Leveraged mining in CashCow Finance

Introduction

What is leveraged mining? Leveraged mining cleverly makes use of two key features of DeFi, yield farming and borrowing. To keep things simple, yield farming is simply providing liquidity for token pairs in a decentralized exchange, and collecting yield from the fees paid for the exchange. Leveraged yield farming is achieved by first borrowing more tokens using the initial amount as collateral, and then providing liquidity with the entire amount. As you might infer, this multiplies the yield earned from the same amount of tokens.

Benefits of leveraged mining

What are the benefits of leveraged mining? Of course, the greatest benefit is the ability to farm much higher yields. This is already an amazing accomplishment in and of itself, but that’s not all!

Leveraged mining also increases the amount of liquidity for decentralized exchanges. With the amount of different trading pairs as well as different decentralized exchanges, liquidity is a real challenge. Increased liquidity helps to lubricate the DeFi ecosystem into a well-oiled machine.

Another benefit of leveraged mining is that it makes use of CashCow’s lending platform to borrow the additional tokens. Borrowing helps to increase the APY and further incentivizes people to participate in lending.

All in all, leveraged mining supercharges the entire DeFi ecosystem. There is an innate elegance in this win-win-win scenario that cannot be overstated.

Risks of leveraged mining

Of course, leveraged mining does come with some risks. However, these risks differ from margin trading in traditional markets, as they are much more predictable and manageable. Let’s go over the risks below.

Liquidation

Liquidation risk is a major consideration when leveraged mining. As all tokens have relative value, the tokens used as collateral might fall in value compared to the tokens borrowed. To protect the lenders’ tokens, liquidation will be triggered before the borrowed tokens outvalue the collateral. Different tokens have different liquidation thresholds, and stablecoins have the most tolerance as well as stability.

Impermanent loss

Impermanent loss happens when the value of the deposited tokens deviate from the value they had when deposited. The bigger the change is, the more impermanent loss is accrued. Let’s look at an example.

Ryan deposits 1 BTC and 10000 USDC in a liquidity pool, which was of equal value at that point in time. The total value of his deposit was therefore 20000 USD. Let’s assume Ryan’s deposit is 10% of the total pool.

Some time passes, and the value of BTC has now increased. As the price of BTC increases incrementally, people go to the pool and trade USDC for BTC. Although the liquidity tokens in the pool remain the same, the ratio of BTC to USDC changes.

Now BTC is valued at 40000 USD, and Ryan withdraws his assets. He receives 0.5 BTC and 20000 USDC. This makes the total value of his withdrawal 40000 USD, which is a whopping 100% more than his deposit! But wait, what if Ryan had just kept his 1 BTC and 10000 USDC instead? The total value of that would now be 50000 USD.

As you can see, impermanent loss can be converted into realized losses once you withdraw from the pool. However, the above example completely ignores the fees that would have been earned. Also notably, such huge impermanent losses only occur in the event of major market movements, and is practically impossible if dealing with stablecoin pairs, which are typically the least exposed to impermanent loss risk.

Conclusion

Leveraged mining is a hugely beneficial aspect of DeFi. As with most things, the greatest rewards are reaped by the earliest adopters. In this regard, CashCow is an extremely attractive project, offering extremely high yields compared to more mature yield farming platforms. By managing the risks, users are able to enjoy maximum benefits while taking on minimal risks.