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 stable 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 stable tokens. All of this while with the aim of maintaining a 1:1 backing.
How POL Works
In the case of derivatives, JWL stable tokens are called derivative tokens in the following text.
1. Token Minting and Allocation
Initial Deposit: When a user deposits 1 primary token, additional stable tokens are minted as protocol-owned liquidity (dynamically determined - varying between JWL-tokens). For the following examples, we assume 1.3 stable tokens are minted.
Liquidity Provision: Out of these 1.3 minted stable tokens, 0.3 stable 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 stable 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 stable tokens will be burned, maintaining the 1:1 backing.
It is also very important to note, that a stable token utilizing POL, may not utilize POL forever.
"But, more stable tokens are being minted, compared to what is being deposited, does that mean there's additional stablecoins circulation that is not backed?
No. The extra minted stable-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 stable tokens will be burned.
Furthermore, the POL tokens are exclusively used to provide liquidity for swaps. They cannot hurt the price of the stable token, as POL are not being sold.
Benefits of POL
Enhanced Liquidity: The system increases the liquidity for the stable 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.
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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