Leveraged Yield Farming
Last updated
Last updated
Leveraged yield farming is an advanced yield strategy to earn yield from providing liquidity on pegged-asset liquidity pools on Balancer and Curve.
This product gets leverage from Notional, deploys into a liquidity pool, and then harvests and auto-reinvests the earned incentives.
Leveraged yield farming gives users organic yield paid in the deposit token. This is a good strategy for active users who want to maximize their APY and are comfortable with APY volatility.
To create a leveraged yield farming position, follow these steps:
Go to the leveraged yield farming page.
Pick a network.
Pick your opportunity. Each opportunity card shows the deposit token and the pool it deploys into:
Input the deposit amount and select your borrow terms. Borrow term options show you the total APY that you will earn and the borrow APY that you will pay on your leverage.
Select your leverage using the leverage slider.
Click Continue to Review.
Click Submit.
Depositing to a leveraged yield farming position involves borrowing from Notional's lending markets. You can borrow at a variable rate or at a fixed rate.
Variable borrow
Zero fee on entry or exit.
Borrow rate can be volatile.
Good choice if you are short-term or if you think fixed borrow rates are too high.
Fixed borrow
Upfront fee on entry and exit before maturity. (More info on fixed rate fees here).
Borrow rate is fixed.
Good choice if you are longer-term or think the fixed rate is low.
At maturity, your fixed rate auto-converts to a variable rate and your position remains open.
Selecting your leverage changes how much you borrow which changes the borrow rate and the total APY.
The more leverage you use, the more you borrow. Usually, this means that your total APY goes up. But it can also make your total APY go down if you borrow so much that it spikes your borrow rate.
Total APY depends on three things:
The APY on vault shares.
The APY spread. (APY spread = vault share APY - borrow APY)
The leverage ratio.
You can find the calculation on the left-hand side of the page.
To find your position, go to the leveraged vaults tab on the portfolio page.
This page will give you detailed information regarding your position, including:
Your current APY
How much you deposited
The current value of your position
Your current earnings
The Notional UI will show you a health factor and a liquidation price for your position.
The liquidation price is in terms of the vault share price. As vaults receive reinvestments, the vault share price increases. If the value of the vault's LP tokens decreases, the vault share price will decrease.
To manage your position, switch to the default portfolio view and expand the position row. Then click the manage button.
The manage button gives you a few options:
Deposit more
Adjust leverage
Withdraw
Switch borrow terms
To deposit more, click the button that says Deposit.
This will take you to a transaction page with a deposit input field.
Your borrow terms and leverage ratio will be kept the same as you deposit more.
Adjusting leverage allows you to increase or decrease your leverage without depositing more tokens or withdrawing from Notional.
Click the adjust leverage button and move the slider to your desired leverage. You can see the impact on your position on the UI:
Switching your borrow terms lets you swap your leverage in one click while keeping your position open.
Users might want to do this if a different borrow term gives them a higher total APY. For example, if the variable borrow rate spikes, a user might want to switch from the variable borrow rate to a lower fixed rate in order to protect their total APY.
On the manage position menu, you will see one button for each borrow maturity. You will see the Total APY that you would get if you switched your borrow to that maturity.
To switch your borrow terms, just click the button and submit the transaction on the next screen.
Leveraged yield farming has two kinds of fees - trading costs and borrow fees.
When you deposit into a leveraged yield farming strategy, the strategy will enter the liquidity pool on the DEX. This involves trading costs because the strategy needs to trade some of the deposit tokens for the other tokens in the pool before entering.
These same costs will occur on exit - the strategy will need to trade back to the deposit token to give that token back to you.
The Notional UI will show you a detailed breakdown of the trading costs on the trade summary when you enter or exit your position.
Leveraged yield farming strategies include borrowing, which can include fees. Variable borrowing does not include an upfront fee, but fixed rate borrowing does. Read more about fixed rate borrow fees here.
The Notional UI will show you a detailed breakdown of the borrow fees on the trade summary when you enter or exit your position.
Leveraged yield farming includes liquidation risk. Remember - you're borrowing from Notional and using the borrowed funds to provide liquidity on a DEX.
Liquidation can occur if the price of vault shares drops. Vault shares hold the strategy's LP tokens, so the way that the price could drop is if one of the tokens in the liquidity pool loses its peg.
This means that the risk of liquidation is driven by potential de-pegs of one of the tokens in the liquidity pool, so be sure to choose liquidity pools carefully.
It's possible for leveraged yield farming positions to have a negative Total APY if the borrow rate increases above the vault share yield. One way of reducing this risk is to use a fixed borrow rate.
When you borrow in leveraged yield farming, there are two types of borrowing:
Fixed Rate Borrowing: This locks in a borrowing rate for the duration of the loan, so you know exactly how much interest you will pay by the time the loan matures. However, if you want to repay the loan early, the current market rate for fixed-rate borrowing comes into play. The amount you will owe may fluctuate based on whether the rate has gone up or down since you first borrowed. This can lead to profit or loss if you exit early.
Variable Rate Borrowing: With a variable rate, your interest rate can change block by block, meaning the amount of interest you owe is continuously adjusted based on the market rate. There’s no upfront fee for liquidity providers as the rate is always moving.
When you take out a fixed-rate loan, you pay interest on that loan at the agreed-upon rate (e.g., 9.34% per year). The "fixed" part means that no matter what happens to the market rates after you lock in your loan, your interest rate won't change. However, if you want to close your position early, the present fixed rate in the market will impact the amount you owe.
For example:
Let’s say you borrow 100 ETH at a fixed rate of 5% for one year. If you hold the loan to maturity, you’ll owe exactly 5 ETH in interest. However, if you want to exit early, say after six months, the current fixed rate affects your payoff:
If rates stay at 5%: You have held your loan for half the time and will need to pay half the interest upon exit, or 2.5 ETH.
If rates rise to 8%: Your debt becomes cheaper. It might cost you only 2.4 ETH to repay instead of 2.5 ETH, meaning you save on interest by exiting early.
If rates fall to 3%: Your debt becomes more expensive. It could now cost 2.6 ETH to repay, meaning you’ll pay more to close the position early.
That’s why Notional shows you changes in the value of your debt even though you’ve locked in a fixed rate — it affects early repayments.
The "Present Value" of your position can change because of:
Borrow Interest Accrual: As time passes, the interest on your loan adds up, affecting your position’s value.
Market Rate Movements: Even though your fixed-rate loan is locked in, market rates fluctuate. If you were to close your position before maturity, the value of your debt might be higher or lower depending on where the current fixed rate stands compared to your locked-in rate.
The fee you pay upfront for fixed-rate borrowing covers two things:
Liquidity Provider Fee: Just like with any other trade in a market, there’s a fee associated with borrowing from a fixed-rate liquidity pool. This fee compensates liquidity providers who enable you to access the fixed rate.
Vault Fee: Leveraged strategies often charge an extra fee for the additional complexity and risk involved. This fee is charged upfront for fixed-rate borrowing, while for variable-rate borrowing, it's spread out over time.
If you notice a difference between your "Present Value" and the amount displayed on the withdrawal screen, it’s likely due to slippage caused by low fixed rate liquidity. If you have a large debt repayment, the fixed rate can move significantly, resulting in slippage loss.
You can estimate the slippage loss using this formula:
Slippage Loss = Debt Repayment Amount × Slippage Percent × Year Fraction
Example: If repaying 253 ETH causes a 3.6% slippage over 3 months, slippage loss is approximately 2.27 ETH. (253 * 0.036 * 0.25)
