An Introduction to Leveraged Yield Farming with Evolve
Evolve will be the first of its kind Decentralized Finance (DeFi) lending protocol on Cronos Mainnet
What Is Leverage?
Leverage involves taking a loan, using the borrowed funds to generate extra profit, then paying back the loan while keeping the extra profit.
What is Yield Farming?
Users are able to become liquidity providers (LP) in Decentralized Exchanges (DEXs) such as MMFinance and @vvs-finance where they are able to gain profits from providing liquidity in two ways. One way is from service fees that are directly added to their LP token position, and the other method is by staking their LP tokens in farms in order to earn yield in the form of tokens. DEX’s incentive LP providers to create and stake their LPs by rewarding them with their DEX tokens (eg $MMF and $VVS).
The current yield rates on MMF, VVS, and other DeFi protocols are substantial especially compared to traditional finance going upwards of over 600% APR. This is why yield farming is so attractive and lucrative. Users can make money even if the market goes down.
So Where does Evolve Fit in?
Evolve is a protocol that enables investors to leverage their LP tokens in order to enhance their yield farming rewards. Investors can take 2–10x loans on the value of their LP tokens in order to farm with it and earn multiples in rewards. It allows users to amplify the already substantial yields seamlessly, and it also allows users to exit those positions just as easily.
For example, if your 10 LP tokens are earning 50% interest, you can leverage them 10x so you now hold 100 LP tokens and you’ll effectively earn 500% interest (minus lending fees) until such time as you de-leverage (pay back the loan).
Of course, the higher the leverage, the higher the risk that price changes could trigger liquidation. Evolve will show users the exact liquidation price limits before they approve the leverage transaction so they can choose the risk they are comfortable with.
What is Liquidation?
The Evolve lending smart contract is always watching the value of the loaned funds and comparing it to the value of the collateral. If the value of the collateral begins to drop below the value of the loaned funds, the contract is able to take the collateral, liquidate it (sell it), and pay back the lender.
This is not ideal for the borrower because it is forcing them to sell their LP position when they may not have been planning on doing so at that moment in time. Additionally, there is a tax placed on top of what is being liquidated. Therefore, it will be extremely important for users to be vigilant and monitor/manage their positions, especially if they are highly leveraged. We will go into ways to manage liquidation risk in future articles.
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