Risks for Farmers
The level of risk when engaging in leveraged yield farming depends on both the tokens that are involved in the pair and also the amount of leverage that a farmer takes advantage of.
Impermanent loss is a risk that comes up every time someone provides liquidity to a liquidity pool. It is to do with the need to keep the dollar ratio of assets in a pool the same at all times, meaning that if one token goes up or down while another stays relatively stable (or moves in an opposite direction), the pool has to be rebalanced.
This changes the proportion of your tokens in the pool and can lead to a loss compared to if you just held the two assets. Impermanent loss is indeed a risk but can be mitigated by the yields gained from providing the funds to the liquidity pool.
Liquidation occurs when a farmer’s leveraged position suffers from impermanent loss, taking on more debt than can be covered by the value of the initial investment. The risk of liquidation rises in line with the amount of funds leveraged, as is shown in this table.
The more funds that are leveraged, the bigger the risk should a token in the pair fall. Having debt that cannot be covered by the farmer’s initial investment brings liquidation.
If the farmer simply uses their own funds, without any leverage, then the risks are no different than using any other yield farming platforms. Impermanent loss is the only consideration.
Leveraged yield farming brings the risk of impermanent loss, as well as that of liquidation if the loss crosses over a certain threshold determined by the platform.
Negative APY is a risk that occurs when the borrowing interest rate is higher than the yield generated from farming with leverage. With debts growing faster than the gains that are made, this could trigger liquidation if not properly monitored.
If a smart contract has any bugs or vulnerabilities, it can be exploited by malicious actors. This risk is compounded when it comes to DeFi products that are rushed to market or created by those without so much experience in the industry.
PembRock Finance has been created by experienced blockchain builders, and will gain an external audit before launch, making sure that the smart contracts employed in our leveraged yield farming protocol are watertight!
Having just launched and handling the transactions of many users, some have experienced corner cases, including:
- Temporary inoperability or the freezing of funds
- Gas usage errors
- NEAR wallet maintenance
- Other cases of maintenance concerning third-party resources; for example, RPCs and nodes.
We would like to assure you that all funds on PembRock Finance are secure, and we are continuously working on improving user experience so that such situations do not occur in the future.