Apricot EDU: How to Open a Long Position Farming Strategy
Welcome to Apricot Finance’s bi-weekly education series, where we walk our users through the platform’s feature set and explain the price exposure of their farming positions.
At its base, Apricot is a lending and borrowing platform, which powers our leveraged farming market. As a benefit to its user base, Apricot’s user accounts are cross-margin — meaning users can farm any LP pair regardless if their deposits contain the assets they are farming. We call this cross-farming (X-Farm).
Leverage farming is initially difficult to understand. To accelerate adoption and understanding of the Apricot platform, the team has compiled a set of topics we’ll cover to remedy this confusion.
The structure of this series will explain the following:
- How to open a long position farming strategy.
- What the user’s max borrow limit is, what Apricot Assist is and when it is triggered.
- How to open a market neutral farming strategy.
- How to open a short position farming strategy.
In this article, we’ll explain how to farm a long position strategy on Apricot.
For a first time user, the simplest route to opening a farming position you will understand is to first deposit an asset containing the LP pair you plan to farm. For example, if you wish to farm SOL — USDC LP on Raydium, first deposit SOL.
We’ll first discuss what a long leveraged farming position looks like farming SOL-USDC LP.
Farming a Long Position Strategy on Apricot:
Sally is an Apricot user with $100 SOL, and she wants to farm the SOL-USDC LP pair on the Raydium dex with 1x portfolio leverage, capturing an 80.32% APR return. (Final Net APR featured above)
- Please note, the rate of return fluctuates depending on interest rates of USDC and SOL, along with the trade volume of the exchange pair SOL-USDC LP pair.
- The more SOL-USDC trades take place in the liquidity pool, the more fees accrue for liquidity providers, driving upwards the profitability of the strategy.
Traditionally, when providing liquidity to a pool, there must be a 50 / 50 split of assets provided to farm. Remember, Sally currently only has $100 SOL — Therefore, she must borrow USDC to farm. Thus, she will be taking a long position against SOL. We’ll explain why this is further on.
To farm this position, Apricot will take Sally’s $100 SOL deposited in the platform and then borrow roughly the same dollar amount of USDC from Apricot’s SOL lending pool.
From the screenshot above you can see the following:
- Sally has to pay an annual interest of (5.14%) for borrowing this asset.
- Her current return on LP Farming is 79.99% and she receives an additional reward in APT of 0.88%
- Her final APR is 78.6%
In the same transaction, Apricot will deposit the $100 SOL and $100 USDC into Raydium’s SOL-USDC LP pool for Sally.
Sally in return will receive LP tokens (equal to her share of the pool) and stakes them to Raydium’s LP Farm to earn additional yield in the form of Ray, Apricot automatically converts the RAY back into SOL-USDC to increase yield via compounding.
Why is Sally strategy effectively long SOL?
The reason Sally’s strategy is long SOL is because she was initially long SOL when she purchased the asset prior to depositing. X-Farm does not change underlying asset exposure.
Additionally, since Sally is borrowing USDC, she is required to return the same amount of initial USDC and the accrued interest. If the price of SOL appreciates in the farming pool, then Sally’s LP tokens redeem more USDC than she borrowed — Producing a more profitable return over time. For a more detailed explanation of token imbalances after redemption, click here to read more.
Position Calculations & Explanation:
Max Borrow Limit = Total Deposit Value x LTV
= $200.00 x .80
Borrow Limit Used = Total Borrow Value / Max Borrow Limit
= $100.00 / $160.00
Borrow Limit Used is the ratio between Total Borrow Value and Max Borrow Value. When it reaches or exceeds 90% (Safe Borrow Value), users will not be able to borrow further. When the limit reaches 100%, liquidation could occur.
Collateral value, with regards to the Borrow Limit, is dependent on the deposited asset’s Loan-To-Value ratio — in this scenario, the deposited assets (SOL-USDC LP) have a LTV ratio of 0.80. The platform’s minimum collateral ratio is 125%, the inverse ratio of .80.
Portfolio Leverage = Net Deposit / Total Borrow Value
Portfolio leverage is the user’s net deposit divided by their total borrowed amount. It’s important to note the following relationships to best understand the level of risk you’re taking on using leverage.
- As collateral falls in value, portfolio leverage rises alongside Borrow Limit Used.
- Collateral with a low LTV ratio has less borrowing power.
Click here to view the glossary terms and more.