Impermax enables permissionless lending for Leveraged Yield Farming
Impermax is a cross-chain, permissionless, decentralized lending protocol where users can participate as lenders or borrowers in isolated lending pools.
Each lending pool represents a pair of 2 tokens of a DEX. Lenders can supply tokens to any lending pool to earn passive yield without impermanent loss. Borrowers can deposit LP tokens in a lending pool to borrow tokens of the token pair. This enables borrowers to leverage their LP tokens and get even more LP tokens, allowing for leveraged yield farming and enhanced LP rewards.
With Impermax, farmers can start earning yield from liquidity providing on DEXes with a single token deposit. Impermax eliminates the risk of impermanent loss for these farmers (suppliers) removing one of the biggest negatives of liquidity providing.
How does this work? Instead of depositing funds directly into DEX contracts, the funds are supplied to borrowers who use them to increase farming earnings through leverage. These increased earnings are shared with the lender under the form of interest. This is called Indirect Liquidity Providing. Borrowers carry all the impermanent loss risk on behalf of the Indirect Liquidity Providers.
This is a great benefit for people who want to earn DEX yields with less risk, but it’s also a benefit for DEXes since it helps more risk-averse users safely participate in liquidity providing.
If you are more comfortable with risk, Impermax also lets you borrow to increase your farming position. You can take LP tokens from a DEX like Uniswap, SushiSwap, or many others, and use them as collateral to borrow more of the same token. Then you earn yield on both your original amount and the borrowed amount. This is called Leveraged Yield Farming.
You share a portion of these extra earnings with the lender and keep the rest as profit. You can de-leverage and pay back the borrowed tokens any time.
What’s the liquidation risk? If there’s a sudden change in collateral value, the borrowed funds may be liquidated to pay back the lender. Liquidation fees are limited to 4% of your borrowed amount.
The ability to choose higher and lower risk/reward positions for DEX farming creates many new earning opportunities that haven’t been available before. The ability to borrow against LP tokens and use the funds for other investing activities removes a big opportunity cost to liquidity providers.
Impermax users have already come up with many new strategies for maximizing returns and minimizing risk. As the DeFi industry grows, these kinds of strategic options will become evermore common and useful.