Baker Academy: Leveraged Yield Farming
In this chapter, we will learn about this innovative financial tool that offers the opportunity to earn extraordinary profits
Baker Finance is a lending protocol allowing leveraged yield farming on BNBChain. It helps lenders to earn safe and stable yields, and offers borrowers loans for leveraged yield farming positions, vastly multiplying their farming principles and resulting profits.
What is leveraged yield farming?
Leveraged yield farming is a concept innovated by the DeFi Ecosystem. With implementation flaws. Baker comes to solve and propose an improvement in the system.
Let's first understand yield farming. This is a process in which users (or farmers) receive additional incentives (typically in the form of another token) for providing liquidity to a liquidity pool on a certain AMM protocol.
How Does it Work?
On Leveraged Yield Farming, you can identify three different actors that interact with each other and create the foundation of the protocol. These are the lenders, the farmers and the liquidators.
In simple words, the lenders provide the capital, the farmers borrow from this capital to open a leveraged position, and the liquidators bots monitor these positions to close them in case the risk of the loan is too high.
- Lenders: the lending users deposit the base assets on the lending vaults in exchange for a stable return. These assets are then offered to yield farmers for leveraging up their positions.
- Yield Farmers: the farming users borrow these base assets from the lending vaults, thus opening a leveraged position, allowing them to multiply the farming APR of the desired assets.
- Liquidators: the liquidation bots monitor the pool for leveraged farming positions and when equity collateral becomes too low, thus approaching the risk of default, they close the position.
To understand what goes on behind the scene on Baker Finance, see the infographics below.
What’s the process of leveraged yield farming?
When it comes to leveraged yield farming the user only needs to supply the token of the pair and/or BNB and choose the leverage level.
After supplying the assets to the smart contract, the process is as follows:
1. The smart contract borrows the amount of BNB from the protocol based on your leverage level.
2. The assets are swapped, making sure you have equal value on both sides of the pair.
3. The liquidity is provided for the said pair on the protocol chosen.
4. LP Tokens are received for the liquidity provided.
5. The LP Tokens are then staked in the farm of said protocol.
6. Reward tokens are farmed.
7. The farmed tokens are sold for more liquidity, increasing the total value of your position.