Single Finance and Leveraged Yield Farming

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Coinmonks

8 min readMar 24, 2022

What is Single Finance?

Single Finance is a Decentralized Finance (DEFI) platform that provides users with the ability to participate in Leveraged Yield Farming (LYF).

What is Leveraged Yield Farming (LYF)?

Leveraged Yield Farming is an approach that allows you to increase your yield farming position by borrowing external liquidity.

So what do I mean by this? Let us go through a simple example to illustrate. Let us assume that Paul and Bob has 1 Bitcoin and 1 USDC each. Paul will be doing yield farming while Bob will be doing Leverage Yield Farming.

Paul: Yield Farming

So, let us start with Paul. He has 1 bitcoin and 1 USDC.

He can put the bitcoin and USDC into the Farm with x3 multiplier. This means that every pair of tokens put in would produce 2 more token pair after the investment period (Ignoring Impermanent loss).

After the investment period, Paul receives 3 bitcoin and 3 USDC in total (Ignoring impermanent loss) !

Bob: Leveraged Yield Farming

Let us level up our game! Bob has 1 bitcoin and 1 USDC, but he will perform a leveraged yield farming strategy. Bob can borrow 2 more bitcoin and 2 more USDC from a borrowing pool. So, he now has 3 bitcoin and 3 USDC in possession and owes 4 bitcoins and 4 USDC.

Next, Bob puts his 3 bitcoin and 3 USDC into the farm.

He will get 9 bitcoins and 9 USDC in return after the investment period (Ignoring impermanent loss).

Finally, he pays off his debt and ends up with 5 bitcoin and 5 USDC (Ignoring impermanent loss).

So who earns more?

As you can see, Bob earns more bitcoin at the end of the day. But is there a catch to his strategy? What are the risks involved?

What are the risks?

Liquidation risk
In order to protect lenders in the borrowing pool, liquidation has to take place if Bob fails to return the debt before his debt reach the liquidation threshold.
This means that Bob will lose his collateral if his debt value reaches a certain percentage of his collateral.
Portfolio volatility
In the previous example, we did not cover how price changes would affect your overall portfolio value. In truth, price changes in token price would affect your portfolio value significantly, for better or worse.
Prudence should be taken when taking a leveraged position.

So what does this mean for LYF?

We have to take extra precautions to protect ourselves in leveraged positions. Thus, it is important to educate ourselves about LYF strategies. The strategies are employed so that we can remain profitable when price of the token changes.

What are some LYF strategies?

There are broadly 3 different LYF strategies we can follow. They mainly differ in the way we borrow for the leverage positions. To facilitate the discussion, let us assume we are invested in a non-stable token A (like bitcoin) and stable token B (like USDC).

Leveraged Long

A leveraged long position involves betting the non-stable token A to increase in price.

This involves borrowing solely stable token B.

Leveraged Short

A leveraged short position involves betting the non-stable token A to fall in price.

This involves borrowing solely non-stable token A.

Market Neutral

A market-neutral position involves betting the non-stable token A to remain stable in price over the long run.

This involves borrowing both non-stable token A and stable token B.

It is important to note that the strategy employed in Single Finance is Pseudo Market Neutral. This requires investors to re-balance their portfolio to retain market neutral position.

Some intuition of LYF strategy gains (short term)

The details of the strategy are quite complex. So i will just outline the results of those position when price of token A changes.

Here we assume that the farm APY (Annual Profit Yield) is 30% and the borrowing interest is 20%. We will also perform a 3x leverage, which means we are borrowing 2 times of our initial capital. Impermanent loss is included.

First, we can take a look at our portfolio after 1 day.

We can see that there are a lot of lines in the plot. This plot basically show how our overall portfolio changes with respect to the price of the non-stable token A.

If we HODL token A for a day, we can observe a linear yellow line. This means that our portfolio value will change linearly with price of the token.
If we just do traditional yield farming for a day, we can observe the orange dotted line that is slightly off from the HODL line. This is because the farming rewards for a single day is not sufficient to cover the impermanent loss if price of token A changes drastically.
If we perform a leveraged long position for a day, we can observe the blue curve that gives a higher gain when price increase and a higher loss when the price falls (with respect to HODL line).
If we perform a leveraged short position for a day, we can observe the purple curve that gives gain when the price falls and losses when price increase.
The most interesting plot is the pseudo market neutral position denoted by the red line. This position involves both short and long position. Thus the curve is closer to the HODL line, even though this is a leveraged position. As long as the price of the token does not change drastically, the value of the portfolio will be protected.

But, it seems that the market neutral position is not giving me higher gains than traditional farming and HODL strategy? What is the point?!!

We can see the point if we hold our positions longer! I will explain in the next section.

Some intuition of LYF strategy gains (long term)

So similarly, we assume that the farm APY (Annual Profit Yield) is 30% and the borrowing interest is 20%. We will also perform a 3x leverage, which means we are borrowing 2 times of our initial capital. Impermanent loss is included.

But instead of looking at our portfolio after 1 day, we leave it for a year.

Let us see is there any change to our portfolio.

If we HODL token A for a year, we can observe the same linear yellow line.
If we just do traditional yield farming for a year, we can observe a that the orange dotted line is higher than the HODL line. This shows that the farming yields becomes more significant in the long run and outweighs the potential impermanent losses.
If we perform a leveraged long position for a year, we can observe the blue curve that gives a significantly higher gain when price increase.
If we perform a leveraged short position for a year, we can observe the purple curve. We will earn profits if the price of Token A falls.
Finally, the pseudo market neutral position is denoted by the red curve. This curve is sort of a mixed of the leveraged long and leveraged short position. We can see that the gain from this strategy is higher than the non-leveraged traditional farming strategy if price of token A stays within 50% to 200%.

So why market neutral position is good for long term investors?

There are several reasons.

In the short term, the portfolio curve is close to the HODL line. This means that even though you are in a leveraged position, your portfolio varies like a HODL strategy if price stays stable.
In the long term, you reap the farm yields in a leveraged position that allows you to beat HODL strategy or traditional yield farming strategy (assuming the token price stays relatively constant in that year).
Investors can always “reset” their position back to 100% by re-balancing their position. Thus, as long as re-balancing is done periodically, the position can be maintained close to true market neutral. More details about re-balancing portfolio will be explained in future blogs.

Concluding thoughts

This is why i see great utility in Single Finance!

Single Finance aims to simplify leveraged yield farming for Decentralized Exchanges (DEX) in several blockchains (such as Cronos and Fantom).

As you can see Single Finance allows you to set up a market-neutral position with a single click!

Moreover, it has capital-protection bot and re-balance bot to maintain your market neutral position over the long run. Basically, we can deposit our funds in the vault and single finance will help us maintain our leveraged position!

What’s more? Single Finance is also looking to include more pools from other DEX such as MMF and other DEX in Fantom!!!

This is not financial advice as i am not a qualified financial advisor. But I see this as a gold mine for yield farmers. Eventually, people would see the value of the platform to make yield farming safer and more lucrative.

Extra note

There are additional platform fees that i did not consider in this blog post. At the moment, these include 19% fee on profits (9% burnt + 10% to reserve/single token holders) and 8% on profits for harvesting funds. So DYOR before making a calculated investment on the platform.

Fret not though, fees are expected to be suppressed in the future when the platform implements the Membership Tier Program, where single token holders can enjoy lower fees.

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