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The Beginner’s Guide to Alpaca Finance

Get started with Alpaca Finance. From being a lender, a yield farmer, a liquidator or a bounty hunter, there are many ways to earn money on Alpaca Finance.

Alpacas are camel-like animals native to South America. Alpacas are often confused with Llamas as they tend to look similar.

But this article is not about South American Alpacas. We are talking about Alpaca Finance, one of the newest entries into the crypto world. A winner among Binance's ‘Most Valuable Builder II’, Alpaca Finance is hot and trending at the moment.

Alpaca Finance is a lending platform on Binance Smart Chain. But unlike other yield farms out there, Alpaca supports leveraged yield farming. Alpaca has a whopping TVL (total value locked ) of $1,457, 868, 045, as of 4th November 2021.

From being a lender, a yield farmer, a liquidator, or a bounty hunter, there are various roles you can play to earn money with Alpaca Finance.

What is Alpaca Finance?

Alpaca Finance, a fair launch project, is a lending protocol that allows leveraged yield farming on Binance Smart Chain. It is currently the largest lending protocol on the BSC.

Alpaca Finance enables lenders to earn safe and stable yields. Borrowers, on the Alpaca platform, can get undercollateralized loans for leveraged yield farming positions. The net result is the vastly multiplying farming principal and resulting profits for both lenders and borrowers.

For those new to crypto, I’ll explain what these terms mean. Others can jump straight to the next section.

  • The ‘Binance smart chain’ is a blockchain ecosystem on which all these crypto applications are built. 
  • A fair launch means that the corresponding project is run by a community. More than that, in a fair-launch project, the cryptocurrency is mined, earned, owned, and governed by a community. There will be no early access to the token (pre-sales) or private allocations before making them public. Bitcoin, Dogecoin, and YFI are good examples of this. Since Alpaca finance is a fair-launch project we can conclude that it is a product made for people by people. In short, by the Alpacas, for the Alpacas.
  • Yield farming is, at its most basic level, a means of allowing crypto investors to earn from their investments. Yield farming is a method of earning interest from trading fees by putting crypto units into a lending mechanism. Some users are occasionally given additional rewards in the form of the protocol's governance token.

Taking out a bank loan can be compared to yield farming. When you borrow money from a bank, you must repay it with interest. In the same way, when borrowers borrow crypto from a lending mechanism, they need to pay interest for it. In this case, the interest is paid not to the bank, but to other crypto investors like you. 

Yield farming is a method of employing "idle cryptos" that would otherwise be wasted on an exchange or hot wallet to provide liquidity in DeFi protocols like Uniswap or Pancakeswap for returns.

  • Leveraged yield farming: Yield farming with the capacity to borrow assets and automatically reinvest farmed tokens and trading fees to boost returns over time is known as leveraged yield farming. 

Imagine yourself as a yield farmer and you wish to invest in yield farming. But before that investment, you borrow some crypto to increase your capital and then invest in the liquidity pool. With this action, you are a lender as well as a borrower and you get profits both ways. This is leveraged yield farming.

The Origin of Alpaca Finance 

We had a DeFi summer last year pioneered by Compound and yield farming on Ethereum blockchain. DeFi on Ethereum thus became the new popular method for projects to bootstrap their liquidity and acquire new users. 

However, the rising costs for transactions on Ethereum were getting too much for the average crypto trader. Ethereum has turned into a whale game due to the exorbitant gas fees that are unaffordable for most traders!

As a result, Binance Smart Chain (BSC) blockchain grew in popularity exponentially. The developers of Alpaca Finance identified a gap in the applications supplied in this burgeoning ecosystem when compared to other chains like Ethereum. One of the most important missing parts was an ‘on-chain leverage protocol’!

The developers also wanted to create a community-owned project that would allow users to build and promote DeFi to the masses irrespective of the market conditions. In a down market, most yield farming operations will fail because yield farming will no longer be lucrative. And the vast majority of VC (Venture Capitalist) projects will simply sell their tokens to ordinary investors.

Alpaca developers believe DeFi is the future of finance, and that everyone should be allowed to lend, borrow, trade, and provide liquidity to AMMs (Automated Market Maker). Alpaca helps to empower the DeFi ecosystem, making it a project and mission that people can believe in.

Thus, Alpaca Finance was founded to provide value to the BSC community through leveraged yield farming.

Advantages of Alpaca over its Competitors

Alpaca Finance was launched only in the first quarter of this year. But it has already become a blue-chip protocol on BSC. It has consistently stayed one among the top 5 BSC projects in terms of Total Value Locked (TVL). 

They currently have around 1.3 billion dollars in their system and had as much as 2 billion dollars before the crypto market crash in the first half of 2021. 

Alpaca Finance is also in the top five in terms of the user base. Many users regard Alpaca as having the best safety standards on BSC. This is because Alpaca is one of the few remaining projects that has never been exploited or faced a big capital loss.

Single-Asset Leveraged Farming: During the second week of June, they introduced another innovative product called ‘Single-asset Leveraged Farming’ that brings significant TVL and profitability to Alpaca holders.

Alpaca offers up to 2.5x leverage on the CAKE Syrup Pool of PancakeSwap.

 

They have already projected some of their upcoming milestones such as going cross-chain, improving third-party protocol composability, enhancing capital efficiency of the lending assets, etc. which are excellent choices by themselves.

USP of Alpaca Finance: A community-owned fair launch project without any investor that allows leveraged farming on BSC is anyways the best USP of Alpaca Finance when compared to its competitors. Their smart contracts are open-sourced and are available in Github for anyone to check.

Audits: Currently, Alpaca Finance is audited by Peckshield, Cetrik Foundation, Slow Mist, and Inspex, a cybersecurity professional service. This proves their credibility.

How can you Benefit from Alpaca Finance?

You can associate with Alpaca finance in four different ways: Lender, Yield Farmer, Liquidator, and Bounty Hunter.

1. Lender 

If you are a lender, you can deposit your base assets in the vaults of Alpaca. Yield farmers in the ecosystem would use up these assets to leverage their positions in yield farming. 

For example, you are depositing your BNB into Alpaca’s deposit vault. Your BNB is now available to other traders in the ecosystem to trade. You are earning interest for your deposit for providing this liquidity. 

As a lender in Alpaca Finance, you will receive,

  • ALPACA tokens as rewards.
  • Interest from borrowers who have borrowed assets to open their leveraged yield farming positions. This Interest rate depends on lending pool utilization.
  • In featured pools, you get rewarded with tokens of platform partners.

2. Yield Farmer

If you are a yield farmer, you can always leverage your position in yield farming by borrowing assets from the liquidity pool. But in this case, you should be aware of the risks associated such as liquidation, impermanent loss, etc.

For example, you want to start with a leveraged yield farming position on the BTC-BNB pair. Then, you can borrow BNB from the deposit vault of Alpaca Finance. Since you opened a leveraged position with high capital (though it is borrowed) you can expect a higher farming yield as a reward.

If you are a yield farmer, then your yields can come in the following ways:

  • Yield farming incentive rewards from the Automated Market Makers, for example. CAKE tokens from PancakeSwap.
  • Underlying trading fees of the pool, for example, trading fees from the PancakeSwap pools.
  • If you have a leveraged position, you get ALPACA tokens as rewards.
  • Rewards are paid in tokens of platform partners (in featured pools).

3. Liquidator

 The liquidator has a monitoring role. You have to keep an eye on the pools for underwater positions and will have to initiate liquidating them once the market conditions become risky.

If you are associated as a liquidator, you may closely watch the health of each leveraged position in the pool. And if any of the positions are going beyond the previously set parameters, you can help the farmer liquidate the position. Therefore lenders do not lose their capital.

For this service, you can take a 5% reward on the liquidated position amount. These are obviously, without any risks.

4. Bounty Hunter

Bounty hunters can call a contract for claiming rewards that are pending. After that, the hunters can help in the reinvestment of the assets back into the pool, receiving parts of the reward in return.

To explain this role, imagine yourself as a bounty hunter. You can keep track of the rewards accrued in each pool. You can help in reinvesting those rewards to compound the benefits of farmers. For this service, you will be paid 3% of the reward pool. This role also incurs no hidden risk.

At the launch, Alpaca had been supporting only the base assets BNB and BUSD with yield farming in PancakeSwap.

Alpaca now supports BNB, BUSD, USDT, ETH, ALPACA, and BTCB base assets. 

How to Buy Alpaca Tokens and Begin Earning?

The native token of the platform is called ALPACA. This token is used for performance fee sharing and earning rewards. ALPACAs are required for network governance. Holding these tokens can get you exclusive NFT access on this platform.

The following is the general procedure for buying and utilizing the ALPACA token: Deposit-Trade-Mine.

Deposit

The first step is to deposit Fiat through Binance exchange.

Binance is the biggest exchange and the most secure one. It also boasts of having the highest trade volumes.

1. Open an account/register in the Binance exchange.

2. After registering, convert USD/EUR to Binance’s BUSD. BUSD is the stable coin pegged to the US dollar on the Binance network.

Read more: How to Convert/Swap Tokens on Binance.com

3. Convert a small portion of BUSD to BNB, which is the platform currency of Binance. BNB is used to pay the gas fee on Binance smart chain. For every process, you need to pay a gas fee even though it is very minimum. Therefore without BNB, you can not perform any actions on Binance smart chain.

4. Download Metamask wallet which is an Ethereum wallet that runs on almost all browsers as an extension. Create a wallet and set it up such that it includes the Binance Smart Chain network.

Read more: The Beginner’s Guide to MetaMask

5. After creating the wallet, transfer BUSD and BNB from Binance to your private wallet. This is also called the ‘withdrawing of coins to your private wallet’.

Read more: How to Transfer Tokens from Binance Account to Metamask Wallet

Note: It is always recommended to withdraw a very small quantity for testing purposes. If the test is a success, you may go for the actual big amount.

Trading: Buying ALPACA Tokens

Now that your funds have come to your wallet, the next step is to buy some ALPACA tokens. Head over to pancakeswap.finance to buy them. Connect your wallet and swap some tokens.

You can convert assets (BNB or BUSD) in your wallet to ALPACA on PancakeSwap.

Mining ALPACAs

Time to reap some benefits! Go to the official website of Alpaca and start farming! There are several ways to earn yields through Alpaca.

Some of them are lending & staking, shorting at a profit, and hedging with double-sided borrowing.

Let us take a closer look at the lending & staking strategy. The first step is to go to the official website of Alpaca Finance, https://app.alpacafinance.org/lend.

  1. Deposit the tokens as you wish using the ‘Deposit’ feature on the official site. Confirm your transaction. 

Note: Alpaca Finance supports USD, USDT, BNB, ETH, BTCB, and ALPACA for payment. 

  1. Your ALPACA tokens in the wallet are now added to the lending pool in Alpaca Finance. As a result, you will get ibALPACA tokens that show your % ownership of the lending pool. Now you got hold of some ibALPACA tokens that can be used for Staking.
  2. Select the ‘Stake’ feature on the site. This navigates you to the staking pool.

  1. Since you have ibALPACA tokens, select the ibALPACA pool, enter the number of ibALPACA tokens you wish to stake, and then confirm your transaction.
  2. Once MetaMask confirms the transaction, ibALPACA will start mining and eventually, you will earn yields.

How simple is that! You may claim your rewards at any point in time.

You can participate in ‘Staking’ using iBNB, iBUSD tokens and ALPACA-BNB LP tokens on PancakeSwap.

Note: Lending and Staking processes do not take any deposit fee from you. But it does charge a gas fee for these transactions on the BSC blockchain. Nothing comes for free!! But the gas fee is very minimal. ~.2 per transaction depending on BNB price.

Liquidation: A Risk Associated With ALPACA

Though you have seen the various yielding opportunities and benefits of Alpaca, it is never free of risk. As the margin of profit goes higher so does the margin of risks. The main risk with Alpaca finance is the risk of liquidation.

What is liquidation? 

Alpaca Finance helps you open a leveraged position. That is, you can borrow up to 6x the funds you plan to deposit. But at the same time, the protocol needs to make sure that you are someone who can pay back that loan. So the amount you add from your funds acts as collateral here, which grows as you accumulate yields (minus borrowing interest).

That collateral always should remain above the amount you owe (plus a margin of safety to account for potentially quick price movements). Once the collateral drops below the threshold that you owe, the protocol may close your position to pay back lenders. This process is called liquidation.

Not only that, 5% of your remaining position value would be paid to the liquidator as a reward for closing your position. This is to ensure that the lenders in the liquidity pool were paid back.

Before You Go...

While dealing with ALPACA, you should be aware of the risk of liquidation and invest accordingly. Holding on to your asset for a longer time for better yields is a good strategy. But in a highly volatile market environment like crypto where the market crashes and swings back in a jiffy, you should be extra cautious in dealing with your funds and investments. 

To be on the safer side, it is better to have proper research and sound knowledge before initiating any processes in Crypto.

Alpaca developers have a well-laid and properly planned roadmap ahead. This roadmap proves that ALPACAs are here to stay, and it is not the dot com bubble that will burst.

We understand that they are in a relentless pursuit to make Alpaca Finance bigger and stronger each passing day. Let’s hope Alpaca Finance continues its legacy and retains its first position among the leveraged protocols on the Binance Smart Chain.

Anju M