Partnership between Wault and Alpaca: what is Leveraged Yield Farming (LYF) and how to benefit from it?

Following the announcement of the partnership between Wault.Finance and Alpaca.Finance (read more here), a new option has emerged for WaultSwap users: Leveraged Yield Farming (LYF), that is to say the farming of tokens with a leverage effect on its yield, which increases tenfold the income linked to farming.

How does LYF work, what are its advantages / disadvantages, and how do you use it with assets from WaultSwap? This is what we will see from now…

Author’s note: for any questions or to discuss about Wault, you can find me on Wault’s French Telegram group (if you speak french!), or on Wault Main Channel. You can follow me on Twitter as well 😉

DISCLAIMER: If you’re new to cryptocurrency, do personal research first and cross-check information before investing in anything!

1. What is Alpaca Leveraged Yield Farming (LYF)?

Logo Alpaca Finance

Alpaca Finance is the largest lending protocol allowing leveraged yield farming on Binance Smart Chain (BSC). It helps lenders achieve safe and stable returns, and provides borrowers with sub-secured loans to achieve leveraged return farming positions, greatly multiplying their farming capacity and resulting profits.

As a user, you can participate in Alpaca Finance in three different ways:

  • Lender: You can get safe and stable returns on your core assets by depositing them in Alpaca’s Lending Vault. These assets are then offered to yield producers to leverage their positions.
  • Yield Producer (Borrower): You can borrow core assets from Alpaca’s loan vaults, which allows you to open a leveraged farming position, multiplying your APR (annual interest rate) up to 6 times, less loan interest! Of course, these higher returns come with greater risks than loans: liquidation, temporary loss (Impermanent Loss), etc.
  • Liquidator: monitors the pool for leveraged farming positions that are at risk (when the equity collateral becomes too low, thus approaching the risk of default), and liquidates them as needed (valid for Bots only).

In this article we will only discuss the profile of the yield producer.

Let’s farm like a pro!

2. How does Farming with leverage work on WaultSwap and Alpaca?

The leverage x1 is the same as the standard farming you can do on WaultSwap. You only farm the tokens that you own and provide to the platform.

The additional advantage of Alpaca, even with a lever x1, is that it allows you to auto-compound your WaultSwap assets (like Eleven or AutoFarm). That is to say, it will automatically claim the rewards of your LP tokens several times a day, then it will resell these rewards to buy back more tokens from your LP pair, and finally it will add these LP tokens to the amount initially deposited, exponentially increasing Interest Generated (APY).

Little reminder :
annual interest rate (simple farming)
APY: annual compound interest rate (farming with auto-compounding)

Above x1, you will need to borrow an asset through Alpaca, which will allow you to multiply your farming position, giving you higher returns as well as bonus ALPACA tokens.

The main disadvantage of leveraged farming is that it will complicate your strategy, since you will not only have to anticipate Impermanent Loss, but also the direction of change in the assets of your pair (upward or downward, we’ll come back to that). But this relative complexity is also its main advantage! 😉

Let’s see in detail how Leveraged Yield Farming works:

When you open a leveraged position, you borrow a protocol asset that you will have to repay when your position is closed (e.g.: BNB). Since, as with any liquidity pool (LP), Alpaca balances the matched assets (e.g.: WEX-BNB) at a ratio of 50:50, when the chosen leverage level is greater than x2, you borrow more from an asset than you can put into the LP position. Also, the protocol will have to exchange part of this borrowed asset (BNB) for the other paired asset (WEX) to create LP tokens in a 50:50 ratio, regardless of the amount you deposit.

The WEX asset will then have a “long” exposure with leverage, so the value of your shares will increase when its price increases. And you will have a slight “short” exposure on the borrowed BNB asset (more precisely, on the BNB part that was sold for WEX). This means that your net worth will increase when the price of BNB goes down, and your net worth will decrease when the price of BNB goes up.

To roughly summarize leveraged farming, regardless of the direction of the variation of the two tokens (upward or downward), the main asset that you provided (ex: WEX) will have to outperform compared to the borrowed asset (eg BNB) to make gains, or so that your position does not get too close to the liquidation zone.

Don’t panic, a concrete example is coming!

3. Example with an LP WEX-BNB and a leverage of x2.5

It’s not easy to understand this long / short mechanism well, but the following example should allow you to better visualize how all this works in practice (you will also find a small tutorial with pictures at the end of the article to create your first position).

3.1. Basic principles :

Let’s say you want to operate the WEX-BNB LP pool with a leverage of x2.5. Let’s assume that BNB is at $340, and WEX is at $0.04.

Via Alpaca, once your wallet is connected, you provide 8500 WEX for a value of 1 BNB ($340), and borrow from Alpaca 1.5 BNB ($510). You now hold a total value of $850, or 2.5 BNB (thanks to the leverage of x2.5). But to create your LP position (WEX-BNB), the protocol needs to sell and convert part of the borrowed BNB to WEX, in order to get a dollar value evenly distributed across the LP pair ($850/2).

Thus, on the 1.5 BNB that it lent you, the protocol sells 0.25 BNB ($85), and converts them into 2125 WEX (having a value of 0.25 BNB). You now have a perfect balance of 1.25 BNB ($425) and 1.25 BNB in ​​WEX tokens (10625 WEX to be precise, or $425), and you can now build your WEX-BNB position at a ratio of 50:50 (1.25 BNB and 10625 WEX).

Some time later, when you close your position, although you only have 1.25 BNB, you still owe the protocol 1.50 BNB (the amount Alpaca initially loaned you). Therefore, the protocol must now buy back 0.25 BNB using your WEX, and add them to the 1.25 BNB you already have in your possession, giving you a total of 1.50 BNB that you will return to the protocol.

3.2 Explanations and challenges of your position with leverage effect:

In summary, here is your total exposure to your WEX-BNB position, assuming that the 1.25 BNB in ​​your LP is neutral, since you already have them in your LP:

  • Long: 10625 WEX (worth 1.25 BNB, or $425 when deposited)
  • Short: 0.25 BNB (worth $85 when deposited)

In this configuration, you therefore hope that the price of WEX goes up to increase the value of your assets and easily repay the 0.25 BNB, but if it does not go up or down, and the BNB goes down in the meantime, you will have reduced the negative effects!

Now let’s compare the above to the total exposure to a WEX-BNB position if you had simply deposited an equal position value of 2.50 BNB yourself, without taking any leverage (so you would have deposited yourself 10625 WEX and 1.25 BNB at x1):

  • Long: 10625 WEX (worth 1.25 BNB, or $425 when deposited)
  • Long: 1.25 BNB (worth $425 when depositing)

Note the differences between the expositions in the examples above. The values ​​of the positions are the same, but without borrowing you would only expect an increase in the prices of WEX and BNB, whereas by taking out a loan with leverage, instead of going “long” on the BNB, you will be in “short”, which will spread the risks.

Voilà, now you know how to short an asset like a real trader! And this new paradigm opens up many new possibilities for profit!

As you have certainly seen, prices go up and down depending on the periods. However, if you are only able to “long” an LP asset, you will only be able to gain value when prices move positively. With “shorting”, you can now place bets and profit from them even when market prices fall!

4. How to leveraged farm an asset from WaultSwap on Alpaca

First, go to the Alpaca app, and connect your web wallet (preferably MetaMask, connected to the Binance Smart Chain network).

Then go to the FARM section, and click on WaultSwap to isolate its pools from the pools of other platforms.

WaultSwap pools overview (more are yet to come).

Choose the pool that’s right for you. Here, in this this example, we are going to choose the WEX-BNB pool, which has a phenomenal APY thanks to the leverages and auto-compounding.

The steps to create a position on Alpaca.

In step 1, first choose which asset you want to provide. You can provide either one (ex: WEX), or the other (ex: BNB), or both. It has no importance. Here I have chosen to provide only 10,000 WEX, with a leverage of x2.5.

Then, indicate which leverage you want to obtain (step 2). The platform will then ask you which asset you wish to borrow (step 3). For information, in this pool, only BNB can be borrowed.

All you have to do now is to check the summary information provided by Alpaca, and then click on Approve. It will then be necessary to confirm several transactions with MetaMask, this is quite normal.

5. Monitor, control and close positions on Alpaca

5.1. Track and control your positions

Once your position is validated, you can go to the “Your Positions” section of the “Farm” page, and see where your position is.

Dashboards of positions on Alpaca.

What’s important to watch is the Debt Ratio (the value of your debt divided by the value of your position). If this exceeds the Liquidation Threshold, then your position will be liquidated and you will suffer a loss without the possibility of “getting back”. This is also indicated by the Security Buffer (Liquidation threshold - Debt ratio). If this reaches zero, then your position is liquidated and you will have to pay a liquidation fee.

5.2. Add equity (collateral)

You can give your position a little more time to recover from a decline by adding equity to it. This will lower your debt ratio. But be careful, it is to be used with great care, because you could widen your deficit a little more if your assets continue to fall! Sometimes it’s better to accept your loss than to make it worse.

Investing in cryptos and DeFi can be stressful. Sometimes.

If you are sure of yourself and want to add equity, just stay in the “Your Positions” section of the “Farm” page, and click on “Add Collateral” which appears to the right of the asset that you want to boost.

Then choose which token you want to add (BNB, WEX, or both) and its quantity (step 1), look at the impact (step 2) that it will have on your Debt Ratio and on your Safety Buffer, then confirm by clicking “Approve” (step 3). Then validate the transactions with your MetaMask wallet.

5.3. Close your positions

If you want to take out your assets to get your LP tokens back, you just need to close your position.

To do this, stay on the “Your Positions” section of the “Farm” page, and click on the “Close Position” button, which appears to the right of the asset you wish to remove, below “Add Collateral”.

How to close a position on Alpaca.

In step 1, you will have to choose between “Minimize Trading” and “Convert to [BNB]” (convert to BNB, but it can be any other token that you have borrowed from a LP pair).

  • Minimize Trading: Alpaca will convert the required minimum amount of tokens into BNB to repay the debt, and return the remaining assets to you with the tokens you provided initially (here, WEX). This can potentially save you on price slippage and trading fees.
  • Convert to [BNB]: the value of your position will be fully converted into your base token (the tokens you borrowed, here BNB), and will be returned to you after paying off the debt.

Check the exit information, including the number of tokens you will receive back, then confirm by clicking “Close Position”.

6) Join the Wault Finance community

Wault Finance currently has several thousands loyal supporters, whom you can join now on the network of your choice!

Author’s note: for any questions or to discuss Wault, you can find me on Wault’s French Telegram group (if you speak french!) or in the main Wault channel, and you can follow me on Twitter as well.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Hary Beno

Hary Beno


Team member of Thorus.Fi. CEO of IS Edition, a French publishing company. Cryptos, DeFi and Blockchain evangelist. Follow me on