Leveraged Yield Farming
Overview
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.
Creating a position
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.
Selecting borrow terms
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 leverage
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.
Understanding Total APY
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.
Viewing your position
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
Liquidation price
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.
Managing your position
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
Depositing more
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
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 borrow terms
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.
Fees
Leveraged yield farming has two kinds of fees - trading costs and borrow fees.
Trading costs
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.
Borrow fees
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.
Liquidation risk
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.
Negative APY risk
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.
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