What is a good yield farming leverage ratio?

Like leverage trading, leverage yield farming allows you to open a position bigger than your collateral. Yield farming in DeFi requires the farmer to deposit equal pairs of tokens in a pool such as USDC/ETH. The DeFi platform such as Uniswap or Convex where you deposit the tokens distributes a part of the fees to you by leaving you with some LP tokens that have the value of your collateral plus the fees paid.

Now imagine you had $100. If you were to invest that in our hypothetical USDC/ETH pool, you will have 50 USDC, and 0.5ETH assuming again that the price of ETH at the time of your investment is $100. Let's say 48 USDC and 0.48ETH since you have to pay some fees on that exchange. Leverage lets you borrow, 2x your initial deposit, for example. leaving you with a total position value of 96 USDC and 0.96ETH.

So what should you keep in mind? Ideally, your debt will go up as your leverage increase, and the more you owe on most exchanges, the lower your liquidation point will be on a scale of 0-100%. Mathematically, your debt ratio is the value of borrowed amount divided by the value of your collateral plus borrowed amounts plus your yield. You should be cautious of your debt ratio because a debt ratio of 70%, for example, could mean that you will be liquidated if your position drops by about 20%. Bringing that back to our 96 USDC and 0.96ETH leveraged pool, a 20% fall in the price of ETH to 0.768 ETH puts us at risk of liquidation. Impermanent loss and market crashes are also crucial points to consider.