How to Avoid Getting Rekt in Leveraged Yield Farming
PembRock Finance’s philosophy and mechanics are built around the fact that when you win, we win. We don’t want anyone on our platform to lose money, which is why aim to provide you with easy-to-understand educational docs. Read on to see what the main leveraged yield farming risks are, and once you understand them, you can better invest your money, manage any risks, and leverage for success!
Leveraged Yield Farming Risks (And How to Mitigate Them)
For those who know what they are doing, using borrowed funds to farm with leverage by up to 3x provides a way to quickly grow your portfolio; however, as with borrowing and cryptocurrencies in general, there are associated risks which can cause greater losses than if you were staking, or farming without leverage. Luckily, you don’t have to be a helpless bystander if something doesn’t go your way; by knowing what your risks are and how to mitigate them, you can still protect your funds and give yourself much greater chances of profiting.
This one is unavoidable to some degree, regardless of whether you are holding, staking, farming, or performing any other DeFi operation. Leveraged yield farming presents increased risk when it comes to volatility due to the possibilities of impermanent loss and liquidation (which we cover below) or negative APY (where your losses outstrip the amount you earn from farming).
How to mitigate: Mitigating volatility could involve:
Picking coins to farm that are generally less volatile.
Not every DeFi protocol is created equal. As products are rushed onto the market to cash in on the latest craze, it could be at the expense of quality control, leading to smart contract exploits or other hacks.
How to mitigate: While it can be difficult to assess the level of security of a project, looking at whether it has an experienced team and has undergone solid testing and platform audits is a good start. Just for the record, PembRock Finance is created by a skilled and experienced team which you can read about here. The project has also undergone intensive internal testing as well as an external audit by BlockSec. Establishing trust between our platform and its users is of top priority.
Impermanent loss is a unique feature that arises when providing liquidity to AMMs. In short, it is the opportunity cost that can occur when the price ratio in a liquidity pool changes relative to the price you deposited at.
How to mitigate: Linked to volatility, impermanent loss can be greater or smaller depending on the assets you farm and whether they are likely to move in the same or opposite directions. Impermanent loss needn’t be disastrous at all, especially if your farming APY far outstrips the percentage loss you incur.
To get a full understanding of impermanent loss, read our documentation — complete with examples!
A necessary process that protects the protocol and lenders from losing any funds, liquidation is the biggest risk to those that borrow crypto to farm with leverage. Liquidation involves the automatic closure of your position and repayment of all fees, occurring when your debt level is set to surpass the amount of funds that you have put up as collateral.
How to mitigate: As with impermanent loss, liquidation can be averted through considering the volatility of your token pair. If one or both coins in your pair is really volatile, you may be best off taking on a smaller debt ratio; however, if you wish to gain the biggest farming rewards possible with 3x leverage, the best way to avoid liquidation is to carefully monitor and adjust your position as required.
Farm with all these steps above and you’ll see that your chances of getting rekt are minimized.