DeFi Lending and Leveraged Yield Farming
Hey Lydians!
In this article as you can see by the title, we are going to be going over DeFi lending and leveraged yield farming!
Lending
So traditionally I am sure most of you are familiar with regular loans from a bank. You need a specific amount of funds and the bank essentially checks your credit and if everything checks out you can get your loan. You will then payback your loan on a monthly basis with some interest of course.
Now if we are taking a loan out on a DeFi platform this scenario will be much different. There is no bank or centralized entity giving you the loan instead, it is all done by smart contracts. This removes the middleman as blockchain technology often does in many cases. So you will be getting your loan from people instead of centralized entities. There is also no need for credit checks. It does however require you to put up some collateral in order for you to get the loan.
This sounds great right? Well, it is but there is also a catch. When you provide your collateral you need to make sure you keep an eye on it due to the volatile nature of the cryptocurrency markets. If the price tanks then you may need to add more collateral or you will run the risk of having your position liquidated.
Right now you might be thinking to yourself why would I be liquidated?
Well the lending platform still needs to be able to cover your loan. They cannot run the risk of losing the lenders money.
What’s in it for the lenders?
Lenders are rewarded with varying amounts of APR depending on the currency. You will often get interest and maybe fees from flash loans.
Stable Coins
Often lending platforms will also have their own stablecoin. Having your own stable coin on a lending platform can also be quite useful. There are many platforms where you can lend a cryptocurrency and then take out maybe 50% of what you used as collateral for their stablecoin. Then with the stablecoin, you can hold it or use it to buy other assets if you would like.
Leveraged Yield Farming
I am sure most of you are familiar with regular Yield Farming by now. The term leverage you have most likely heard of as well. Maybe some of you might even trade with leverage on other platforms. So with this, imagine you could increase your position size in a yield farm. So instead of 100$ into a particular farm, you could have let’s say 300$ by using 3x leverage.
Where does the money come from?
Usually how this would work is the DeFi platform would first offer you the ability to lend your crypto. That would in turn be the supply that users could pull from to leverage their farm positions. Every platform will have different amounts of leverage that can be used as well. So this is similar to lending and borrowing like we talked about above in the first section but instead of just borrowing and taking the cryptocurrency you are borrowing money to increase the amount of money in your farms.
There is also the same risk of course. You need to manage your positions carefully as you can be liquidated like we mentioned above. There is also normally some interest that you will have to pay as well but where this differs is that you can borrow much more than you put in unlike with traditional lending and borrowing on most DeFi platforms.
So what does this mean for me?
So basically with a traditional lending and borrwing system, you can only take out half of what you put in. So if you put up $100 as collateral then you can only borrow $50. With leveraged yield farming you can put in $100 and depending on the leverage available (let’s say 5x) then you can take out $400 to 5x your position to a total of $500. Pretty cool right? So this is of course more capital efficient for the user.
Ok Lydians that’s all for this article. Hope you all enjoyed it!
About Lydia Finance
Lydia Finance is an Automated Market Maker, Yield Farming, Staking, and Launchpad platform on Avalanche.
Their rich UI and comprehensive documentation/tutorials allow every level of user to invest in DeFi and maximize their earnings by taking advantage of Avalanche’s lightning-fast infrastructure with very low gas costs.
Trade, stake, pool, and earn $LYD and many other token utilities all on Lydia Finance.
