How do you calculate yield farming leverage?

Asked 3 years ago

I am wanting to invest in yield farming, but I am doing a bunch of research before I begin anything. I want to make sure I have all my facts in order before putting my money on the table. I understand that leverage is the lending of crypto assets in order to receive returns. But how is this calculated?

Yield farming Yield rates

Dakota Andersen

Saturday, May 14, 2022

A leveraged position is essentially a borrowed position. It means that you have $500, for example, but you can create a trading position of up to 6x that amount. If you hope to lend your asset on a DeFi leverage platform, what you earn is an APY. It is calculated by adding the interest on each period to your initial deposit up to a period of 365 days of the time you were invested in the DeFi platform. Mathematically, APY is given by:
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APY= (1+r/n)^n -1  where r= period rate, and n= number of compounding period.
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As a lender, you may want to provide your asset to the pool with a high utilization rate because that increases the amount of interest paid on your deposit. The risks in leverage trading as a lender incudes impermanent loss and price volatility of the supplied asset or collateral.