Rock Solid Yield Strategy Exploration Memo #1 — Alpha Homora
In Stone’s pursuit of Rock Solid Yield and innovative strategies, the team has decided to publish a series of short memos to explain what new venues and strategies we have explored. The memo series is aimed at providing the community update on our latest thoughts besides current strategies, and the pros and cons of potential new strategies. We hope it provides a discussion point in the community of how to grow Stone further.
We started the journey by asking ourselves “would the community love an ETH-based strategy?” and the question is yes. However we are also aware of the fact that so far there is a lack of ETH strategies in the market (YFI’s ETH vault provides 2.15% APY). Therefore we have analyzed various combinations of venues and corresponding strategies, and we arrive at the most sensible one at Alpha Homora.
A brief introduction of Alpha Homora
Alpha Homora, which is on Ethereum, is a protocol for leveraging your position in yield farming pools. ETH lenders can earn high interest on ETH, and yield farmers can get even higher farming APY from taking on leveraged positions on yield farming.
There are three types of roles in Alpha:
- Yield farmers: the ones who borrow ETH to take leverage in yield farming. Their own assets are used as collaterals in Alpha. They take the risk of being liquidated, specifically when the farming token price drops significantly (relative to ETH).
- ETH lenders (what we are interested in our analysis): The ones who lend out ETH to Yield farmers and gain up to 20% APY with full collateral. They share the risk of debts accrued by underwater positions in case liquidators did not liquidate in time.
- Liquidators & Bounty Hunters: The ones who execute liquidation when price drops below kill ratio and earn 5% liquidation bonus.
Opportunities, challenges and risks
We are particularly interested in the role of ETH lenders with an indicative APY of 20% and fully collateralized. We explored implementing ETH lending on Alpha homora. However this has a certain tail risk which we identified. Since most coins allow up to 2x leverage, a 50% move in ETH would undercollateralized the pledged asset and incur losses for ETH lenders. This situation may be further compounded by high gas fee ( which would hinder liquidations ) & high slippage due to illiquidity during such market conditions.
Alpha homora hasn’t yet gone through such market downturn yet since its inception (think about March 12 in 2020). Every market downturn acts differently due to nuances in market participants and its trigger, therefore such black swan is not a given but a tail risk event which has high probability in the long run given crypto market’s volatility.
It is worth noting that their code is audited by Peckshield and the Alpha team has stated clearly on the risks of each role in their medium post. This level of transparency is highly appreciated and also something that the Stone team is trying to provide to its community!
Our current conclusion
Our team really likes what Alpha finance is doing on leveraged yield farming (an amplifier on yield). It is a crucial direction to maximize user’s returns while it requires more sophisticated mechanisms for timely liquidation under extreme market conditions. For now, Stone will focus on Rock Solid Yield strategies with minimum risk on users’ funds. We believe this will be part of Stone’s farming strategies in the future however we will observe how Alpha is tested in the market before we deploy such a strategy.