However there is a tradeoff the cost of gas for multiple transactions to makes it expensive to reinvest: For example, if you farm an incentized pool on Sushiswap, you earn a fixed amount of SUSHI per day (based on your position), regardless of the number of swaps that occur.Ī common strategy for liquidity providers is once they have accumulated a certain amount of a governance token, is to dump it on the market and trade it for more tokens to increase their position. In addition, LPs benefit from farming pools that are incentivized by DeFi governance tokens issued by DeFi protocols and platforms. In a protocol like Uniswap, the pool takes a 0.30% cut if you owned 1% of the tokens in the pool, then you would receive 1% of the 0.30% cut, i.e. The benefits of being an LP are the fees that you earn for every swap.
In return, liquidity providers are given LP tokens that represents their ownership of the pool. For example, a LP provides liquidity to a ETH-WBTC pool by depositing an equal amount (based on market price) of Ethereum and Wrapped Bitcoin into the pool. LPs are those who supply tokens to a liquidity pool. Hence, when we talk liquidity pools, we must also talk about the liquidity providers (LPs). liquidity! For example, if you want to swap Bitcoin (BTC) for Ethereum (ETH), the pool must have enough Ethereum to give you for that Bitcoin. Liquidity pools are core components of DeFi because they are permissionless and do not require a centralized exchange to operate.įor liquidity pools to operate, they need well. Liquidity pools are smart contracts that allow people to swap one token for another with a small fee attached. Do this at your own risk!īefore we get into Alpha Homora, lets get into the basics about yield farming, and more specifically, liquidity pools. In this post, I'll provide a brief overview of yield farming, and then I'll go into the mechanics of how Alpha Homora works, what the quirks are, and how you can use Alpha Homora to maximize your position.īe warned none of this should be considered financial advice. Alpha Homora is a game changer for the Decentralized Finance (DeFi) ecosystem because you can leverage an undercollaterized position to earn high yields in a liquidity pool. For the past couple of months, I've been getting my head deep inside of Alpha Homora V1, a platform for leveraged yield farming on Ethereum.
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