Strategy 4 : Farming with Leverage : Hedging
Holding Multiple Positions in a Single Farming Pool
KLEVA Protocol is a DeFi Protocol to help Farmers maximize their Farm Yields by utilizing Leverage. Farmers can implement numerous strategies based on different methods of utilizing Leverage and Tokens to Farm with. Strategy 4 focuses on implementing Hedging by opening 2 Farming Positions. It has to be first noted that with KLEVA Protocol, Farmers can open multiple Farming Positions on the same Farming Pool. For example, when Jennis wishes to farm in KLAY-WEMIX Pool, he can open multiple Farming Positions, varying in Leverage Multiple or type of Borrowed Asset.
Example : Jennis wants to open multiple Farming Positions in KLAY-WEMIX Pool
Assumption : 1 WEMIX = 10 KLAY
Position 1 : 3.0x Leverage, Jennis's Equity : 100 WEMIX, Borrowed Asset : 2,000 KLAY
Position 2 : 3.0x Leverage, Jennis's Equity : 1,000 KLAY, Borrowed Asset : 200 WEMIX
Position 3 : 2.0x Leverage, Jennis's Equity : 100 WEMIX, Borrowed Asset : 1,000 KLAY
Position 4 : 2.0x Leverage, Jennis's Equity : 1,000 KLAY, Borrowed Asset : 100 WEMIX
Hedging
By holding multiple Farming Positions in the same Farming Pool, Farmers can Hedge their Farming Positions, reducing risk. In order to Hedge, Farmers must open Farming Positions in a Stablecoin Pool. In this case, Farmers can maintain risk level of farming in Stablecoin Pools, while expecting a much higher APR.
Assumptions :
1 WEMIX = 20 KUSDT
Jennis wishes to farm in WEMIX-KUSDT Pool
Jennis holds both WEMIX and KUSDT
Jennis wants to utilize 3.0x Leverage
1) Position 1
Equity Value : 10 WEMIX
Debt Value : 400 KUSDT
Position Value : 30 WEMIX or 600 KUSDT
Farming Position : [15 WEMIX : 300 KUSDT]
Long Position on 15 WEMIX
Short Position on 100 KUSDT
2) Position 2
Equity Value : 600 KUSDT
Debt Value : 60 WEMIX
Position Value : 90 WEMIX or 1,800 KUSDT
Farming Position : [45 WEMIX : 900 KUSDT]
Short Position on 15 WEMIX
Long Position on 900 KUSDT
3) Position 1 + Position 2
Position Value : 120 WEMIX or 2,400 KUSDT
15 WEMIX (Position 1, Long) + 15 WEMIX (Position 2, Short) = Neutral
100 KUSDT (Position 1, Short) + 900 KUSDT (Position 2, Long) = 800 KUSDT (Long)
As a result, Jennis is holding Long Position on 800 KUSDT. Although WEMX-KUSDT Pool is not a Stablecoin Pool, Jennis can Farm with much lower risks. Given that high APRs are usually accompanied by high price volatility and high risks, Farmers can expect high APRs with low risks by Hedging.
Taking a step further, Hedging can be formulated as below.
1) Position 1
Equity Value : $A worth of WEMIX
Debt Value : $2A worth of KUSDT
Position Value : $3A
Farming Position : [$1.5A worth of WEMIX : $1.5A worth of KUSDT]
Long Position on $1.5A worth of WEMIX
Short Position on $0.5A worth of KUSDT
2) Position 2
Equity Value : $B worth of KUSDT
Debt Value : $2B worth of WEMIX
Position Value : $3B
Farming Position : [$1.5B worth of WEMIX : $1.5B worth of KUSDT]
Short Position on $0.5B worth of WEMIX
Long Position on $1.5B worth of KUSDT
3) Position 1 + Position 2
Position Value : $3(A+B)
$1.5A worth of WEMIX (Position 1, Long) + $0.5B worth of WEMIX (Position 2, Short)
$0.5A worth of KUSDT (Position 1, Short) + $1.5B worth of KUSDT (Position 2, Long)
Should B = 3A, Jennis is holding a Neutral Position on WEMIX, thus Hedging his risks. It has to be noted that with price fluctuation, the Debt Ratio may also continuously change. It is advised that Jennis holds extra Tokens to add more collateral, should the Debt Ratio be at risk.
Strategy 4 emphasizes a method to maximize Leverage benefits while minimizing risks, by opening multiple Farming Positions. However, it is advised that Participants take a step-by-step approach to first understand KLEVA Protocol, before implementing Hedging; Starting as Lenders, then normal Leveraged Yield Farming, then Hedging.
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