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BSC Binance Smart Chain | Leveraged farming new king Alpaca, what is the principle of income?

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BSC Binance Smart Chain | Leveraged farming new king Alpaca, what is the principle of income?

This article is authorized for republishing from "Old Cat Tests 3C," originally titled "The New King of Alpaca Finance's Leverage Farm on Binance Smart Chain (BSC)", written by Josh Lu Zijian.

Binance Smart Chain's (BSC) hot project, Alpaca Finance, locked in $800 million within two days of its launch, currently reaching $1.5 billion. What makes Alpaca Finance so popular? Let's explore what makes Alpaca appealing. However, we often hear people say "Cherish life, stay away from leverage farms." What exactly does this mean? Alpaca Finance is the first leverage yield farm on Binance Smart Chain (BSC), allowing farm yields to double through borrowing. It sounds promising, but why does it also feel risky? Is this a project that people both love and hate? Let Josh decrypt this super promising yet often misunderstood project, Alpaca, for you.

Alpaca Finance: The King of Leveraged Farms

In the era of DeFi, everyone is a farmer, everyone is mining. Maximizing farmer's profits is the goal of Alpaca Finance. Users can increase their capital through borrowing to work on the farm. However, Alpaca's capabilities go beyond that. Alpaca belongs to the category of derivative financial products, covering three main functions:

  • Lending Market: Currently, you can borrow four types of currencies - BNB, BUSD, ETH, Alpaca, and BTCB will be added later.
  • Long leverage farm: Similar to regular farms, holding trading pairs on LP will profit from the rise. Additionally, farmers can receive Alpaca products.
  • Short leverage farm: This is something that regular farms cannot do. While mining, if the borrowed currency falls, it is equivalent to shorting, and the farmer will profit from it.

Having both long and short leverage farm functions allows users to flexibly configure their work methods. The short function will be a useful tool during bear markets as the need to hedge and reduce risks is vital, especially for whales. Traditional finance has hedge funds to accommodate large funds, but such services are rare in the crypto market. Using a short-type leverage farm on Alpaca, after deducting borrowing interest, users can earn additional income, making it a great product. Alpaca can generate four types of revenue, users can receive types 2, 3, 4 from leveraging farms, and types 1 and 4 from borrowing and collateralizing.

  1. Lending revenue
  2. Farm revenue
  3. Trading fee revenue LP
  4. Alpaca reward revenue

NFTs are also a focus of Alpaca Finance, along with the upcoming syrup pool feature. Through collaborations with different projects, pledging ibALPACA can earn the project's unique tokens. The upcoming syrup pool in collaboration with Multiplier Finance is known as the Grazing Range farm, where users can start earning BMXX from 5/7.

Cherish Life, Stay Away from Leveraged Farms?

Why is there such a misunderstanding? It actually stems from a lack of understanding of leveraged farms, leading to incorrect usage and resulting in losses! Because you are still treating it like a regular farm and forgetting that it actually has both short and long functions. Choosing the wrong borrowing direction will naturally lead to losses when the coin price rises. Here are two examples to help you understand:

Loan target BNB

Choose the LINK-BNB pool, invest in 100 LINK, choose 3x leverage

As shown in the image, Alpaca will borrow 12.24 BNB, forming a LINK-BNB quantity of 9.17 BNB + 149.92 LINK. With 3x leverage on 100 LINK, the LP composition should ideally be 9.171 BNB + 150 LINK, but due to PancakeSwap transaction fees, you might see a slight discrepancy of 149.92 LINK.

Did you notice? You borrowed 12.24 BNB, but the actual LP composition is only 9.17 BNB. This means that when you exit the farm, you will need to purchase over 3 BNB to repay. So, when BNB rises, you will need to buy BNB at a higher price than when you borrowed it. Additionally, when BNB rapidly rises, the collateral you provided, 100 LINK, will decrease, resulting in insufficient collateral for Alpaca to liquidate your position. Therefore, borrowing BNB essentially means you are shorting a portion of BNB.

Loan target BUSD

Choose the BNB-BUSD pool, invest 619 BUSD, choose 2x leverage

As shown in the image, Alpaca will borrow 618.98 BUSD and buy 1 BNB, forming a BNB-BUSD quantity of 618.22 BUSD + 1 BNB. Since BUSD was borrowed, there is no issue with price fluctuations. Additionally, buying 1 BNB means that if BNB rises in the future, you will profit as you need to repay in BUSD, not BNB. This is the long leverage farm. If you believe in BNB, this is the right farm to choose.

Entering Stablecoin Farms but Still Losing Money! Why?

When Alpaca first started operating, many people rushed into stablecoin trading pairs farms seeing high profits in the hundreds of thousands, but then disaster struck. Even though they borrowed BUSD, which shouldn't have downside risks, why were they still losing money? The main reason is slippage. Below are the stablecoin farms on Alpaca:

  • USDT-BUSD
  • VAI-BUSD
  • USDC-BUSD
  • DAI-BUSD
  • UST-BUSD

Alpaca collaborates with PancakeSwap, and when the amount exchanged is too large, slippage easily occurs. Whether exchanging USDT or DAI, PancakeSwap was not specifically designed for stablecoin trading markets, as seen in the screenshot where a user directly opened a 6x position with $550,000, equivalent to $1.65 million USDT. I remember at that time, the total pool on PancakeSwap was only $25 million USDT, making it difficult to avoid slippage with such large amounts.

Currently, it is recommended to build positions in batches to avoid slippage. You can also use Belt and Ellipsis, specialized in stablecoin trading swaps, to exchange first, ensuring you only need to borrow BUSD directly to avoid slippage issues. In the next article, Josh will explain how to safely start your leverage farm, how to choose farms, calculate profits, and other essential things you need to know before diving in. Alpaca is definitely an underestimated project, so come and experience it now.

Summary of Alpaca's Key Features

  1. Offers leverage functions for increased profits
  2. Has both long and short functions for flexibility
  3. Provides multiple revenue streams
  4. Offers a lending market
  5. Empowers the Alpaca token, adding lending functions and the Grazing Range farm for more functionality
  6. Regular revenue farms suffer during bear markets, as seen in the October 2020 Ethereum revenue farms, but Alpaca has a short function, essential for hedging in bear markets
  7. The upcoming NFT feature is highly anticipated, and it remains to be seen what kind of NFT experience Alpaca will bring. It has caught the trend
  8. The Alpaca logo is too cute, making people want to buy merchandise