What is leveraged yield farming?

Leveraged yield farming is a concept innovated by Alpha Finance Lab. Alpha Homora, deployed on Ethereum in October 2020, is developed by Alpha Finance Lab and is the first leveraged yield farming product in DeFi.

Yield farming is a process in which users (or farmers) receive additional incentives (typically in the form of another token) for providing liquidity to a liquidity pool on a certain AMM protocol, such as PancakeSwap in this case.

For instance, if you were to provide liquidity of 1 BNB and 250 BUSD (assuming 1 BNB = 250 BUSD) to a BNB-BUSD liquidity pool on PancakeSwap, then you will receive rewards in another token (e.g. 10 Token A) in addition to a share of trading fees that the protocol gains (e.g. 10% APY), which you would normally receive for being a liquidity provider on any AMM.

Leveraged yield farming is a mechanism that allows farmers to lever up their yield farming position, meaning to borrow external liquidity and add to their liquidity to yield farm. As a result of having more liquidity to yield farm (e.g. borrow 2 more BNB, adding up to 3 BNB and 250 BUSD), leveraged yield farmers gain more rewards in Token A and a larger share of the trading fees than otherwise.

To understand what goes on behind the scene on Alpha Homora, see the infographics below.