Can you explain the liquidity provision architecture on Parcl v3?
On V3, there is a single LP pool that underwrites all markets. LPs collect 80% of trading fees. The underlying incentives keep the market longs/shorts as balanced as possible — that is, traders are right ~50% of the time & LPs accrue yields with limited exposure to the underlying price/volatility.
I don't quite understand. Can you explain in simpler terms?
Let's hammer this down together with a simple analogy. Take Monopoly, the popular board game. The Bank, in the beginning, holds the deeds to all the properties & currencies — a neutral arbiter acting as the game's 'margin fund'.
➡️ The Bank wins whenever the players are fined, pay rents or mortgage their properties.
➡️ The Bank loses whenever a player passes GO (and collects $200), wins a random beauty contest, opens a favourable Community Chest etc.
In Parcl, the liquidity pool ≈ the Bank. LPs gain from liquidations and wrong trades; they could possibly stand to lose if the traders are increasingly in the green.
What are the different kinds of risks an LP could be exposed to?
In DeFi, LP risks come mainly in the form of Impermanent Loss (IL) and smart contract exploits.
Parcl has undergone multiple rounds of audits and the system is heavily tilted towards minimizing LP risks and losses.
What are some of these risk management measures that the platform has set in place for LPs?
Essentially, it is a combination of:
➡️ Funding Rate Velocity
➡️ Price Impact
➡️ Skew Scale
On a high level, all these parameters are fairly conservative and in favor of minimized LP risks.
If we deposit USDC into an LP, do I get an LP token in my wallet?
No, that was the case in the earlier versions. In v3, you own on-chain 'LP shares' that you can track on the Parcl UI. The prices of these shares (generally hovering around $1) fluctuate, in part depending on the trader fees & their overall gains and losses.
Once I become an LP, how do I claim the trading fees?
You don't need to. Fees accrue to the liquidity pool in real time. And it is reflected in the share prices.
I deposited $1000, but it has gone down to $999.4. Why is that?
➡️ Price at which LPs minted the shares: If the current price of the LP share is $1 users who minted at $0.995 will be in the positive yield territory, those who minted at $1 will be flat & those who minted above $1 will be in the red — all else equal.
➡️ Unrealized trader PnL: A negative value here is beneficial to the LPs. This means that trader losses are yet to be recognized. Once they are realized, the funds will accrue to the liquidity pool and the share price will increase.
To summarize, LP PnL projection = [share(exit) - share(entry)] + f(Unrealized Trader PnL).
At this present moment, as you can see from the attached dashboard 🔽 there are $7,900+ worth of unrealized trader losses. Once this is realized, LP share prices should appreciate.
