Yield farming is one of the more common uses for earning money with DeFi. Basically, users give liquidity to a decentralized exchange. The exchange then rewards the yield farmers with a percent of the fees that the exchange collects on transactions.
Alpha Homora takes this to the next level. It offers further leverage on yield farmers, which means that yield farmers can leverage their yield up to 2.5x. Of course, leverage comes with risks, so this is by no means guaranteed money.
This article will examine how Alpha Homora and leverage work in DeFi.
What is Alpha Homora?
First, Alpha Homora is a product released by Alpha Finance Lab that allows users to leverage their yield farming position. It is the first product of its type to be released, so there is some confusion about how it works.
We will clear up this confusion.
How does Alpha Homora work?
You should think of Alpha Homora as just another yield farming option, but with higher returns and the risk of liquidation. We will cover liquidation in another section.
What pairs does Alpha Homora offer?
Alpha Homora offers five yield farming pairs at the time of writing. These pairs include the following:
All but the WETH/DPI pair are done through Uniswap. WETH/DPI is offered through IndexCoop.
In addition to the normal yield from yield farming, Alpha Homora also provides ALPHA tokens to yield farmers. These tokens are then reinvested to maximize profits.
What is ALPHA token?
ALPHA token is the governance token and utility token for Alpha Finance Lab. It has all the standard uses one would expect from a token from a protocol like Alpha Finance Lab. These uses include staking, liquidity, and governance.
We really like that ALPHA token allows holders to vote on governance. This is standard in DeFi, but it’s not always the case.
Alpha Homora Positives
Here are some of the positives of Alpha Homora.
The biggest positive with Alpha Homora is that it offers yield farmers an opportunity for even more yield. As always, this extra yield comes with some risk, but it’s always nice to have the option for those that have more risk tolerance.
Audited Smart Contract
Alpha Homora has an audited smart contract, which is not something that you often see with smart contracts. This gives yield farmers extra peace of mind that the smart contract will not likely be compromised.
You can view the smart contract audit here.
Finally, we really like that Alpha Finance Labs has released a governance token that allows holders of the token to vote on governance issues. This token also allows for staking and the opportunity to provide liquidity to the platform.
Plus, a token is a good sign that the protocol is more serious about growing than those protocols that do not have a governance token.
Alpha Homora Negatives
There are some downsides with Alpha Homora. However, we do not view the downsides as a major concern, but we will still list them to ensure a full understanding of the platform.
Price Drops Can Cause Liquidation
The biggest downside with leveraged yield farming is any drops in price of the underlying asset will cause a liquidation of the collateral.
That is simply how leverage works – you either pay a margin call or the remaining collateral is liquidated.
In the case of Alpha Homora, the value must drop to 80% of the value for liquidation if the yield farming is through Uniswap. If the yield farming is through IndexCoop, then the value of the underlying assets must drop to 60% of the value of the loan for liquidation to occur.
This is the increased risk factor or leverage yield farming.
Security is Still a Concern
The other downside of Alpha Homora, and every DeFi platform, is that security is still a concern. Yes, Alpha Homora has been audited, but that does not mean that security flaws do not exist.
Flaws still might exist or might open in an update. It’s unlikely, but it is possible for it to happen.
Overall, though, this is not something you should worry about too much with Alpha Homora.
Is Alpha Homora and leverage yield farming right for me?
This depends on your risk tolerance. Using leverage for any financial transaction adds an extra layer of risk because price drops will cause liquidation of the smart contract.
However, the added risk means more profit.
In our opinion, we believe that leveraged yield farming is a risky proposition in the volatile world of cryptocurrency. We strongly recommend viewing the volatility of the underlying assets you want to yield farm before you decide to use leverage.
You will see that volatility can often wipe you out before you become profitable.
What other features does Alpha Homora offer?
Alpha Homora offers more than just leveraged yield farming. Remember, leverage opens up the opportunity for liquidation, and Alpha Homora offers the opportunity for users to liquify positions.
That’s right, these users are called liquidators. And they manually liquidate eligible positions for a 5% commision.
Alpha Homora also offers the ability to earn interest on Ethereum. Simply deposit Ether into the Alpha Homora Bank and you will receive ibETH tokens that earn interest. These tokens can also be traded on the free market.
Alpha Homora is one of the more interesting DeFi ecosystems out there. It allows users to partake in leveraged yield farming, which serves as a way for the DeFi ecosystem to become more similar to a traditional financial system.
Of course, that is the main use of Alpha Homora. But we also like the other features such as Ethereum lending and the ability of users to become liquidators.
All things considered, Alpha Homora is a DeFi protocol that is worth keeping your eye on in the future.