The Leveraged Yield Farmer’s Guide To Liquidation
Updated: May 22, 2021
Impermax lets liquidity providers borrow funds to leverage their yields, but liquidation is always possible when using leverage. Let’s look at what causes liquidation, how bad liquidation can be, and what to expect if liquidation seems to be coming closer.
Bottom line: you won’t lose all your funds.
Wider Price Ranges Are Safer
When you take a leveraged position, you choose a price range estimate for the value of the LP token you are leveraging. Higher leverage means you will have a smaller price range. Liquidation happens when the price moves outside this range. Therefore a smaller range means more risk. Prices are calculated with Time Weighted Average Prices (TWAP).
When you are choosing your desired leverage, watch how the estimated New Liquidation Prices range changes when you move the slider bar.
If The Price Drops Too Low
If the LP token price drops below this range, the collateral is about to become worth less than it would take to repay the loan. To protect the lender the loan is automatically repaid, plus 4% of the borrowed amount is withdrawn from the starting LP token balance.
If The Price Rises Too High
Similarly, if the LP token price moves above this range, the value of the loan will be too high to be repaid by the collateral. In the same way, the loan is repaid with 4% of the borrowed amount taken from the starting LP balance.
Liquidation Does Not Mean Losing All Your Funds
As mentioned above, when your position is liquidated you will only lose 4% of the borrowed amount, which is deducted from your starting collateral.
For example, if you start with 1,000 tokens and borrow 2,000 tokens, this gives you a x3 leveraged position. In the event of liquidation you would lose 4% of 2,000 which is 80. So after liquidation your account balance would be 1,000–80 = 920.
Here’s a table of expected liquidation outcomes at different leverage amounts. Note that these are expected amounts and may vary slightly due to network congestion or possible price swings.
What can you do to protect yourself from liquidation?
Choose LP tokens with more stable value. More volatile token pairs have a higher chance to go outside the liquidation price range.
Choose a wider liquidation price range when you take your leveraged position.
When prices are volatile, you may want to check back on your leveraged position often to see whether you want to deleverage.
If you see the price getting too high or too low, you can reduce leverage or fully exit your leverage with the app’s deleverage button. Note that this relies on confirming a network transaction, so it may require higher transaction fees or wait times if the network is congested.
Supply funds instead of leveraging. Supplied funds have no risk of liquidation. This will always be a safer option than leveraging and may also provide very good returns. You can supply funds in the Lending tab of the app.
Choose The Right Level Of Risk
Impermax believes in giving users the freedom to choose their leverage, even when doing so may be quite risky. In the future there may be additional tools or user-created solutions to help mitigate the risks of high leverage and reduce the need for monitoring. In the meantime, choose your risk level carefully and be aware that even if your position is liquidated, you should not expect to lose everything.
We're developing a DeFi ecosystem that will enable investors to leverage their LP Token.