. After a month, Jennis wishes to close his Farming Position

   • Jennis must return the 2,000 KLAY he borrowed to close his Farming Position

   • Jennis currently holds only 1,500 KLAY, thus part of his WEMIX must be swapped to 500 KLAY

   • If WEMIX has appreciated, Jennis can swap less than 50 WEMIX for 500 KLAY

   • In conclusion, Jennis can end his Farming Position, with more WEMIX than he started (100 WEMIX)

Please note :

1. Jennis holds Short Position only on 500 KLAY, the part of Borrowed Asset that has been swapped

2. Jennis must return 2,000 KLAY he borrowed. Therefore, when KLAY has depreciated, Jennis can return the 2,000 KLAY at a much cheaper price

3. Taking a step further, when Jennis's WEMIX appreciates, Jennis only has to swap a small part of his WEMIX to return the KLAY he borrowed

Conclusion

For Leverage > 2.0x, Farmers are holding Short Position on their Borrowed Asset (in this example, KLAY), and Long Position on their Equity (in this example, WEMIX)

2) Leverage < 2.0x

1. Warya's Equity : 100 WEMIX | Leverage = 1.5x | Borrowed Asset : KLAY

   • Warya opens Farming Position at 1.5x Leverage, borrowing 500 KLAY

   • Warya's Farming Position Value : 100 WEMIX + 500 KLAY

   • Equal value of WEMIX and KLAY must be deposited to open Farming Position : 25 WEMIX is swapped to 250 KLAY

   • Warya's Farming Position : [75 WEMIX : 750 KLAY]

2. After a month, Warya wishes to close her Farming Position

   • Warya must return the 500 KLAY she borrowed to close her Farming Position

   • Since Warya holds 750 KLAY, she can close her Farming Position after returning 500 KLAY

   • Warya closes her Farming Position, and now holds 75 WEMIX and 250 KLAY

   • In conclusion, should 250 KLAY > 25 WEMIX, then Warya is at profit. In other words, if the appreciation of KLAY is higher than the appreciation of WEMIX, Warya is at profit.

Conclusion

For Leverage < 2.0x, Farmers are holding Long Position on both their Equity (WEMIX) and Borrowed Asset (KLAY), but a bit more Long on the asset they borrowed. (Farmers will gain more profit when the asset they borrowed appreciates more)

3) Leverage = 2.0x

1. Harya's Equity : 100 WEMIX | Leverage = 2.0x | Borrowed Asset : KLAY

   • Harya opens Farming Position at 2.0x Leverage, borrowing 1,000 KLAY

   • Harya's Farming Position Value : 100 WEMIX, 1,000 KLAY

   • Harya enters Farming right away, for there's no need for any swaps : [100 WEMIX : 1,000 KLAY]

2. After a month, Harya wishes to close her Farming Position

   • Harya must return the 1,000 KLAY she borrowed to close her Farming Position

   • Harya currently holds exactly 1,000 KLAY; She can close her Farming Position right away after returning the 1,000 KLAY

   • Harya closes her Farming Position, and now holds 100 WEMIX

Conclusion

For Leverage = 2.0x, Farmers are holding a Neutral Position on both their Equity and Borrowed Assets.

Please Note

The above example neglects any change in the exchange ratio between the two assets, as well as any Farm Yields or Borrowing Interest. The contents were neglected to aid Farmers' understanding of holding Long/Short Position based on Leverage. During actual Leveraged Yield Farming through KLEVA Protocol, there may be more variables than those listed above, including change in exchange ratio, Farm Yield, and Borrowing Interest. However, there is no change in holding Long/Short Position based on Leverage Multiple.