If you are already familiar with yield farming, then you will understand leveraged yield farming in no time.

Leveraged yield farming is a concept innovated by Alpha Venture DAO back in October 2020. It is a mechanism that allows farmers to create a bigger yield farming position by borrowing external liquidity using the same amount of capital.

As a result of having more liquidity to yield farm, farmers gain more yield farming rewards as well as a larger share of the trading fees than before.

Mechanism Behind Homora

Essentially Homora allows farmers to supply any combination of assets in a liquidity pool to borrow additional liquidity needed for the desired leverage.

Homora V2 uses the concept of collateral credit and borrowing credit to determine how much leverage a user can get given which asset(s) is supplied and which asset(s) is borrowed to yield farm. With this mechanism, Homora V2 can set leverage and buffer parameters according to the volatility of each asset to ensure maximum capital efficiency and security of the protocol.

Example

Let’s say we are about to farm in ETH/DAI pool with a goal to leverage 7X. Take a look at how Homora turns Bob from having $100 worth of capital to farming with $700 worth of capital.

Given that:

Supplying $1 of ETH : 0.8 collateral credit, $1 of DAI : 0.95 collateral credit

Borrowing $1 of ETH : 1.2 borrowing credit, $1 of DAI : 1.05 borrowing credit

1. Bob has $100 of ETH and decides to supply ETH in order to borrow DAI
2. Supply $100 of ETH * 0.8 translates to ~80 credit.
3. If Bob wants to achieve 7X leverage, he would need to borrow $700 worth of total supplied
4. If Bob decides to only borrow $600 in DAI, he would need 630 borrowing credit (600*1.05).