I propose a vault strategy on Force DAO that helps to make DeFi farming on leverage through Alaha Homora V1 / V2 more efficient, generates higher returns and manages risks for the end-user automatically.
I would like to suggest a strategy vault centered around the Alpha Homora V1 respectively V2 product. Alpha Homora offers yield farming on leverage (currently up to 3x) and has integrations on various DEXs like Uniswap or Sushiswap.
Manual strategies deployed directly on Alpha Homora have several disadvantages that could be mitigated through automation on a decentralized vault provider like Force DAO.
Alpha Homora (AH) allows yield farmers and liquidity providers to create leveraged positions by taking a loan in ETH or stable coins based on the collateral they provide for their position. Lenders (or in the case of V2 partly the Iron Bank) provides the loan for these positions. If the collateral ratio goes above a certain percentage, the loan can be liquidated by users (for a reward) and therefore needs to be maintained closely. Alpha Homora V1 is live for several months now and has achieved great traction in the DeFi market with more than 0.5B TVL currently. Alpha Homora V2 (build around Cream’s Iron Bank) started off equally good but experienced one major drawdown after an exploit regarding the debt that Alpha Homora V2 takes from Cream’s Iron Bank. Despite that no end-user funds were affected, new leverage positions were stopped and another security audited was contracted. TVL decreased to about 175M right now. This audit was done successfully and leverage trading will soon commence again. Meanwhile, Alpha started on BSC and attracted more than 250M TVL within a few days. Overall, leverage farming is a great niche, provides added value, and has generated a lot of retail interest but it poses a few problems for individuals.
More than 42 farming positions on AH V1
Currently 4 positions on AH V2 (soon expanding)
When farming on AH manually the user is facing mainly three problems:
High gas fees
Rewards have to be claimed manually
Collateral/debt ratio has to be monitored closely to avoid liquidation
In more detail:
Ad 1) Due to the complexity of the AH smart contracts and the current overload of the Ethereum blockchain and generally high gas fees, the costs to open a leveraged farming position (and it’s closure) might cost between $200 and $500. This renders the usage of the platform nearly pointless for capital less than $5000-10000.
Ad 2) The high APY rewards for farming on AH consists mainly on three types of rewards, two of them have to be claimed manually:
A) Yield Farming = token rewards on underlying platform (e.g. $SUSHI), has to be claimed manually
B) Trading fees = fee rewards that are accrued within the underlying position, no need to claim manually
C) Alpha rewards = incentives by the AH protocol for leveraged positions, has to be claimed manually
Claiming manually on Ethereum again brings two challenges: often the rewards need to accumulate for a long time before they can be claimed and redeployed due to the high gas fees. This limits the potential of compounding and therefore increasing total APY significantly over a longer time period (when compared to auto-farming and daily or weekly re-deployment into one’s position).
Example: 70% APR on AH if compounded on a weekly basis over 12 months would lead to 100% APY, increasing total returns by nearly 50%.
Ad 3) As AH is based on leverage, every leveraged position consists of debt (mostly taken in ETH). Besides many things that users need to be aware of because of this, the most important result is that every leveraged farming position needs to be closely monitored in order to avoid costly liquidation. This is especially true if the ETH-counterpart position drops in price and the collateral value is reduced compared to the debt denominated in ETH. As crypto markets often move erratically and dramatically with daily losses of up to 50%, this is a huge risk for users which can only be mitigated if the amount of leverage is reduced.
Interesting side notes:
Very soon ALPHA staking goes live which allows for higher leverage for stakes than for non-smokers, dependent on the amount of ALPHA staked (+10% to +40%)
A possible solution by Force DAO:
Force DAO has the huge opportunity of automating claiming and redeployment for higher user APY as well as managing the collateral/debt ratio for all users in one huge position based on specified algorithms leading all in all to three huge advantages when farming on AH is done through Force instead of through AH directly:
Reduction of gas fees which also allows smaller positions to work effectively
Increased compounding returns for greater APY
Outsourcing of liquidation risk and no need to monitor own position manually
The main risk can be seen in the total number of layers working together. We are talking about Force wrapping AH leveraged mining wrapping LP positions (e.g. (FORCE(AH(SUSHI))).
This also means that all risks of underlaying platforms are inherited by Force.
On top of that the managing of the collateral/debt ratio is probably the biggest challenge in this endeavor as a failure in managing this, might lead to a substantial loss for not only 1 user but all users farming through Force.
More about the specific risks of AH:
Risks in V1: Alpha Homora’s Risk Analysis
Risks in V2: Yield farmers’ risks - Alpha Homora V2
How I can help:
I am not a dev but I can help with further explanation, can provide contacts at Alpha Finance and can help with testing. I also know a developer who is interested in the specific issue and might help to code it.
Alpha Homora V1: Alpha Homora - Yield Farming on Leverage
Alpha Homora V2: Alpha Homora - Yield Farming on Leverage
Overview article AH V2: Alpha Homora V2 - Yield Farm With Up To 9x Leverage