Profiting with Tulip Protocol Part 4: Farming with Minimal Leverage
Part 4 of a 5 part series
Read Part 3
Strategy #4: Farming with Minimal Leverage
Conservative Connie holds $10,000 in ORCA because she believes in the project. She wants to earn yield on her ORCA somehow. She read Part 1 (leveraging long) of this series, but she doesn’t like the idea of having a leveraged long exposure on ORCA.
She could possibly deposit ORCA on a lending protocol. For example, Tulip Protocol has an ORCA lending pool that yields 89% APY.
Or, if she believes farming her tokens on a DEX (Raydium, Orca, or Saber) is profitable, she can provide $10,000 in ORCA + $10,000 in USDC or SOL liquidity to a DEX and stake her LP tokens with Tulip Protocol to autocompound her yields to earn ~133% APY.
But, by using LYF on Tulip Protocol, specifically using 2x leverage, Conservative Connie can potentially earn even more yield. If she opens an ORCA-USDC or ORCA-SOL farm, deposits $10,000 in ORCA, and borrows $10,000 in USDC or SOL (2x leverage), she can earn 2x farming yields or about ~400% APY on her $10,000 in ORCA. She will not have leveraged exposure to any token because the borrowed tokens are not swapped for any other tokens.
Let’s apply the calculations explained in Part 1 to further explain the above paragraph. If she opens an ORCA-USDC farm, deposits $10,000 in ORCA and borrows $10,000 in USDC (2x leverage), she will be farming $10,000 ORCA + $10,000 USDC. Her exposure will be:
Long $10,000 in ORCA (tokens in LP)
Long $10,000 in USDC (tokens in LP)
Short $10,000 in USDC (tokens borrowed)
Her initial net exposure will be $10,000 in ORCA, which is the same exposure she had before LYF at 2x.
If she opens an ORCA-SOL farm, deposits $10,000 in ORCA and borrows $10,000 in SOL (2x leverage), she will be farming $10,000 ORCA + $10,000 SOL. Her exposure will be:
Long $10,000 in ORCA (tokens in LP)
Long $10,000 in SOL (tokens in LP)
Short $10,000 in SOL (tokens borrowed)
Her initial net exposure will be $10,000 in ORCA, which is the same market exposure
In both cases, she will be earning 2x yield or ~400% APY.
However, when the price of the non-borrowed token (ORCA) or borrowed token (USDC or SOL) changes, her LPs will rebalance. The graph below models her equity when these token prices change.
Black dotted line - Conservative Connie’s equity if she HODLed her $10,000 ORCA in her wallet.
Black line - Conservative Connie’s equity when farming ORCA-USDC (or ORCA-SOL if SOL stays flat) at 2x leverage, without considering yields. Her equity will always be below the black dotted line due to impermanent loss.
Purple line - Conservative Connie’s equity when farming ORCA-USDC (or ORCA-SOL if SOL stays flat) at 2x leverage (borrowing USDC), inclusive of yields. Her equity will be greater than HODLing ORCA in her wallet, if ORCA stays in the range [-50%, +85%] during the 30-day farming period.
Green line - Conservative Connie’s equity when farming ORCA-SOL at 2x (borrowing SOL), inclusive of yields. If SOL rises by 20%, her LPs will rebalance to contain more ORCA. Thus, if ORCA (the non-borrowed token) rises, she will profit slightly more than the Purple Line; if ORCA falls, she will profit slightly less.
Red line - Conservative Connie’s equity when farming ORCA-SOL at 2x (borrowing SOL) inclusive of farming yields. If SOL falls by 20%, her LPs will rebalance to contain less ORCA. Thus, if ORCA (the non-borrowed token) rises, she will profit slightly less than the Purple Line; if ORCA falls, she will profit slightly more.
Liquidation Risks
According to the table in Part 1, at 2x leverage, ORCA will have to fall 65.4% before she gets liquidated. At any time during farming, you can use the table to determine how much a token needs to fall before getting liquidated. Just match the Kill Buffer shown under “Your Positions” with the values in the table.
In conclusion, you can use 2x leverage on Tulip Protocol to farm a token you are bullish on while being minimally leveraged. This could be more profitable than standard farming at 1x or HODLing the token in your wallet, as you will be earning 2x farming yields.
Stay tuned for our final article on Tulip!
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