[Company Watch] Alpha Homora, Leveraging Liquidity Providing

Liquidity providing to AMMs, despite only went on fire a few months back with the SushiSwap saga, is already not a new concept. Uniswap alone leads the market with $2.8 billion in assets; and Sushi, Balancer and 1inch are contributing another $3 billion. If we count in Curve, the top 5 players for AMM have collectively somewhere $7.3 billion assets — all for the purpose that you and I to trade seemlessly on-chain.

We have earlier argued that providing liquidity is a good business. It’s also one of our core strategies. For those who are worried about impermanent loss, well, it’s there but it’s not a lot compared to the yield. Please see our twitter below for a some example calculation.

For most months last year, the APY for providing liquidity was about 20% to 40%, and there were occasional peaks over 100%, e.g. if there had been a hacking. For the last two weeks, when the market went a bit insane, the APY for providing liquidity was about 50% to 80%.

And, Alpha Homora can further enhance that.

Alpha Homora, which is on Ethereum, is a protocol for leveraging your position in yield farming pools. ETH lenders can earn high interest on ETH, and yield farmers can get even higher farming APY from taking on leveraged positions on yield farming. In a but shell, you can borrow ETH (or stablecoin) for your liquidity providing in Uniswap or Sushiswap to enhance the yield.

Taking Uniswap for example, borrowing ETH and supply to Uniswap with your stable coins like USDC, can enhance the yield from the current 63.75% to a maximum of 152%.

The UI is pretty straight forward. Refer to the official docs for more details.

The trick here is, as providing liquidity is a matter of shorting volatility, whether ETH moves up or down, you will incur impermanent loss. Borrowing ETH will magnify the loss as well. The maths here is whether the enhanced yield will compensate the magnified impermanent loss during your investment horizon.

We have done a simple calculation for the returns.

For instance, if you have 10,000 USDC and borrow $10,000 worth of ETH (i.e. 2x leverage) from Alpha Horoma, and then put into Uniswap. Assuming now ETH is 1,000 USDC, and you have 10,000 USDC and 10 ETH in the pool. For simplicity, we assumed no borrowing cost (actually 7%+).

When the ETH price moves to 1,100 USDC, your pool change. Whilst impermanent loss should be roughly 0.11% for a 10% change, your loss due to impermanent loss is 0.2%, as a result of leverage. The bigger the price movements, the higher the loss due to impermanent loss will be.

The last two lines calculate the duration of liquidity providing yield to compensate the loss. Assuming the price move linearly from 1,000 to what the end price is, and the yield is 30%. Note that the higher the ETH price, the higher the USDC dollar amount of yield you are getting, for the same 30% yield. It seems that a price movement of -30% to 50% will take 2–3 weeks of yields to compensate. In other words, you will make money, if the price of ETH do not swing more than -30% to 50% in 2–3 weeks.

Good luck!

(Serenity Team, 12 Jan 2021, Twitter: https://twitter.com/SerenityFund)



Zero market risk and stable return - risk neutralised cryptocurrency fund.

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The Serenity Fund

Zero market risk and stable return - risk neutralised cryptocurrency fund.