What is Alpaca Finance?
Alpaca Finance made a name for itself as the biggest leverage farming protocol on BNB Chain. The protocol sprung out in 2021, and it capitalizes on the low fees of BNB Chain to help users earn yields. To explain Alpaca Finance, it's important to mention their concept isn't entirely new.
Leveraged yield farming started out on Ethereum as a popular method for projects to bootstrap liquidity and bring more users. However, the fees began pricing out new users who just couldn't afford a $100 swap fee. This turned out to be a major opportunity for alternative blockchains to attract users.
Due to the open nature of crypto, projects can easily adjust the code to a new blockchain. BNB Chain is essentially a cheaper version of Ethereum, which means projects can migrate to their blockchain using the existing codebase. This comes with advantages and disadvantages.
The advantage is that protocols use battle tested code from popular protocols such as Compound or Aave. Chances of hacks are therefore reduced due to the extensive security checks done by their teams. The disadvantage stems from the fact that unexperienced teams are tempted to copy-paste the code without actual knowledge of how it works. As a result, their slow reaction to a hack could result in disastrous consequences.
Alpaca Finance gains inspiration from the leverage yield farming on Ethereum, and it implements additional security checks on top of that. Like any other DeFi protocol, Alpaca Finance represents a collection of smart contracts. These automated pieces of code perform strategies to maximize yield.
The open nature of DeFi encourages protocols to cooperate and innovate. Alpaca Finance is a unique protocol that has been in the making since early 2021. However, the code can be vulnerable to hacks and exploits. As easy as it is for developers to review each others’ code, hackers can just as easily spot a vulnerability and take advantage of it.
Within the BNB Chain community, Alpaca Finance is widely regarded as one of the most secure platforms because of our spotless track record of never being hacked. Some of the accolades include 20 audits, as well as ranking 3rd highest security score from Certik.
As an extra precautionary measure, Alpaca is ensured by Nexus Mutual and Insurace. In the case of a shortfall event, up to 50% of future Protocol Revenue going to the Governance Vault can be used to pay back users who lost funds.
Even with all the security measures in place, nothing compares to understanding the risks of participating in DeFi protocols. Alpaca Finance requires no KYC, which means the playground is open for everyone, including bad actors.
At first sight, Alpaca is a powerful profit-enhancing tool for market makers who want to provide liquidity on exchanges. If users want to multiply their farming profits, Alpaca can loan them assets to ramp up their positions resulting APYs up to 6x.
When lending on DeFi protocols, there is always the risk of bad debt. Due to high volatility periods, liquidations could happen at the wrong price, resulting in lenders losing a portion of their funds. This is a test of endurance for DeFi protocols. Their mechanisms have to ensure liquidations happen at the fair market price to protect borrowers and lenders.
Alpaca Finance has two mechanisms in place to mitigate liquidation risks. The first one is to create a large enough buffer to process all liquidations in time. These key parameters have been by the Alpaca team.
The second approach is to incentivize liquidators so they liquidate positions when the case applies. Alpaca Finance strives to make the liquidation process neutral.
How does Alpaca Finance work?
Alpaca Finance is the largest DeFi protocol for leveraged yield farming on BNB Chain. It helps lenders earn safe and stable yields, and offers borrowers uncollateralized loans for leveraged yield farming positions. Alpaca derives its value from amplifying the liquidity layer, improving their capital efficiency by connecting borrowers and lenders.
Alpaca Finance Leverage Yield Farming
Leveraged yield farming is the service that put Alpaca on the map. In a nutshell, leveraged yield farming means borrowing funds to increase your LP position. Where leveraged yield farming shines is in its capital efficiency–the ability to borrow more than you put up as collateral.
For anyone who is new to DeFi, one of its major shortcomings is that you have to lock up more collateral than you are able to borrow. If you put up $100 as collateral, you might only be able to borrow $50. So if you then use that $50 to yield farm, then why wouldn't you use the $100 from the start? This limit has its logic in the context of a young DeFi ecosystem. However, it's not the case with leveraged yield farming.
Unlike most traditional lending platforms, leveraged yield farming allows for undercollateralized loans. This model unlocks higher APYs for borrowers as well as better rates for lenders, since more of their capital is in demand. Alpaca Finance can safely offer leveraged yield farming because borrowers can withdraw the funds from the platform. As such, the usage and subsequent return of the funds are tightly controlled by the protocols and their liquidation mechanisms, ensuring lenders receive their funds back. This is in contrast to traditional lending platforms that allow borrowers to take and use their funds anywhere.
Although leveraged yield farming can bring substantially better profits, one of the top concerns is the liquidation mechanism. Users have to worry about the liquidations when their collateral drops in price. Alpaca Finance has simplified the leveraged farming process by automating many of its mechanics.
Alpaca Finance Automated Vaults
Alpaca's automated vaults are smart contracts that run strategies on users' behalf. They can be compared to a crypto hedge fund.
Alpaca has two strategies for Automated Vaults, which are the Market-Neutral Strategy and the Savings Strategy.
The Market-Neutral Strategy eliminates the majority of market risk by farming long & short positions simultaneously, and rebalancing them for you to maintain neutral exposure. Simply put, this is a low risk and high yield strategy.
Alpaca achieves this by opening one long position and one short position at optimal sizing to achieve zero net market exposure on the volatile asset in a token pair. As the market moves, Alpaca's vault rebalances the long and short positions to maintain 0 market exposure.
The Savings Strategy farms long & short positions simultaneously just like the market-neutral strategy. However, the Savings Strategy remains at 1x long instead of market-neutral. Basically, you keep 1x exposure to the asset, and earn much higher yields compared to CeFi and DeFi lending.
Alpaca Finance AUSD
AUSD (AlpacaUSD) is an auto-farming stablecoin that earns passive yields for you in the background.
The stablecoin is overcollateralized by a basket of cryptos, so that its value stays pegged at $1.
Lenders in Alpaca Finance can collateralize their deposits(ibTokens) to borrow AUSD, which they can use inside and outside Alpaca Finance to earn additional yields. Lenders are thus able to continue earning Lending APR and Staking APR, while also borrowing AUSD.
How to make money on Alpaca Finance?
Alpaca Finance can be a good source of multiplying your profits on BNB Chain. The core of Alpaca strategies are centered around capital efficiency, which means your deposited funds will be put to work, producing yields while you sleep.
So far, it sounds well and cosy. The protocol is akin to an automated hedge fund manager, and instead of paying a commission to the manager, fees go back to the protocol treasury and users.
Anyone can use Alpaca Finance thanks to its permissionless nature. There isn't even a minimum amount required to use the protocol. The amount of crypto you can earn is correlated to the market rates as well as the amount of financial risk you can stomach. With this caveat in mind, we can explore the many ways to make money on Alpaca Finance!
Alpaca Finance Lending
Lending and staking can be a lucrative activity to put your idle crypto assets at work. It is the simplest method to earn on Alpaca Finance, and it's usually considered low-risk compared to other services.
To start lending on Alpaca Finance, follow these steps:
1. Open Alpaca Finance app
2. Go to "Lend" page
3. Click "Deposit" on the desired asset pool
4. Specify the amount you want to deposit
5. Click Confirm and approve the transaction
6. Once the transaction has gone through, you should automatically receive ibBNB in your wallet if you deposited BNB, or ibBUSD if you deposited BUSD
Staking works just as easy. Just click on the "Stake" page, select the desired staking pool, type the number of tokens you want to stake and click "Stake." In addition to the APY from staking, users are also entitled to ALPACA rewards.
The APY one can receive from lending and staking on Alpaca is subject to market conditions and varies from asset to asset. If you see better APYs elsewhere, you can easily withdraw your funds and move to greener pastures. However, Alpaca has an ace in their hand when it comes to yields.
Alpaca Finance has tuned its strategy to maximize capital efficiency. The APY users receive from lending is paid by the borrowers. Therefore, more borrowers equals sustained APYs. Borrowers can open undercollateralized loans for yield farming. As a result, Alpaca's utilization rate and lending interest rates are consistently higher compared to other DeFi protocols.
Alpaca Finance Leverage Yield Farming
Now that we explained how lending works, let's switch to the borrowing side. Borrowing on Alpaca is associated with leverage yield farming. In simple terms, users borrow funds to increase their farming position. For example, the ALPACA/BNB pair offering 2% APY would get you $2 return on a $100 deposit. With a $1000 loan, the return would be $20. Of course, leverage yield farming is not free. Users have to pay interest on the loan. Yet, leveraged yield farming shines in terms of capital efficiency.
When using leveraged yield farming you need to ask yourself: "How much profit do I get compared to the interest I need to pay?"
If the interest is higher than the APY, the strategy may turn out to be unprofitable. Trading fees are also an important factor to keep in mind. On the good side, Alpaca Finance offers a detailed overview of these variables on their app.
To open a leveraged yield farming position on Alpaca Finance, follow these steps:
1. Go to Alpaca Finance app
2. Select you desired farming pool
3. Click "Farm"
4. Enter the amount you'd like to Farm with
5. Select your desired leverage
6. Select the asset you wish to borrow
7. Click "Farm" and approve the transaction
8. Profit
Opening a leveraged yield farming positions comes with the risk of liquidation. The protocol needs to be sure you will be able to pay the funds back, which is why the amount you add from your funds acts as collateral.
Alpaca Finance Automated Vaults
One major advantage of using our Automated Vaults vs. manually performing similar strategies is that Automated Vaults running market-neutral strategies will not have liquidation risk. The Automated Vaults' positions will not have connected liquidation bots, or allow liquidation.
Here's how you use Alpaca's Automated Vaults:
Go to Alpaca Finance app
Click on the "Farm" tab and navigate to "Automated Vaults" tab
Click "Invest" for the Vault that you prefer
On the Vault Detail Page, click "Invest" button
input the desired amount that you wish to invest
Click "Invest" and approve the transaction
Now you can sit back, relax and enjoy high yields, while the Vault is doing its job to maintain the position for you.
Alpaca Finance AUSD
Minting AUSD can be a lucrative opportunity within the Alpaca ecosystem. Basically, you are minting a stablecoin while maintaining exposure to the underlying collateral. With the minted AUSD you can use it to earn even more yields.
Here's how you open an AUSD position:
Go to Alpaca Finance app
Open the AUSD Page
Select your desired collateral pool
Click "Open Position"
Enter the amount you would like to put up as collateral
Enter the amount of AUSD you would like to borrow
Click "Supply & Borrow"
Approve the transaction
With the newly minted AUSD you can go ahead and provide liquidity in the AUSD-BUSD pool to earn yields from trading fees, or maintain the peg price of $1 for AUSD by buying and selling AUSD when price deviates from $1.
Price Prediction for Alpaca Finance — Can it hit $1000?
Buying and hodling ALPACA — the native token of the Alpaca Finance — is one way of potentially making money on Alpaca.
The main utility of the ALPACA token is to serve as a governance token and incentive for the liquidity providers. Its value is directly tied to the number of new users and its token issuance schedule.
Since launch, Alpaca Finance has adopted buyback & burn as a deflationary mechanism to increase the long-term value of the ALPACA token. A small percentage of each transaction fee is being burned to protect the price of ALPCA.
By looking at its current price, it’s natural to think about the chance of ALPACA hitting $10 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.
Let’s examine the potential growth of the ALPACA token by analyzing its tokenomics. ALPACA’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} ALPACA tokens being in circulation today, that means a price of {PRICE} per ALPACA.
How did we come to that calculation? It’s quite easy, the price of an ALPACA token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each ALPACA coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of ALPACA at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for ALPACA to hit that price.
At a price of $10 per token, that means the current market cap of ALPACA would equal ${{CIRCULATING_SUPPLY} * 10}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $10.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. ALPACA’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} ALPACA which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of ALPACA? Taking into account the current price of an ALPACA token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. ALPACA coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of an ALPACA token. Doing the same calculation but with a price of $10 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 10} for the ALPACA protocol fully diluted market cap.
These are all crucial details to know when calculating if ALPACA can reach the price of $10 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of ALPACA depends solely on its growth as a network used by tens and hundreds of millions of users. Technically, the price of ALPCA can reach $10 and beyond by 2030.
If you’re looking to add some ALPACA to your portfolio, the most trusted places to get some are Binance and Coinbase.