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70% APR on stablecoins with no impermanent loss, hardly any risk of liquidation and almost zero transaction fees. Sounds good, right? It's possible with leveraged farming of $MATIC rewards on $AAVE on Polygon. See how to do it
$COMP farming last year was probably the first time when DeFi users got paid for borrowing. Savvy farmers substantially increased their APRs by iterative lending and borrowing. The same can be done on $AAVE with transaction fees on Polygon so low that you can hardly feel them.
Iterative lending and borrowing works this way:
1. You have 1000 DAI and lend it on Aave.
2. You borrow 75% of your deposit, i.e. 750 DAI.
3. You lend borrowed 750 DAI on Aave.
4. You borrow 75% of your deposit, i.e. 562.50 DAI.
5. Repeat multiple times.
1. You have 1000 DAI and lend it on Aave.
2. You borrow 75% of your deposit, i.e. 750 DAI.
3. You lend borrowed 750 DAI on Aave.
4. You borrow 75% of your deposit, i.e. 562.50 DAI.
5. Repeat multiple times.
Looks ridiculous? Yes, a bit. But borrowing and lending on Aave is incentivized with $MATIC rewards. So the more you borrow and lend, the more rewards you get. On Ethereum it wouldn't be profitable for small amounts due to transaction costs but on Polygon, fees are unnoticeable.
With 1000 DAI of initial deposit and 10 iterations of lend and borrow, you can increase your total lend amount to 3831 DAI and total borrow amount to 2831 DAI. Taking into account $MATIC rewards, lend and borrow APRs, you can easily reach 70% APR on your initial deposit.
You can play with the spreadsheet I prepared for Aave Leverage Farming. Just make a local copy, change highlighted cells using the most recent data from Aave, input your deposit amount and number of iterations and you will get an estimate of APR. https://docs.google.com/spreadsheets/d/1NSHO6WnQ4lsdaaKHcp3R7pOFHD2P-nnTT1y_SKFQR1A/edit?usp=sharing
I was wondering if there is a risk of liquidation in this leveraged farming but I think it simply can't happen if you lend and borrow the same asset. Even in case of oracle failure, its impact on borrow and lend value is exactly the same so it cancels out. But I'm not a dev :)
To move your funds from Ethereum to Polygon, you can use: https://zapper.fi/bridge
