Thread by @rektdiomedes

Thread: Thoughts On Delta-Neutral/Leveraged Yield Farming

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Alright sers, so lately I've been focused on delta neutral strategies, and also playing around with leveraged yield farming (the two overlap obviously).

Its a tricky topic though so wanted to do thread..

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As a quick synopsis, delta neutral strategies are where you earn APR on a token or LP position without gaining/losing money when the token goes up or down.

Many like this strategy when of bearish sentiment since it removes price exposure.

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An example of a successful delta neutral strategy would be depositing 10k of $USDC, borrowing 5k of $JOE at -10% apr, then staking it on the TraderJoe website for 50% apr, earning you 20% on the underlying $USDC deposit. [(50% - 10%)/2]

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This is a totally legit strategy that works well, HOWEVER, it becomes way more complicated when you attempt to do it via LP farming instead of single-asset staking.

This is what I want to go over.

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To do so I am going to reference the following video from the absolute gigabrain @phtevenstrong.

In the middle of it he goes over using AlphaHomora for 'pseudo delta neutral' leveraged farming.



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Steven is an absolute genius, and also created an incredible calculator for the strategy you can access in the video description (opens in excel, click 'make copy', then you can edit the copy).

I'll be using that calc to generate examples for this thread.

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The idea is that you deposit say 5k of USDC on Alpha Homora, then borrow 7.5k worth of $AVAX, and another 2.5k worth of USDC, for a total (leveraged) position of 15k in the TraderJoe or Pangolin LP for $AVAX/ $USDC.

This is roughly 'delta neutral'.

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You could do similar strategies with less leverage by say, depositing 10k USDC, borrowing 5k $FTM, then farming $FTM / $USDC on Protofi or Wigoswap.

These strategies can work, however, its important to understand its much riskier than LP'ing normally.

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Normally, LP'ing volatile pairs like this will produce 'Impermanent Loss', but this is only loss you incur COMPARED to if you didn't LP the two tokens.

Here's a big thread I did on Impermanent Loss:

https://twitter.com/rektdiomedes/status/1475353597223194625

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When you farm volatile LP pairs as part of a delta neutral or leveraged strategy though, the 'Impermanent Loss' becomes ACTUAL loss, because the increase/decrease of the LP position value vs your 'borrow' will always be negative.

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As a result, its crucial that the yield you receive from the apr exceeds the loss you will incur from the relationship between the LP value and your 'borrow' due to Impermanent Loss.

Let's look at a couple examples without APR to see what it looks like.

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A 'psuedo delta neutral' strat where we deposit 4k $USDC and borrow $AVAX (+ a bit more $USDC) for a total LP value of 12k (3x leverage), then...

-If Avax goes from $75 to $90, we lose $54.66.
-If Avax goes from $75 to $60, we lose $66.88.

This is ACTUAL loss, not IL.

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Again though, we are getting a very healthy (leveraged) apr though, which may make up for this loss.

For instance, if we are getting 100% apr on the 12k position, then even if we saw those prices divergences just in the first 30 days, we'd still be profitable.

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So this kind of strategy can work great, but its crucial you do the math and estimate your return depending on what happens to prices... as the 'Impermanent Loss' isn't theoretical, and MUST be overcome by the apr in order for you to make money.

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So it really, really depends on how quickly and how much the price changes.

If you are looking for simpler delta neutral strategies, stick with single-asset staking, or LP pairs without IL, such as $FTM - $TOMB (since they're pegged to one another).

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Finally, you can also consider just lending to these leveraged yield farming platforms.

@AlphaFinanceLab is currently providing some of the best yields on Avalanche for single-sided lenders.

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Another good one is @AlpacaFinance on Fantom.

Also @ImpermaxFinance, which is on a bunch of chains.

And also @TarotFinance as well.

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And- in conclusion- wanted to make special point recommending @phtevenstrong's amazing YouTube channel AND his Patreon, where he provides a ton of other beautiful defi calculators.

He's a great guy and I have immense respect for his work!

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So, tl/dr is DO YOUR MATH if you want to leverage or delta neutral yield farm VOLATILE pairs, and make sure your apr is high enough to counter IL-catalyzed loss. Or, stick to single-sided options for doing it :)

Plz rt and follow if you found this helpful!

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