How Profitable is Leveraged Yield Farming on Solana? A Deep Dive with SolanaFM

10 min readJul 21, 2022

Introduction

Within Solana’s DeFi ecosystem, strategies like yield farming, lending and staking have become the primary methods to earn stable returns on investment. Though the Total Value Locked (TVL) across DeFi protocols in Solana has decreased due to the overall market downturn, we have started to see relief — TVL from 20 June to the time of writing (20 July) has seen a Month-on-Month increase of 16% (from $1.9B to $2.22B).

Yield generation strategies continue to be profitable in bear markets as traders can now apply shorting and hedging, allowing them to still profit should the markets go south. For risk-seekers, some protocols within the ecosystem also offer Leveraged Yield Farming (LYF) which enables traders to borrow funds from the protocol to farm and generate even more yield. However, leveraged yield farming often appears to be a difficult concept to grasp due to the inherent risks involved such as impermanent losses and the possibility of liquidation. With the recent failures of crypto lenders like Voyager Digital or Celsius Network, many traders would shy away from leveraged strategies for the time being.

On that note, SolanaFM aims to demystify the complexities accompanying leveraged yield farming, as well as dive deeper into the profitability of leveraged yield farming strategies. In this report, we will explore a number of protocols within Solana offering leveraged yield farming and subsequently conduct a theoretical risk analysis of a few leverage farming strategies. Before that, a quick primer on how leveraged yield farming works.

How Does Leverage Yield Farming (LYF) Work?

Leveraged yield farming allows the trader to leverage i.e. ‘borrow’ their position in order to generate more yield. In layman’s terms, traders gear up their yield positions by “borrowing more to earn more.” Here are some examples to visualise conventional yield farming and leveraged yield farming.

Conventional Yield Farming

Trader Joe farms an equal amount of SOL and USDC into a protocol which generates yield at a certain APY for 30 days. Assuming the price of SOL and USDC remains unchanged, after the 30 days, Trader Joe withdraws the position with profit A.

Leveraged Yield Farming

Trader Joe intends to earn more profit throughout a 30-day period, and borrows an additional amount of SOL and USDC equivalent to 2 times his original amount from the protocol. He then farms all SOL and USDC (i.e a 3x Leverage Farm) into the same protocol generating the same APY for 30 days.

If the price of SOL remains unchanged, Trader Joe withdraws the position with the profit being almost 3 times of A.

If the price of SOL decreases, Trader Joe withdraws the position with the same profit (3 x A) — however, he risks losing more than what he earned due to the fall in price of SOL. The event where the dollar value of the withdrawal is lower than the dollar value of the deposit can be referred to as Impermanent Loss.

The leveraged position also comes with a liquidation price. If the price of SOL drops to a certain level, Trader Joe will be forced to close his position and return the protocol’s borrowed SOL, leaving him with close to nothing in return.

Introduction to Leveraged Farming Protocols in Solana

In the Solana ecosystem, different protocols deploy unique borrowing and farming mechanisms for traders to generate more yield. We will introduce three extensive protocols offering leveraged yield farming in this section; Francium, Tulip Protocol and Apricot Finance. Let’s explore what goes on behind the scenes for each protocol.

Tulip Protocol

Tulip Protocol is the first yield aggregation platform built on Solana. The platform offers leveraged farming with up to 3x leverage on 22 trading pairs across Raydium and Orca. Through the possibility of leverage farming, traders can open over 9,000 unique positions to maximize yield, with the highest APY of a position being over 8,000%.

Currently, the largest pools in the protocol are the SOL-USDC (Raydium), RAY-USDC (Raydium) and GENE-USDC (Raydium) pools with $19.00M, $4.24M and $4.22M in TVL respectively (at the time of writing).

Leverage Farming Mechanism

What happens behind the scenes when a trader opens up a LYF position? In the case of Tulip Protocol, the process begins when the trader deposits any proportion of the two LP tokens into the LP pools.

Traders can borrow one of the two tokens up to the maximum leverage (3x) from the funds supplied into Tulip Protocol’s Lending Pool. Tulip Protocol then utilizes the Jupiter Aggregator to split the LP tokens evenly. The LP tokens are then deposited into the LP pools (supported by Raydium or Orca) to generate yield. Find out more about leverage farming on Tulip Protocol here.

Difference in APY for Raydium and Orca Pools. Source: Tulip Protocol

Based on the figure above, it is also important to note that though Raydium and Orca offer similar LP pools, the TVL of pools on both platforms differ greatly due to the differences in APY rewards.

Francium

Francium is a yield aggregator offering leveraged farms, also with up to 3x leverage to get a higher APY. In Francium, positions can be opened with a stop-loss threshold to reduce the risk of liquidation. Similarly with Tulip Protocol, the platform’s leveraged farms also include markets from Raydium and Orca.

The largest pools within Francium are currently the SOL-USDC (Raydium), SOL-USDC (Orca) and SOL-USDT (Raydium) pools with $10.49M, $7.41M and $5.69M in TVL respectively (at the time of writing).

Leverage Farming Mechanism

Francium’s Leverage Farming mechanism is relatively similar with that of Tulip Protocol — the platform allows traders to borrow one of the two tokens up to the maximum leverage (3x) from Francium’s lending pool supply, and the LP tokens are split evenly through swaps on Jupiter. Find out more about leverage farming on Francium here.

Apricot Finance

Apricot Finance is a protocol offering lending and a unique form of leveraged yield farming, Apricot Cross-Farm. The protocol is integrated with Raydium, Orca and Saber to offer in-app swaps. This allows traders to convert deposits in Apricot from one token to another.

Currently, the biggest farms within Apricot Finance are the SOL-USDC (Raydium), SOL-USDT (Raydium) and SOL-USDC (Orca) pools with $3.38M, $286.9K and $202.1K in TVL respectively (at the time of writing).

Leverage Farming Mechanism

In the case of Apricot Finance, The protocol’s Cross-Farm provides cross-margin leveraged yield farming for traders to maximize yield from their existing holdings. In other words, traders do not have to own the assets present in the pools; they can deposit any supported assets they own and borrow LP tokens from the protocol at up to 3x leverage.

In this case, X-Farm allows traders to gain access to yield without forcing them to sell and swap any principal assets. Find out more about leverage farming on Apricot Finance here.

Evaluating Risks & Rewards of Leveraged Yield Farming

Onto the main question — How profitable is Leveraged Yield Farming on Solana, and how risky are these positions?

In this section, we will conduct a theoretical analysis on the risks and rewards of Leveraged Yield Farming with the help of Tulip Protocol’s Leverage Farming Simulator. The analysis will visualise two scenarios; Long Farming (3x) and Short Farming (3x). Before we dive in, a brief description of the scenario.

In both scenarios, we will visualise a trader depositing 10,000 $USDC into the SOL-USDC (Raydium) pool, which will automatically be split into the corresponding amount of $SOL and $USDC based on the asset being borrowed. We will assume the price of SOL on deposit is $45 and the trader farms for a 30-day period. We will then compare how much the trader stands to gain or lose in each scenario compared to holding SOL in spot.

Case Study 1 – 3x Long Farming

In this case study, the trader deposits $10,000 USDC into a (3x) leveraged long farming position generating about 78.39% APY; this means they have conviction in upward price action in SOL. With this position, how will the trader’s yield be affected by directional movement?

According to the farming simulator, assuming the price of SOL remains unchanged, the trader can expect to earn a yield of 4.15%, or $414.74 over the span of 30 days.

When the price of SOL increases, the farm profit (Equity — Initial Deposit) increases above the hold profit (profit by holding SOL in spot).

To put this into perspective, the figure above shows the difference between 30-day farm profit ($3,339) and profit by holding SOL in spot ($2,000) when the price of SOL increases by 20% — we observe that the trader makes 66% more profit by leverage farming.

On the other hand, when the price of SOL decreases, the farm position may lose more value compared to holding SOL in spot.

The figure above shows the difference between 30-day farm profit ($3,339) and profit by holding SOL in spot ($2,000) when the price of SOL decreases by 20% — we observe that the trader loses 37.6% more by leverage farming.

Though the bullish case may see the trader earning a whopping additional 66% in profit, the simulator also expects the trader’s position to get liquidated when the price of SOL drops (by 39%) to $25. SOL almost reached these levels last month — any sharp fall in the price of SOL may pose a large risk for a trader with this position.

Case Study 2 — 3x Short Farming

In this case study, we will explore the flipside. The trader deposits $10,000 USDC into a (3x) leveraged short farming position generating about 73.51% APY; this means they have conviction in downwards price action in SOL. In this case, how will the trader’s yield be affected by directional movement?

If the price of SOL remains unchanged, the trader can expect to earn a yield of 3.82%, or over $380 the span of 30 days.

Inverse to a long position, a short-farming position would benefit from a decrease in SOL price, where the farm profit (Equity — Initial Deposit) would increase above the hold profit.

To put this into perspective, the figure above shows that a 20% fall in the price of SOL at the end of 30 days will result in a 20% loss ($2,000) for the trader holding SOL in spot, while short farm position gives the trader a 12.7% profit of $1,270.

You might notice that the ‘farm profit’ looks slightly different on the figure above compared to the previous case study; As the price of SOL continues to drop, the farm profit peaks at around $20, and then proceeds to fall all the way back towards the ‘hold profit’ levels. This appears to be the case as traders are still holding one side of the LP token — if the price of SOL falls too low, the dollar value of the farm position will eventually fall below the value deposited into the position.

On the other hand, bullish action on SOL will pose a risk of losses, or even liquidation for the trader.

Based on the figure above, a 20% rise in the price of SOL at the end of 30 days will result in a 7% ($704) fall in value of the dollar of the farm position. The trader would have been better off holding SOL in spot and earning 20% ($2000) in yield. Additionally, if the current relief rally continues at its pace, the trader may get liquidated from their position if the price of SOL rises by 64% to $73.79.

The Bottom Line

The simulations within Tulip Protocol reiterate how leveraged yield farming allows traders to earn stable returns in both bullish and bearish market scenarios. While parts of the paper may have been directed at the more risk-seeking traders, the potential losses and equity decimations that yield farming can cause did not go unnoticed. In every case, it is up to the trader’s discretion whether he wants to exercise a long or short farming strategy, which will ultimately depend on where he thinks the market is heading towards.

Given the strong volatilities in token prices, it is reasonable to believe that traders will see yield farming as a capital efficient way to earn even more returns. For the other, the simulators built by farming protocols in Solana also prompt traders to familiarise themselves with the immense risks associated with leverage yield farming. Therefore, being able to visualise both high profits and losses could induce traders to think twice before setting the highest possible leverage.

In sum, leverage yield farming can be a potentially powerful strategy to generate more yield, if done properly. To mitigate risk, traders should always set the liquidation price as a guideline to protect themselves from incurring significant losses.