JewelSwap Protocol Owned Liquidity (POL)
Overview
JewelSwap Protocol Owned Liquidity Provision (POL) is a novel system within the JewelSwap ecosystem designed to optimize liquidity for the JWL derivative tokens. This system introduces a unique approach to liquidity provision. The main benefits are deeper liquidity in the AMM pool, which enhances the trading experience and ensures price stability for the JWL derivative tokens. All of this while with the aim of maintaining a 1:1 backing.
How POL Works
1. Token Minting and Allocation
Initial Deposit: When a user deposits 1 primary token, additional derivative tokens are minted as protocol-owned liquidity (dynamically determined - varying between JWL-tokens). For the following examples, we assume 1.3 derivative tokens are minted.
Liquidity Provision: Out of these 1.3 minted derivative tokens, 0.3 derivative tokens and 0.3 of the user-deposited primary tokens are allocated to liquidity provision. This liquidity is protocol-owned liquidity and can not be touched, enhancing the market-price stability of the stable token by increasing the depth of the available liquidity.
Staking: The remaining 0.7 primary tokens are staked or used in their respective revenue generating fashion (depending on the JWL token).
2. Reward Distribution
Users who stake their JWL-tokens receive rewards from several sources:
Rewards generated by the 0.7 primary tokens.
Depending on the JWL-token: A portion of the generated fees from the respective JewelSwap module.
3. Redemption Mechanism
If a user tries to redeem a derivative token, primarily, the primary tokens will be unstaked/removed from it's revenue generating source and returned to the user after the unbonding period. But in the event of there being too little primary tokens available, JewelSwap will remove part of the AMM liquidity and the excess JWL tokens will be burned, maintaining/improving the 1:1 backing.
It is also very important to note, that a derivative token utilizing POL, may not utilize POL forever and that the degree of how many tokens are minted for POL can vary.
"But, more derivative tokens are being minted, compared to what is being deposited, does that mean there's additional stablecoins circulation that is not backed?
No. It does not. The extra minted derivative-tokens, together with the same amount of deposited primary tokens, are used to provide liquidity. This ensures there is a deeper liquidity in the system for swaps and acts as an additional conduit for swaps. The tokens are backed at the point of the swap. If many/big redemptions happen, some of the liquidity in the pools will be withdrawn for redemptions, as described above, and the withdrawn derivative tokens will be burned.
Furthermore, the minted tokens are exclusively used to provide liquidity for swaps. They cannot hurt the price of the stable token, as POL tokens are not being sold. JWL derivative tokens cannot leave the system without the adequate amount of primary (backing) tokens being provided.
Benefits of POL
Enhanced Liquidity: The system increases the liquidity for the derivative token, ensuring its stability and usability. Without affecting the rewards for the stakers, the stable token can enjoy a deeper liquidity and thus more price stability on the open market, which is beneficial to the soft-peg and benefits traders and liquidity providers through lower slippage.
Conclusion
JewelSwap's POL represents an innovative approach to liquidity management in the DeFi space. POL establishes a solid foundation for the stable tokens by creating additional stable liquidity. The deeper liquidity for the stable tokens enhances their utility and price stability for users within the JewelSwap ecosystem.
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