The recent decline in the crypto market has made many investors look into fixed return strategies. However, the gas fees on Ethereum is climbing unstoppably, putting a strain on everybody’s wallets, and most of the EVM-based chains are in their early stages. A big chunk of Defi users have shifted to competing low-fee L1 blockchains like Solana. The question is: how to identify a safe and high-yield investment?

The ecosystem on Solana has developed rapidly since last year. The hackathon held by the Solana dev team has successfully attracted a large number of developers to build decentralized apps on Solana. Solana has become one of the best-performing chains after Ethereum and Solana’s vibrant ecosystem is also highly popular among Defi users.

Generally, Defi users are most concerned about the profitability of liquidity mining and the security of contracts. At the same time, multiple investment strategies while avoiding liquidation under market fluctuations are pivotal. In this regard, we studied the mainstream Defi protocols and liquidity mining products on Solana. Auto-compounding Liquidity mining rewards are very common, sophisticated Defi-ers will maximize their returns in borrowing against their LPs for more exposure, and further convert the borrowed tokens to provide LP to do Liquidity mining. This looping strategy is leveraging the invested amount and thus earning multiple rewards. If this is what you are hunting for, let’s dive into Larix, the lending protocol which is specialized in auto-compounded LP and collateralization.

What is Auto-compounding and why is it beneficial?

Larix’s auto-compounding mechanism is a magic key to increase the yield of liquidity mining. The most critical part is that it belongs to the automatic nature of smart contracts, rather than manual execution. The specific implementation is as follows:

For example, we created a SOL-USDT liquidity mining LP in Raydium, and then supplied the SOL-USDT LP in Larix. Larix then put the LP back into Raydium to earn additional $RAY rewards. What makes it different from just LP mining in Raydium is that every 10 minutes, Larix uses the earned $RAY rewards to form additional SOL-USDT LPs. The advantage of this is that through the continuous snowballing effect, our LP shows an increasing trend, and the LP rewards in Raydium are also increasing so that the investment return can be maximized through compound interest.

According to the APY displayed on Larix’s UI, there is a 10% increase in the same LP mining APY from Raydium, which is an inviting investment return.

If you stop here, you will miss the chance to further leverage your APY, this is when you should learn to ‘loop’, an advanced strategy that will get you addicted, because of its high yield performance!

After supplying LP in Larix, apart from the LP mining rewards, don’t forget that you can borrow against your LP. ‘Borrowing against’ means you can use LP as collateral to borrow other single tokens. Once you borrow more tokens, you can easily pair more LPs on Raydium, and then reinvest them into Larix’s LP mining pool. If you do this repeatedly, it is like looping a cycle, also referred to as a “looping strategy”. At present, Larix is the first platform to support looping in mining. Therefore, using this function can maximize the rewards, which might trigger the start of a Defi looping and compound interest boom.

Let's do some calculations to illustrate how looping is maximizing your APY. Take SOL-USDT as an example:
Let’s say we have supplied $100 of SOL-USDT LP tokens into Larix, by collateralizing the LP we can borrow $25 SOL and $25 USDT, then pair another $50 SOL-USDT LP. By repeating this action we are adding leverage to our initial LP mining. At present, under the premise of ensuring a suitable leverage ratio, the mining rewards can be increased by 2-3 times compared to the initial exposure.

A friendly reminder, you are also earning additional $Larix rewards at the same time, which is incentivized by Larix. This dual mining model is improving the mining profitability of users as a whole.

Advantages of LP Collateralization

At present, the common DeFi liquidity mining mechanism mainly uses single tokens as collateral to conduct looping strategies. Although this model can also obtain a lot of benefits for investors, relatively speaking, it carries a high risk. Take SOL as an example:

Suppose we supplied 10 SOL tokens and borrowed an equivalent of 5 SOL with of USDT at a borrow ratio of 50%, we can swap the USDT into 5 SOL then supply again, and then borrow against the 5 SOL for an equivalent of 2.5 SOL worth of USDT. When the price of SOL falls by 50%, it will trigger liquidation.

When using SOL-USDT LP as collateral, when SOL falls by 50%, the LP value may actually drop by slightly more than 25%, which is far less than 50%. The reason is that the USDT acts as a hedge against SOL’s volatility. The participation of USDT reduces the value fluctuation of LP, so this makes looping LPs that are paired with stablecoins more suitable for leveraged DeFi mining. Under the same borrow ratio, LP assets with stable coins can have better resilience under volatile market swings.

Comparison of Yields

We all know that the yield performance differs among projects. Let’s take SOL-USDC LP as an example and do some comparison. The rate of return (APR) is as follows:

Larix's LP mining with auto-compounding resulted in a higher yielding rate, Larix also exempts investors from borrowing fees, so looping does not incur any extra borrowing fees, which further improves the user's capital utilization rate and reduces cost.

In fact, the APR is not the only factor to be considered. Number of participants, TVL, and the security of the project are other overarching important factors.

At present, Orca's TVL is about $300 million, Larix's TVL is around $210 million and Apricot's is $150 million. Considering that Orca's yield is relatively low, if we balance TVL and yield, Larix would be a good fit. At the same time, users can choose whether to carry out leveraged mining operations according to their actual situation. For the increase in the income brought by compound interest, Apricot has a 20% protocol fee, so part of the lending interests paid by borrowers will go to the protocol. Larix has no fees or restrictions in this regard, which is a clear competitive advantage for Larix.

In fact, the looping strategy has become one of the focuses in developing a DeFi project, especially when liquidity mining encounters a bottleneck. This is considered by developers when building on the ecosystem after the recent booming DeFi summer.

Conclusion

Although liquidity mining has impermanent losses, for long-term holders, DeFi mining can actually be regarded as a low-risk and stable return investment. When the token price falls, LP will automatically adjust the amount of tokens in the LP pair, it’s like BTFD [buying the dip]. When the price rises, it can also be regarded as a sell operation, which will even out the response to market movements for a certain range, and prove beneficial to long-term holders.

As one of the best performing chains of 2021, Solana’s Defi Dapp market has developed rapidly and attracted a lot of capital attention, Larix has seized the opportunity and taken the lead to stay competitive. In addition, for the prosperity of the Solana ecosystem, there will inevitably be a number of innovative DeFi projects that will truly stand out. Through DeFi