How to Yield Farm with Aave on Polygon
In this blog post, we will walk through yield farming with Aave on the Polygon network. Aave is a decentralized lending and borrowing protocol and has currently more than US$1.6B in its Polygon market. Polygon is home to one of the largest communities and is aimed at making blockchain technology accessible to the world.
Step 1: Head over to https://app.aave.com
Step 2: To start yield farming, connect to its Polygon market.
Step 3: Connect your wallet by clicking on the connect button and make sure you’re on the Polygon Mainnet.
Step 4: Choose your deposit asset from the available list.
Step 5: Click on the preferred asset to bring up the market information — total borrowed and total supply, alongside key stats like utilisation ratio. You can also find the maximum LTV (loan-to-value) which represent the maximum borrowing power for that collateral asset.
Step 6: To deposit, click on the “deposit” functionality on the right and you are done.
Borrow against your assets as a collateral
Step 7(Optional): Head over to the “Borrow” tab on Aave and select the asset you wish to borrow for.
Step 8(Optional): Use the maximum LTV (loan-to-value) as a guide, you can borrow against your deposited assets from the Aave protocol and pay low interest on the loan.
There are few terms that we need to understand before making the deposit.
Health Factor: The health factor represents the safety of your loan derived from the proportion of collateral versus the amount borrowed. Keep it above 1 to avoid liquidation. An Ideal and safe health factor would be 1.5.
Max LTV: The Maximum Loan-to-Value ratio represents the maximum borrowing power of specific collateral.
Liquidation Threshold: This represents the threshold at which a borrow position will be considered undercollateralized and subject to liquidation for each collateral. For example, if the collateral has a liquidation threshold of 80%, it means that the loan will be liquidated when the debt value is worth 80% of the collateral value.
An example of how liquidation works has been provided for your reference: Bob has 500 DAI and uses this to borrow 375 USDT at a max LTV of 80%. This is essentially a safe loan but in the event that the value of DAI falls 6.67% vs value of the collateral it could result in liquidation as described below:
DAI as Collateral- $500
Borrowed USDT @ 75% LTV- $375
Liquidation Threshold- 80%
Minimum Collateral Value- $400
DAI % Drop for Liquidation- 6.67%
Liquidation Penalty: When a liquidation occurs, liquidators repay part or all of the outstanding borrowed amount on behalf of the borrower. In return, they can buy the collateral at a discount and keep the difference as a bonus!
APR & APY: APR represents the annual rate charged for earning or borrowing money. For starters, APY, or annual percentage yield, takes into account compound interest, but APR, which stands for annual percentage rate, does not.
Subscribe to our medium — https://polygontech.medium.com/subscribe
Polygon is the first well-structured, easy-to-use platform for Ethereum scaling and infrastructure development. Its core component is Polygon SDK, a modular, flexible framework that supports building and connecting Secured Chains like Plasma, Optimistic Rollups, zkRollups, Validium, etc, and Standalone Chains like Polygon POS, designed for flexibility and independence. Polygon’s scaling solutions have seen widespread adoption with 500+ Dapps, ~567M+ txns, and ~6M+ daily txns.
If you’re an Ethereum Developer, you’re already a Polygon developer! Leverage Polygon’s fast and secure txns for your Dapp, get started here.