Strategy 2 : Farming with Leverage : Stablecoins

Leveraged Yield Farming with Risk Management

Participants who are worried about possible risks (such as Impermanent Loss or Liquidation) arising from price volatility may implement risk management solution utilizing Stablecoins. Because the exchange ratios of any two tokens in Farming Pools are determined by AMM(Automated Market Maker), when the value of either of the two tokens fluctuation, Farmers may experience Impermanent Loss. Stablecoins, however, are pegged to 1 USD, providing extremely low price volatility. Furthermore, stablecoins are highly utilized in DeFi Ecosystems, and thus there are many methods to farm with stablecoins, with good APYs.

On Klaytn DeFi Ecosystem, there exists many stablecoins that Farmers can freely choose to open Farming Positions. On KLEVA Protocol, for stablecoin pairs have much higher Liquidation Threshold and Leverage Multiple (up to 5.0x, 6.0x), Farmers can expect 5, 6 times higher APY.

Farmers who are new to Leveraged Yield Farming and wish to start light & simple can find what they are seeking through Leveraged Yield Farming with stablecions, and earn additional rewards at KLEVA Protocol

Farming with Leverage : Stablecoins

KLEVA Protocol provides Leveraged Yield Farming not only for Tokens, but also for stablecoins. From the Launch Stage, KLEVA Protocol will open Lending Pools for various stablecoins. Farmers will then be able to borrow stablecoins to Leveraged Yield Farm in various Stablecoin Farming Pools. such as KUSDT - KDAI, KUSDT - KUSDC and more.

Farming with stablecoin pairs allows high profit while maintaing low-risk level, as that of Lenders. Since Lenders usually deposit single assets, they are free from potential risks such as Impermanent Loss and Liquidation; however, with low-risk, comes low-return. On the contrary, as Leveraged Yield Farmers are more exposed to potential risks, they can enjoy higher returns (profits); however, Farmers can be free from such risks. Both Impermanent Loss and Liquidation are results of price volatility of Token Pair. With stablecoin pairs, which are pegged to 1 USD and thus have extremely low price volatility, Farmers can find an exit from those risks.

Furthermore, even the Farming Pools that "guarantee" high APYs are not free from loss due to depreciation of Token Pairs (such as in Bear Market). Therefore, should a Bear Market be expected, it could be advised that Farmers close their original Farming Positions and open new Farming Positions with stablecoin Pairs.

Stablecoin Farming Profit (with Dason)

Dason is not a risktaker, and has to intention in Leveraged Yield Farming. Knowing that Farming in stablecoin pairs provides much lower risk-level, however, Dason decides to Farm with stablecoins at Leverage. Dason has 1,000 KUSDT, and decides to Farm in KUSDT-KDAI Farming Pool of KLAYswap. Let's assume the current Utilization Ratio(UR) of KUSDT and KDAI Lending Pools are 70% and 30%, respectively.

  1. Dason's Equirt : 1,000 KUSDT

  2. Borrowing Interest of KUDST : 20% (KUSDT Lending Pool UR : 70%)

  3. Borrowing Interest of KDAI : 10% (KDAI Lending Pool UR : 30%)

  4. KUSDT - KDAI Farming Pool APY : 50%

(For those unfamiliar with the relationship between Interest and UR, please refer to Interest Rate Model)

  1. Leverage = 2.0x

    • Dason decides to borrow KDAI (which has lower Borrowing Interest) and selects 2.0x Leverage, borrowing 1,000 KDAI

    • Dason's Farming Position : [1,000 KUSDT : 1,000 KDAI]

    • Dason's APY : (Pool APY x Leverage) - (Interest Rate x (Leverage - 1)) + KLEVA Reward

      = (50% x 2.0) - (10% x (2-1)) + α

      = 90% + α

    • Dason can expect additional DEX Governance Token Rewards by staking ibKLEVA after depositing KLEVA Token to Lending Pool.

  2. Leverage = 6.0x

    • Dason decides to borrow KDAI (which has lower Borrowing Interest) and selected 6.0x Leverage, borrowing 5,000 KDAI

    • Dason's Farming Position Value : 1,000 KUDST + 5,000 KDAI

    • For the two stablecoins have to be of same value when entering Farming Pool, 2,000 KDAI must be swapped for 2,000 KUSDT

    • Dason's Farming Position : [3,000 KUSDT : 3,000 KDAI]

    • Dason's APY : (Pool APY x Leverage) - (Interest Rate x (Leverage - 1)) + KLEVA Reward

    = (50% x 6.0) - (10% x (6-1)) + α

    = 250% + α

    • Dason can expect additional DEX Governance Token Rewards by staking ibKLEVA after depositing KLEVA Token to Lending Pool.

(The example above is subject to change due to factors including, but not limited to, APY of Farming Pool, Autocompound and change in interest)

Please Note

Depending on the type of stablecoin, stablecoin may also experience slight price volatility. Stablecoins with high circulation and fiat-collateralized stablecoins usually have low price volatility. Below is the list of stablecoins currently available in Klaytn DeFi Ecosystem :

  1. Fiat-Collateralized Stablecoin

    • Example : KUSDT, KUSDC, KBUSD

  2. Crypto-Collateralized Stablecoin

    • Example : KDAI, KSD

  3. Algorithmic Stablecoin

    • KAI, JUN

Leveraged Yield Farming with stablecoins typically have lower APYs than Token pairs. On the contrary, since many Farmers prefer to borrow stablecoins, the Utilization Ratio of stablecoins may spike, resulting in spike in Borrowing Interest. Although highly unlikely, the spike in Borrowing Interest may cause Farmers' APYs to be very low, or even slightly negative. Please note that such phenomenon is very temporarily, for KLEVA Protocol has implemented methods, including Interest Rate Model, to decrease Utilization Ratio and thus Farmer's Borrowing Interest. Farmers must take into account such possible risks before Farming.

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