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Project Insight: Alpaca Finance - Leverage Yield Farming Protocol on BNB

Alpaca has grown its “herd” quickly and thus has secured its place as the largest lending protocol allowing leveraged yield farming on BNB Chain.

Introducing Alpaca Finance

Alpaca Finance is one of the largest lending protocols offering leveraged yield farming on the BNB Chain. It enables lenders to earn safe and stable yields and offers borrowers undercollateralized loans for leveraged yield farming positions, potentially multiplying their farming principles and resulting profits.‌ It was designed as an alternative to the market-dominating lending/farming protocols on Ethereum.

As it was made for the BNB Chain, it benefits from much lower gas fees–in the case of Ethereum can cost up to thousands of dollars, thereby making it accessible to a much wider user base.

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Alpaca aims to drive the liquidity layer of integrated exchanges, improving their capital efficiency by connecting LP borrowers and lenders. It's through this empowering function that Alpaca has become a fundamental building block within Decentralized Finance (DeFi) space. Alpaca token is a utility token for Alpaca Finance that users can stake to earn xAlpaca, which can be used for voting on platform-related governance proposals. 

Value Proposition

Alpaca Finance offers the following to its users:

  • Staggering yields through yield farming.
  • Variety of pools of investing.
  • Significant savings on transaction fees.
  • Strong focus on transparency and verification.
  • Higher rewards with lower investment–through the protocols leveraged positions.
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In addition, it has become one of the top protocols in the BNB DeFi ecosystem because of the robust security infrastructure implemented to provide assurance to investors; some of these measures are as follows:

  • Flash loans are banned on the platform.
  • Alpaca Finance has been audited 20 times by reputed operators such as Certik, Peckshield, SlowMist, and Inpex, making it one of the most secure protocols.
  • It has a bug bounty program that rewards bug reporters/finders up to $100,000.
  • It partnered with Nexus Mutual and InsurAce to provide protocol insurance.
  • All orders through the admin (core developers) are required to go through the Timelock contract and are delayed for 24 hours before it takes effect. This allows the community adequate response time in the event of any code alteration.
  • Implementation of Alpaca Guard–An auto-activated mechanism to protect users from potential price manipulation, flash liquidation, and market failure.
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Alpaca's Products

Alpaca Finance’s product portfolio comprises:

  • Leveraged Yield Farming: Enables users to maximize earnings with borrowed capital.
  • Automated Vaults: Automated yield-generation strategies.
  • AUSD (Alpaca USD): An auto-farming stablecoin that generates passive yields for users.
  • ALPACA & ibToken: ALPACA is the utility token for the network. Allows users to participate in staking, farming, lending, or other features. 
  • Governance Vault: Enables users to deposit the native token in return for governance powers such as voting and yield generation.
  • Alpies: A hand-drawn, limited edition 10,000-piece Non-Fungible Token (NFT) collection

Let’s dive deeper into each of these products and its features:

  • Leveraged Yield Farming:

Yield farming is the practice of staking or lending crypto assets in order to generate high returns or rewards. This innovative yet risky and volatile DeFi application has skyrocketed in popularity recently thanks to further innovations like liquidity mining. Yield farming is one of the biggest growth drivers of the still-nascent DeFi sector. Yield farming protocols incentivize liquidity providers (LP) to stake or lock up their crypto assets in a smart contract-based liquidity pool. These incentives can be a percentage of transaction fees, interest from lenders, or a governance token. These returns are expressed as an annual percentage yield (APY). As more investors add funds to the related liquidity pool, the value of the issued returns decrease accordingly.

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In leveraged yield farming, users can borrow tokens to maximize their farming positions and, therefore, capture additional farming yields. On Alpaca Finance, users can participate in leveraged yield farming through three different approaches such as:

  • Lender: Users can generate stable returns on their base assets by depositing them into lending vaults. These assets are then offered to yield farmers for leveraging up their positions. For example, when a user deposits USDT into the lending vault, the user receives ibUSDT–an interest-bearing token representing the share of USDT in the lending vault. The deposited USDT is then available for a yield farmer to borrow. While the interest token–ibUSDT generates interest, the user can withdraw more USDT than the amount deposited (i.e., representing principle USDT + interest)
  • Yield Farmer: Users can borrow base assets from the lending vaults, allowing them to open a leveraged farming position thereby, multiplying the farming APR by up to 6x (minus borrowing interest). For example, if a user intends to open a leveraged yield farming position on the BTC/BNB pair, he/she borrows BNB from the vault and is entitled to higher yield-farming rewards. Alpaca Finance's smart contract handles the mechanics behind the scenes , such as  optimally switching assets to the appropriate ratio, providing liquidity to the pool, and staking the LP tokens for rewards. However, there are inherent risks associated with these higher yields, such as liquidation, impermanent loss, etc. 
  • Liquidator: The liquidator bot monitors the health of each leveraged position, and when it exceeds certain designated parameters, the bot helps liquidate the position, making sure lenders do not lose their capital. For this service, the bot is rewarded 5% from the liquidated position. Alpaca also has an in-house bot that uses 100% of this fee for a buyback and burns of the ALPACA token. 
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Alpaca Finance offers a variety of investment mechanisms that can optimize the capital efficiency of crypto assets. Let's look at the recommended yield farming strategies: 

  • Lend and Stake: Users can lend and then stake their individual crypto assets (BUSD, USDT, BNB, BTCB, ETH, ALPACA) for the highest single-asset yields within DeFi at very low risk. These high Annual Percentage Yields (APYs) can be sustainably achieved because Alpaca offers uniquely high capital efficiency to borrowers, allowing them to open undercollateralized loans for yield farming. This results in high utilization and lending rates–up to two times higher compared to the competition. 

In order to lend, users need to deposit their chosen asset, after which they will receive the interest-bearing tokens (ibToken) in their wallets. The values of the ibToken increase overtime at the same rate as the Lending APR (lending interest is auto-compounded). To stake, users can deposit their iB tokens to earn additional rewards in ALPACA.

  • Auto-compounded Yields Without Leverage: In this strategy, the rewards from staking pools are reinvested into the staked principal, thereby generating interest on interest. In addition, Alpaca claims that these auto-compounding farms are more profitable compared to the competition as they have a very low-performance fee–3%, thereby allowing users to keep most of their earnings–maximizing yields.
  • Maximizing Stablecoin Yields: When markets are volatile, crypto traders tend to hold a percentage of their portfolio in stablecoins. During volatile market situations, a popular strategy is to hold a percentage of the portfolio in stablecoins. These can be deposited into various available protocols, usually for 10%-25% yields. However, Alpaca Finance offers users the ability to borrow additional stablecoins, which can be used to increase their positions snd generate more income–while still being exposed to very low risk. 
  • Maximizing Gains in Bull Market: Crypto gains can be efficiently multiplied in a bull market by leveraging up long positions. When traders are confidently bullish on an asset, they often use leverage to increase their gains. For example, in margin trading, stock traders borrow money to buy more stocks using their existing equity as collateral. Similarly, crypto traders can buy perpetual contracts on CEXs, using crypto assets as collateral. However, in this case, both the perpetual and the crypto asset used for collateral cannot be withdrawn from the CEX. This means leverage traders lose out on profitable farming opportunities on these assets while also paying borrowing interest. 

However, in Alpaca’s leveraged yield farming, traders can leverage up an asset and earn farming yields on the equity and borrowed assets, making it far more capital efficient. Therefore, if traders are bullish on an asset, leveraged yield farming that asset is a more profitable strategy.

  • Yield Farm Profitability in Bear Market: One of the key distinguishing features of Alpaca FInance is that it allows traders to yield profit in all market conditions. Traders are not forced to hold long positions which are unprofitable in down-trending markets. They can short their positions when the chosen asset price drops–critical to profitability in a bear market. 
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Benefits of Automated Strategies Employed in Yield Farming:

  • Flexible deposit options: The vault automatically converts deposited assets and the borrowed assets to get an equal value split to supply the liquidity pool. 
  • Automatic staking: Alpaca code automatically stakes the LP tokens on the chosen platform. 
  • Continuous auto-compounding: The Alpaca bot automatically sells the user’s DEX rewards every time the user interacts with the pool (opens/closes/adjusts a position on a given pool). The bot then converts the rewards into LP tokens for the farming pool and compounds them onto the user’s farming principal in order to maximize the APY. 
  • ALPACA rewards: Users can earn and claim these ALPACA rewards on the staking section by just opening a leveraged yield farming position.

Automated Vaults

Automated vaults are complex strategies–similar to an on-chain hedge fund. Alpaca Finance currently offers two strategies for Automated Vaults, such as: 

  • Market-Neutral Strategy: It is a leveraged yield farming strategy where users can yield farm high APY pairs while minimizing risk by hedging out market exposure. It eliminates market risk by farming long and short positions simultaneously and rebalancing them to maintain neutral exposure. In short–high yield with low risk.
  • Savings Vault Strategy: It is a long strategy similar to lending or staking base crypto assets (ETH, BTC, BNB, etc.) but with higher APYs because the underlying capital is deployed to earn yields in high-leverage yield farming positions with no liquidation possibilities. 
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Benefits of Automated Vaults:

  • Higher max leverage (up to 8x): As these strategies are auto-rebalancing and liquidation-free, they can run higher leverage profitably with a minimal increase in risk.
  • Auto-rebalancing: Automated vaults monitor positions and execute strategies based on the movement of the asset price automatically with no need for manual intervention, thereby appealing to both new and veteran crypto users.
  • No liquidation risk: When one position drops in equity value, the other asset’s equity value rises to the corresponding amount, making the aggregate change to equity value close to nil because of auto-balancing, thereby mitigating the liquidation risk. 
  • Auto-compounding: To maximize yields, in addition to compounding the yield farming tokens, ALPACA rewards earned from the two positions in this strategy will be auto-compounded, maximizing the yields and reducing position maintenance even further.
  • No lock-up: Users can deposit and withdraw at any time.

Alpaca USD (AUSD)

AUSD is an auto-farming stablecoin that generates passive yields in the background. It is overcollateralized, decentralized, and reinforced with multi-layered pegging mechanisms to ensure it remains stable at $1. Lenders in Alpaca Finance can collateralize their deposits (ibTokens) to borrow AUSD, which they can use to earn additional yields. AUSD is fully backed with robust risk management parameters. The stablecoin is over collateralized by a collection of top digital assets, including ETH, BNB, USDT, BUSD, BTCB, and TUSD. AUSD smart contracts passed audits from three professional security firms such as PackShield, InSpex, and SlowMist. 

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Key features of AUSD:

  • Farmable Collateral Module: AUSD smart contracts allow for the collateral (used to borrow AUSD) to be used to earn lending and staking APR, which earns additional ALPACA rewards. It can also potentially compose of other protocols. As the lending APR is much higher than the stability fee for AUSD (2% for most collateral types), the loans are effectively better than interest-free; essentially, they are yield-bearing auto-farming loans.
  • Efficient Pegging: In addition to maintaining overcollateralization, Alpaca Finance can also adjust borrowing interest on AUSD for the collateral assets. When the price crosses $1, Alpaca can lower the borrowing interest, thereby incentivizing users to mint new AUSD, which creates selling pressure to bring the price closer to the $1 peg. In case the price goes below $1, Alpaca can increase borrowing interest, incentivizing users to buy back the AUSD to close their borrowing positions because they have become more expensive, which creates buying pressure to bring the price back up to $1.
  • ​​Gradual Liquidation: In case the AUSD borrowing position faces liquidation, only a small portion of the position is liquidated until the loss is covered. The max liquidation size is limited to 25% of a position’s Debt Value. This liquidation model results in lower associated costs and liquidation risk for AUSD borrowers while still preventing the risk of bad debt.
  • Handling of bad debt: 50% of the protocol APR meant for the governance vault will be allocated for the remuneration for this event until the loss is covered. This way, the risk of bad debt will not only be minimized but also have coverage.

ALPACA & ibToken

ALPACA: It is the platforms’ governance token, allowing users to stake and receive xALPACA–the quantity of which will determine the voting rights and governance stake. The total supply is limited to 188 million, which will be released gradually over two years from going live. 8.7% of ALPACA tokens are allocated to fund development and team expansion, 4.3% for future strategic expenses such as listing fees, audits, third-party services, liquidity for partnerships, etc., and the remaining 87% are allocated to be distributed equitably to users of the protocol–making it a genuine, fair launch project. 

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ALPACA is deflationary in the long run because of the burning mechanism. The platform will provide part of the protocol fee to buy back and burn, such as 80% of the liquidation fee, 10% of the loan interest, and 4% of the liquidation bounty received by the liquidation robot. This helps to create positive price pressure. ALPACA holders also have exclusive access to Alpies NFTs and can earn additional rewards from the ‘Grazing’ range pools–only available to governance vault stakers. 

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ibToken: It is Alpaca Finance’s interest-bearing token; it represents the asset deposits in vaults. For example, when a user deposits BUSD, he/she receives ibBUSD in the wallet, which represents the BUSD deposit and the interest accrued. This balance of the ibTokens is directly proportional to the stake in the lending pool, which accrues interest every block. ibTokens accumulate interest through their exchange rate; over time, each ibToken's value increases, becoming convertible into a larger amount of its underlying asset with every block. Each deposit pool has its own utilization rate, which will also determine the appreciation of the corresponding ibTokens over time. The longer a user holds ibTokens, the higher the appreciation value–interest accumulation.

Governance Vaults

Alpaca’s governance mechanism focus on aligning platforms’ incentives with loyal token holders. To participate in governance, users can lock their ALPACA tokens from a minimum of one week to a maximum of one year. For which they receive a corresponding amount of xALPACA tokens, which represent their share in the governance rewards pool and their voting power for governance functions. The amount of xALPACA users receive is based on the amount of ALPACA deposited and the remaining lock duration. The xALPACA balance will decrease linearly over time and will reach zero when it’s unlocked. The longer the lock-up period, the more xALPACA users receive, which translates into higher rewards for APY and governance voting power.

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Governance vaults allow ALPACA stakers the following benefits:

  • ALPACA Emissions: A️ share of ALPACA emissions are distributed to governance vault stakers–300 allocation points (~0.355 ALPACA/block) These rewards are transferred from the ibALPACA staking pool.
  • Grazing Pool Rewards: Governance vault stakers are entitled to earn token rewards from all the operational grazing pools simultaneously. 
  • Revenue Sharing: 5% of the 9% leverage yield farming fee is allocated to ALPACA stakers in the governance vault. 
  • Voting: As mentioned earlier, more ALPACA staked in the governance vault means more xALPACA, which translates to more voting power. 

Alpies NFTs

Alpies is a cross-chain NFT collection on Ethereum and BSC consisting of a total of 10,000 NFT Avatars to serve as playable heroes in Alpaca Finance’s upcoming PlaytoEarn gaming platform and metaverse. The collection consists of two sets of 5,000 alpies sold in two parts, first on BSC (Dauntless), then on Ethereum (Dreamers), and bridgeable between both blockchains. The Dauntless are dark-themed Alpies; they are relentless capitalists, clearing their path to success through a fierce focus on execution. The Dreamers are light-themed Alpies; they are idealistic builders in their quest to grow the crypto industry into a financial utopia.

Alpies NFTs offer the following benefits, including: 

  • Presale allocation of Alpaca’s upcoming GameFi token. 
  • 50% higher max leverage on Alpaca Finance’s leveraged yield farming platform.
  • Beta access to Alpaca’s play-to-earn game.
  • Exclusive free game items.
  • High-quality NFT breeding.
  • Exclusive access to Alpaca physical merchandise.
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Recent Developments

As reported by BSC News, Alpaca Finance announced a partnership with Nexus Mutual Insurance to provide users the ability to purchase coverage for their funds deployed in any Alpaca product, including lending, farming, the grazing range, and staking. 

The BNB based protocol has been audited 20 times by various well-known auditors in the cryptoverse like PeckShield, Certik, SlowMist, and ImmuneFi amongst others.

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In addition, as reported by BSC News, Alpaca Finance launched its governance forum on February 9. The forum will serve as the meeting ground for the community to discuss and propose improvements that will enhance the value proposition of Alpaca Finance.

Team & Background

Alpaca Finance’s teams comprise expertise in software engineering, blockchain, FinTech, and banking infrastructure. It is led by James Strudwick and Pete Woodard.

James Strudwick has four years of experience in blockchain technologies. He was part of numerous CeFi institutions, including BNP Paribas and Capital Markets. Pete Woodard is the former CEO of Nebeus–a cryptocurrency lending company. Has four years of expertise in blockchain and four years in banking Infrastructure. 

Concluding Thoughts 

Alpaca Finance is currently the third-largest DeFi ecosystem built on the BNB Chain, with a total value locked (TVL) of $519. 69 million, as per data from DeFiLlama. The TVL in the protocol reached its all-time high of $1.8 billion on August 23, 2021, amid the peak of the market-wide bull run.

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However, one aspect of the ecosystem is especially noteworthy, the ecosystem’s stablecoin, ALpaca USD (AUSD). The auto-framing stablecoin is backed by other digital assets like BTC, ETH, USDT, and BUSD, amongst others, and not backed 1:1 by the fiat dollar as with the case of the dominant stablecoins like Tether (USDT) and USD Coin. This is an important consideration to make for users and investors, especially with the recent fiasco with the Terra network’s stablecoin UST, which caused a domino effect leading to a market-wide crash across assets. 

In conclusion, the unique combination of features that Alpaca brings to the market makes it an ideal platform for generating low-risk returns. The platform continues to see growing adoption in the booming DeFi revolution, which is creating a competitive environment with more players entering every other day. Alpaca Finance’s yield generating mechanisms (ability to earn in all market conditions), their appeal to a wide user base (from beginner to advanced), and their focus on security and governance make them a force to be reckoned with. Seemingly all bases are covered, and there is something for everyone regardless of risk profile, target yields, or knowledge level. 

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