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What is Alpaca Finance?

Posted by
Ian Kane

Leveraged yield farming on Binance Smart Chain

Alpaca Finance is the largest lending protocol allowing leveraged yield farming on Binance Smart Chain. It helps lenders earn safe and stable yields, and offers borrowers undercollateralized loans for leveraged yield farming positions, greatly multiplying their farming investments and profits.‌ Additionally, users can earn the platform’s native token ALPACA by staking and providing liquidity.

Alpaca amplifies the liquidity layer of integrated exchanges, improving their capital efficiency by connecting liquidity provider (LP) borrowers and lenders. It’s through this function that Alpaca has become a fundamental building block within DeFi, helping bring the power of decentralized finance to more people. Additionally touting $1.3B total value locked across its smart contracts to date. 

Alpaca made its intentions clear from the start. At launch, Alpaca offered no pre-sale, no investors, and no pre-mine. So from the beginning, it’s clearly laid out its stall as a platform built by the people, for the people. Or as they like to say: by the alpacas, for the alpacas. 

Why Alpaca Finance?

Pioneered by Compound and their COMP governance token during the DeFi Summer of 2020, yield farming on Ethereum had become a popular way for projects to bootstrap their liquidity and acquire users. But, the rising costs of these processes on Ethereum protocols have become more and more prohibitive for the majority. In fact, Ethereum has become a whale’s hang-out because the gas fees are just too high.

As a result, Binance Smart Chain (BSC) has experienced an exponential boom in popularity. It’s within that ecosystem Alpaca identified a gap. To be specific, one of the largest missing pieces–was an on-chain leverage protocol. Alpaca Finance was born, seeking to provide value to the BSC community through leveraged yield farming.

What is leveraged yield farming?

The core idea of yield farming is an innovative DeFi concept where users stake or lend their crypto assets in order to receive returns. Leverage results from using borrowed capital to expand your asset base and the potential returns on that asset base. In other words, you borrow funds so you can invest more, and as a result–earn more. In the context of yield farming, leverage involves borrowing assets to multiply your yield farming position, resulting in you accruing larger yields. 

Source: The Defiant

ALPACA token

The platform’s native token is ALPACA and there are already several mechanisms in place for both performance fee sharing and for making ALPACA deflationary in nature. 10% of the 19% performance fees for yield farming positions on the single-asset CAKE vault are distributed as Protocol APR to ALPACA lending depositors. In addition, 4% of the 5% of every liquidation bounty that any liquidation bot receives as a fee, goes towards buybacks and burns of the ALPACA token. The 10% of 19% of the lending interest that lenders earn goes towards buybacks and burns of the ALPACA token. These mechanisms mean most of the rewards from the ALPACA platform will soon be directly or indirectly shared with ALPACA token holders.

Moreover, burning tokens is also a method of fee distribution, but more efficient at increasing the price. Burning directly lowers available supply which increases the value of the remaining tokens. Instead of giving out protocol earnings as yields that users can, and often do, dump on the market, through burn, these earnings embed into the token price itself, which discourages selling because users would have to sell part of their principal. This is a more effective way of both rewarding long-term holders, and creating them.

Three ways to get involved

As a user, you can use Alpaca Finance in three different ways:

Lender: Earn stable returns on your base assets by depositing them into lending vaults. These assets are then offered to yield farmers for leveraging up their positions.

Yield farmer: Borrow base assets from lending vaults, allowing you to open a leveraged farming position, multiplying your farming APR by up to 6x(minus borrowing interest). Of course, these higher yields come with larger risks than lending: liquidation, impermanent loss, etc.

Liquidator: Monitors the pool for leveraged farming positions with Safety Buffers at 0 (when equity collateral becomes too low, thus approaching risk of default) and liquidates them. 

Alpaca currently supports the following assets : BNB, BUSD, USDT, TUSD, ETH, ALPACA, and BTCB. Leveraged farming is integrated with PancakeSwap and WaultSwap. A comprehensive step-by-step guide to using Alpaca Finance can be found here.

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The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds positions in ETH, BTC, ADA, MATIC, SAFEMOON, HEX, LINK, GRT, CRO, OMI, USDT, AVASTR, GMEE, GALA, BOSON, AND OCEAN

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