Market Neutral Farming (Single Asset Borrow)

Market Neutral Farming (MNF) Vaults employ a strategy where the users funds are deployed into an LP farming position. The LP exposure is hedged with a novel rebalancing mechanic. These strategies should be considered active strategies and require highly reliable software infrastructure to operate.

A MNF strategy deploys a portion of the initial capital into a Money Market (MM) as collateral. A borrow token is selected. This token will be paired with the initial capital (the portion not deposited into the money market as collateral), to form an LP position. Using a portion of the initial capital as collateral, we have borrowed a token for the LP position. This process is detailed in the figure below (Numbers are used as an example, these are configurable).

If the relative price between the two tokens does not change, the position is perfectly market neutral. However, when the relative prices between the two assets changes the position is subject to Impermanent Loss (IL). Yield farmers who do not have the benefit of the BoF technology hope that the yield generated from the yield farm will exceed the negative impact of the impermanent loss.

There are various calculators available online to calculate the impact of impermanent loss given various changes in the price of the tokens in the LP position. The impact of IL is visually represented in the figure below.

It is critical to understand the negative impact IL can have on the returns from yield farming, where the price of the two tokens being farmed lose positive correlation. Here is a video explaining impermanent loss: https://youtu.be/8XJ1MSTEuU0.

In order to minimize the impact of impermanent loss; we have built a unique rebalancing technique to adjust the position based on market movements. For this mechanic, there are two key terms, Debt Ratio and Collateral Ratio:

Debt Ratio = Balance of Borrowed Token in LP Position divided by Borrowed Debt

Collateral Ratio = Debt Value divided by Collateral Value