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  • 🦙Alpaca Finance
  • Our Protocol
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      • Introduction to Six Simple Strategies to Earn
      • Strategy 1: Hold a Token While Earning High Yields at Low Risk; aka Lend & Stake
      • Strategy 2: Hold a Token Pair to Earn Auto-Compounded Yields Without Leverage
      • Strategy 3: Supercharge Your Stablecoin Yields
      • Strategy 4: Multiply Crypto Gains in a Bull Market
      • Strategy 5: Yield Farm Profitably in a Bear Market
      • Strategy 6: Multiply Crypto Gains in Any Market by Hedging
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    • 🌐Global Protocol Parameters
      • ⏫Leveraged Yield Farming Parameters
      • 📈AF1.0 Interest Rate Model
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      • 📙AF2.0 Parameters
  • Tokenomics
    • 📀ALPACA Token
    • 💰ibTokens
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      • Burn Sources Details
  • Lending
    • 🏦Introduction to Lending
    • ❗Risks
    • ⏭️Step-by-Step Guide
      • Lend & Stake
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  • Leveraged Yield Farming
    • 🚀Introduction to Leveraged Yield Farming
    • 🏊Pool-Specific Parameters
      • PancakeSwap Pools
      • Mdex Pools
      • Biswap Pools
      • SpookySwap Pools (Deprecated)
      • WaultSwap Pools (Deprecated)
    • 🧮Leveraged Yield Farming Mechanics
      • PancakeSwap Farms
      • Mdex Farms
      • Biswap Farms
      • SpookySwap Farms (Deprecated)
      • WaultSwap Farms (Deprecated)
    • 🌊AF1.0 Liquidation
    • ❗Risks
    • ⏭️Step-by-Step Guide
      • Open a Leveraged Yield Farming Position
      • Adjust a Leveraged Yield Farming Position
      • Close/Partially Close a Leveraged Yield Farming Position
      • Claim Rewards
      • Liquidate Positions
  • Automated Vaults
    • ⚙️Introduction to Automated Vaults
      • Market-Neutral Strategy
      • Savings Vault Strategy
    • 🧮Hedging Mechanics
    • ⏬Lowering Vault Leverage Mechanics
    • 🔏Private Automated Vault
    • 📈Backtest Results
    • ❗Risks
    • ⏭️Step-by-Step Guide
      • Invest in an Automated Vault
      • View Your Automated Vault Position
      • Withdraw from the Automated Vault
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      • Liquidity Providers
    • 🚀Launch Plan
    • 💲Trading Fee Discount Program
    • 🎁Referral Program
    • ❗Risks
    • ⏭️Step-by-Step Guide
      • Open a Leveraged Position
      • Manage a Leveraged Position
      • Close a Leveraged Position
      • Swap Asset
      • Invest in & Stake ALP token
      • Unstake & Withdraw ALP token
  • Alpaca Finance 2.0
    • 💎Introduction to Alpaca Finance 2.0
      • Money Market
      • Leveraged Yield Farming
    • 🚀Launch Plan
    • ⭐Incentive Rewards
    • 🌊AF2.0 Liquidation
    • ❗Risks
    • ⏭️Step-by-Step Guide
      • Deposit
      • Borrow
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      • Looping Strategies
  • Governance
    • 🗳️Governance Vault
    • 🍃Grazing Range (New)
    • ⚡Early Withdrawal
    • 🔎Governance Sources Details
    • 📝Governance Discussion and Voting
    • 🗒️AIP Details
      • AIP-1: Handling of ITAM Rewards
      • AIP-2: Governance Vault on Fantom
      • AIP-3: Handling of Governance Vault’s Early Withdrawal Penalty
      • AIP-4.1: Handling of a recent bad debt on WaultSwap’s position
      • AIP-4.2: Solution to eliminate bad debt risks from remaining Waultswap positions
      • AIP-5: Interest Model Adjustment
      • AIP-6.1: Limiting Access to Automated Vault
      • AIP-6.2 Limiting Access to Automated Vault
      • AIP-7: Handling of a recent bad debt on Fantom Network
      • AIP-8.1: Increase AUSD utility by providing access to high-leveraged AVs
      • AIP-8.2: Increase AUSD utility by providing access to high-leveraged AVs
      • AIP-9: Deposit Liquidation Treasury Funds into Lending Pools while waiting to be used for buyback
      • AIP-10: Further optimizing the borrowing interest rate slope
      • AIP-11: Adjust Stability Fee for AUSD to help restore peg
      • AIP-12: Handling of bad debt from the recent stkBNB's depeg
      • AIP-13: Removing xALPACA requirement for accessing high-leveraged Automated Vaults
      • AIP-14: Close remaining LYF positions on stkBNB-BNB pool to avoid any potential future bad debt
      • AIP-15.1: Incentives for New Upcoming Products (Perp, AF2.0)
      • AIP-15.2: Distribution Method - Incentives for New Upcoming Products (Perp, AF2.0)
      • AIP-15.3: Incentives Amount for Perp - Incentives for New Upcoming Products (Perp)
      • AIP-15.4: Incentives Amount for AF2.0 - Incentives for New Upcoming Products (AF2.0)
      • AIP-15.5: Sources for Incentives - Incentives for New Upcoming Products (Perp, AF2.0)
      • AIP-16: Adjusting Slope3 max interest rate
      • AIP-17: Handling of extra ALPACA tokens from the AIP-15 incentives
      • AIP-18: Sunsetting Leveraged Yield Farming Support for MDEX pools
      • AIP-19: Implement Shielded Voting
      • AIP-20: Aligning AF1.0 lending performance fee structure with AF2.0
      • AIP-21.1: Adjusting bad debt repayment scheme from the stkBNB de-peg event
      • AIP-21.2: Adjusting bad debt repayment scheme from the stkBNB de-peg event
      • AIP-22: Paid Marketing Budget for Alperp and AF2.0
      • AIP-23: Sunsetting Leveraged Yield Farming Support for TUSD
      • AIP-24.1: New Governance Vault Implementation
      • AIP-24.2: New Governance Vault Implementation - Unlocking Period
      • AIP-24.3: New Governance Vault Implementation - Transferability
      • AIP-24.4: New Governance Vault Implementation - Early Withdrawal
      • AIP-24.5: New Governance Vault Implementation - Early Withdrawal Penalty Model
      • AIP-25: Migration from AF1.0 -> AF2.0
      • AIP-26: Transitioning the Governance Vault
      • AIP-27: Alpaca Insurance Plan Update
      • AIP-28: Updating Governance Voting Structure
      • AIP-29.1: Converting Remaining BUSD in AF1.0 lending into USDT
      • AIP-29.2: Charging conversion fees to the remaining BUSD depositors
      • AIP-29.3: Determining the conversion fees
      • AIP-30: New Product Proposal - Stablecoin
      • AIP-31.1 Handling of remaining assets in the AUSD’s stable swap module
      • AIP-31.2 Handling of remaining assets in the AUSD’s stable swap module
      • AIP-32: Distribution Plan to Lenders of Stablecoins from THE Liquidation
    • ⏭️Step-by-Step Guide
      • Lock ALPACA in Governance Vault
      • Lock more ALPACA/Extend Lock Time
      • Claim Rewards from Governance Vault
      • Add Custom tokens to your MetaMask
      • Vote on Alpaca Improvement Proposal (AIP)
      • Early Withdraw ALPACA from Governance Vault
      • Withdraw ALPACA from FANTOM Governance Vault on BNB Chain
      • Withdraw xALPACA from old Governance Vault
  • ALPIES
    • 🌗Introduction to Alpies
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      • Bridging Alpies from BNB Chain to ETH
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    • 👩‍🏫Alpaca Academy
      • Lesson 0 - How to Buy Alpaca and Start Earning Yields for Beginners(Lending+Staking)
      • Lesson 1 - Alpaca Finance’s Unique Use-Case — Shorting at a Profit
      • Lesson 2 - Introduction to Hedging with Double-Sided Borrowing
      • Lesson 3 - Liquidation Risk in Leveraged Yield Farming
      • Lesson 4 - Open/Close Positions With 0 Swap Fees
      • Lesson 5 - The Truth About Impermanent Loss and Common Misunderstandings
      • Proficiency Exams (earn NFTs)
    • 📚General Knowledge Articles
      • Navigating the Economic and Safety Landscape of DeFi
      • Yield Farming and Liquidity Mining: The Engines of DeFi Growth
      • Leveraging Advanced DeFi Instruments for Secured Funds Compounding with Alpaca Finance
      • Get Stablecoin Yields and Build Crypto Savings with Alpaca Finance's Lending Platform
      • Understanding the Basics of Decentralized Finance (DeFi)
      • Advanced Ways of Decentralized Trading with Alpaca Finance’s Perpetual Futures Exchange
      • Maximize Your Returns with Automated Vaults and Leveraged Yield Farming on Alpaca Finance
      • What does 'buy and hold' or HODL mean in investing?
      • What is DeFi Governance and why is it important?
      • What exactly are DeFi Money Markets?
      • What is yield farming and how does it differ from traditional investing?
      • What exactly does 'unlocking liquidity from long-term holdings' mean?
    • ❓FAQ
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      • 🧮APY Calculation
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  • Developers
    • 🐞Bug Bounty Program
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    • 💻Integrating With Alpaca Finance
    • 🏛️AF2.0 Repurchasing Guide
    • ⚡AF2.0 Flashloan Guide
  • Past Products
    • 💵AUSD (Old)
      • 💵Introduction to AUSD
      • 💹How to Participate
      • 💦AUSD Liquidation
      • 〰️AUSD Price Stability Module
      • ❗Risks
      • ⏭️Step-by-Step Guide
        • Open an AUSD Position
        • Adjust an AUSD Position
        • Close/Partially Close an AUSD Position
        • Add/remove AUSD-3EPS LP tokens
        • Redeem AUSD for ALPACA
      • 📔AUSD Parameters
    • 🗳️Governance Vault (Old)
    • ⚡Early Withdrawal (Old)
    • 🌿Grazing Range (Old)
    • 💪Stronk Vault
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On this page
  • Potential Risks to Yield Farmers
  • Price Impact When Entering/Exiting a Position:
  • Impermanent Loss (IL):
  • Negative APY
  • Liquidation:
  • Smart Contract Risks

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  1. Leveraged Yield Farming

Risks

PreviousAF1.0 LiquidationNextStep-by-Step Guide

Last updated 3 years ago

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Although we take a multitude of safety precautions and Alpaca is , farming and participating in DeFi comes with certain risks. Below, we discuss the potential risks associated with using Alpaca Finance.

Potential Risks to Yield Farmers

Price Impact When Entering/Exiting a Position:

  • Risk:

    • If you try to open a large position relative to the pool size and require swapping, you transaction could incur a large price impact.

    • As an example, if a liquidity of a pool is USD 100 million, swapping USD 1 million (1% of pool’s liquidity) worth of tokens would incur ~4% price impact.

    • If you are unfamiliar with how price impact works for AMM, please

  • Mitigation:

    • Open multiple smaller positions or open a smaller position and add collateral to that position at a later time. You should wait for a short interval for arbitrageur to bring price back to normal.

    • Bring a combination of asset that require lower swapping requirement-e.g., if you want to open a 2x leverage on CAKE-BNB pair. Supplying only CAKE token will result in a very small swap amount because the Vault will loan to you approximately equal value in BUSD.

    • Avoid opening and exiting position in a short period of time.

    • When exiting a large position, choose "Minimize Trading" strategy to reduce price impact from swapping asset and trading fees

Impermanent Loss (IL):

  • Risk:

    • Risk of (impermanent) capital loss from asset rebalancing in the Automated Market Maker ("AMM") pool.

    • Even stablecoin pairs can be subject to impermanent loss if the price of at least one moves off peg. While in general, the IL from this is small and transient, historically, there have been instances where stablecoins have stayed off-peg for extended periods of time. By opening a position with large leverage, you are also amplifying the potential IL on your principal.

  • Mitigation:

    • Impermanent loss is not unique to Alpaca Finance. It is common among all yield farming and AMMs. While we currently do not yet have a way to mitigate IL, users can choose to yield farm asset pairs that have high correlations to minimize potential IL. For more information on IL, you can start with this .

Negative APY

    • This is a scenario where the borrowing interest rate is higher than your yield farming gain. This means your debt position will grow faster than your equity value. If this continues for a period of time, it could reduce your equity value down to the level that triggers liquidation.

    • Likely causes for this scenario to occur are 1.) high borrowing pool utilization, pushing up the borrowing interest rate. 2.) A significant price drop in the rewards token - i.e., CAKE causing the farming yield to drop.

    • Monitor your positions closely and have a plan if APY turns negative - i.e., close position, wait and see, or add collateral to the position.

    • If utilization remains high for a period longer than a few days, the team will analyze the situation and likely raise the borrowing interest rate which should lower utilization.

    • Exercise cautions when opening a position if the pool's utilization is high.

Liquidation:

    • This can be mitigated by using a lower leverage level, monitoring positions during volatile market conditions, and closing them before hitting the liquidation parameters.

Smart Contract Risks

    • While our smart contracts have been audited by third-party firms, they could theoretically have vulnerabilities. Integrated 3rd-party platforms like the AMMs we build on can also carry smart contract risk.

    • We carefully screen any platforms we integrate with, only working with those that have been audited and shown a track record of good security.

Risk:

Mitigation:

Risk:

If you open a leveraged yield farming position, Alpaca Finance borrows a base asset for you to farm. You run the risk of being liquidated if price of the borrowed asset appreciates against the farming token pair. Your position will be liquidated when the Debt Ratio (debt / position value) reaches the Liquidation Debt Ratio aka Kill Threshold. See for more information.

Mitigation:

Risk:

Mitigation:

Having smart contracts audited by multiple professional third-party firms decreases the chance of vulnerabilities. You can find audit reports

We also run a bug bounty program to provide incentives for people to look for vulnerabilities in our live code as an extra layer to filter out any potential issues. More on that .

While we do our best to eliminate all the possible risks, DeFi is an industry where events that no one predicted can occur(the dreaded black swans). So please don’t invest your life savings, or risk assets you can’t afford to lose. Try to be as careful with your funds as we are with our code.

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