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Illustrating the Effects of Positive Token Price Movements on Leveraged Yield Farming
On 1st February 2022, I received a number of questions from individuals who were puzzled (or alarmed) by the situation where even though the prices of both tokens in the Liquidity Pool (LP) pair they are farming had increased, the number of tokens they have as equity had fallen instead, suggesting a loss. I will illustrate this with an example where we start with an initial investment of 10 SOL, but even though both the prices of SOL and the paired asset had significantly increased, we somehow ended up with 12% less SOL. While it is tempting to say that this could be due to impermanent loss, it is actually the debt one takes on in Leveraged Yield Farming (LYF) that has a much more pronounced effect on the outcome.
Disclaimer: This is not investment or financial advice, but a sharing of my adventures and learnings in crypto space, where I conduct various experiments with different tokens and protocols across different blockchains.
SHDW-SOL
Because a high number of the queries were in relation to the SHDW-SOL (GenesysGo Shadow - Solana) LP pair, let me use this pair to illustrate what happens over a recent 24-hour period on 1st February 2022, where the price of SHDW increased by 8.25% from $0.859308 to $0.930168 while the price of SOL increased by 17.62% from $92.17 to $108.41.
