The Parachute Liquidity Pool

As we kick off ParJar Swaps, we’re inviting Parachuters to join our soon-to-be launching liquidity program on Uniswap! See how it works and what you get!

Parachute recently launched its flagship product — Swapping, which allows users to swap tokens directly in ParJar by leveraging an integration with the liquidity of Uniswap. To kick off our newest product, we’re creating a new program to encourage community members who have PAR to add liquidity on our Uniswap V2 pool. In return, we’ll be sending out a TON of PAR to those who participate.

There’s a healthy amount of details, explanations, and just good-to-have info on what Uniswap is below. Have a look and if it’s right you see how to get involved!

Here’s the Details:

We think that adding more liquidity in the v2 Uniswap PAR/ETH pool will help users get the PAR they want to use in our new Swap feature. The program is expected to run for two months, with a target start date of August 15th; end date of October 15th.

  1. Parachute will incentivize liquidity providers for Uniswap v2 PAR/ETH pool only.
  2. Contribution deadline: August 15th. Liquidity provided since day one of the Uniswap v2 pool will be counted at the amount of PAR that was put in at the time it was put in.
  3. Lockup period end: October 15th
  4. To qualify and participate, a participant simply needs to contribute PAR & ETH liquidity into the Uniswap v2 pool by the contribution deadline and may only remove that liquidity on or after the lockup period end date.
  5. The PAR that is to be rewarded to the users will follow specific tiered rates laid out below — any amount of PAR contributed greater than or equal to the tier will receive that tiered rate PAR pro-rata.
  6. PAR will be automatically deposited, on or soon after October 16th, into the on-chain wallets of the providers based on their contributions (as can be reconciled on Etherscan.)

What does the reward look like?

  1. PAR liquidity tiers are minimum thresholds for qualification
  2. Rewards are discrete at each tier, ie 650k will earn at the 9.5% rate = 61,750 PAR
  3. PAR provided comes from Community Vault established for community rewards programs
  4. Potential providers should read the Risks Appendix before participation — there are inherent risks involved with cryptocurrency, this is not nor should be construed as investment advice.

Here’s how you add liquidity to the pool:

  1. To start swapping you’ll want to use a web3 connected wallet like MetaMask or TrustWallet.
  2. Visit https://app.uniswap.org/#/pool
  3. Click the “Add Liquidity” button.
  4. Click the “Select a Token” button and add our contract address: 0x1beef31946fbbb40b877a72e4ae04a8d1a5cee06
  5. Select the amount of PAR and ETH you want to add to the pool and click “Approve PAR” and stay on this page until the “Supply” button appears.
  6. After your approval goes through and the “Supply” button appears, click “Supply.”

Note: Please remember that in order to participate in this program, you must have your Liquidity added to the PAR/ETH pool prior to August 15th and must leave it untouched in the pool until October 15th. PLEASE read the below background below on Uniswap, swapping, and pooling.

Background: Uniswap

Let us first understand Uniswap, one of the most amazing decentralized applications and smart contracts of 2020 that has truly innovated and changed the landscape and ecosystem of Ethereum and decentralized exchanges and finance.

Uniswap is a very unique smart contract built on the Ethereum network. It is a ‘trustless’ smart contract in that users do not need to await other individuals or any other participants to interact with this contract — one can interact with it directly either over the block chain or through a web3 application such as metamask or ParJar. Uniswap supports a few key interactions: Swapping, Pooling, and Transferring. We will go through in more detail Swapping and Pooling, as Transferring is a very similar function to that of an ERC20 smart contract or simply sending Ethereum from party A to party B.

Swapping:

Uniswap provides a method for users to swap between ERC20 tokens and Ethereum and ERC20 tokens and other ERC20 tokens. It is very unique and revolutionary in this regard that any pair of tokens or eth/token can be exchanged through the Uniswap protocol. A user simply can interact with the smart contracts over web3 or directly with blockchain contracts to exchange token X with token Y (including Ethereum as a “token” in this example). The calculation of said exchange is derived by a ratio of token X : Y. The actual calculation can be examined in further details on the Uniswap documents. However, to be clear — given the exchange is based on the ratio of X : Y, whenever a user decides to swap, this alters the ratio and thus changes the price of X : Y. If user A buys X selling Y, this means A is sending in Y into the uniswap pool and removing X out of the pool, thus exchange X_1 : Y_1 != X_2 : Y:2 because X_1 > X_2 and Y_1 < Y_2.

What does this mean?

For liquidity pools on Uniswap where there is large amounts of liquidity, the relative change in the ratio from one swap to the next is marginal — and so it requires a large swapping of one token to the other in the same direction to noticeably move the ratio and price of x/y — such is the case with USDC/ETH or USDT/ BAT. There needs to be a significant change in supply vs demand of one token vs the other to move the ratio to be a noticeable difference of the exchange rates.

However, one must be cautious when dealing with lower liquidity lower market cap tokens. Why? Simply because the liquidity is less, when user B swaps from token X to ETH, this can significantly change the ratio in the uniswap liquidity pool — and thus noticeably change the exchange rates of token X : Y. All of this to say — how does the price in Uniswap of tokens change? From users buying and selling — simple supply and demand, however when the liquidity that supports the supply/demand ratio is not sufficient to maintain a relatively stable ratio over multiple user transactions, this can lead to very rapid change in price of one token vs another.

Pooling Liquidity:

Now we get to the meat & potatoes of Uniswap! Users that are supportive of a token, or simply have excess tokens and do not want to sell them, have the option to “pool” them and provide the liquidity for the rest of the market. What does this mean?

When you provide liquidity into Uniswap — you are going to provide in equal proportion of tokens & Eth at the current exchange ratio of X : ETH. So if the current rate of USDC is 230 : 1 (USDC / ETH), then for you to pool tokens, you can provide 230 USDC and 1 Ethereum to the liquidity pool, or an equivalent proportion of lesser amounts (like 115 USDC and .5 ETH).

Why would you do this? Uniswap takes a .3% fee for every transaction! And that fee stays in the liquidity pool, so IFF the exchange ratio of USDC : ETH when you input your liquidity does not change from T_0 => T_1, then you would be able to withdraw the same amount of USDC and ETH that you input Plus your additional pro-rata amount of the fees earned over the period in which you are providing liquidity.

Uniswap absolutely requires users to provide liquidity for its continued existence — and they are compensated with these fees! It is actually quite amazing and unique, any user can be compensated for simply providing liquidity that they can withdraw at anytime. Most CEXs try to do this by issuing their own token and providing “dividends” of fees they collect in their own token… which is questionable at best of the purpose of this rather than dividending their token holders in BTC or ETH (but that is beyond the context of this argument). Uniswap, however, doesn’t care what token you hold, you don’t need to hold a special “Uniswap” token, you can earn fees from exchange transactions simply by participating via adding liquidity to the pool. Incredible!

But wait… What happens if the exchange ratio of X: Eth changes from when I add my liquidity to when I pull it out?

Well — You don’t get out your original liquidity investment. You will get the equivalent “dollar” value of tokens & eth that you put in. They call this “impermanent loss”. When you put in 1mm PAR and 2 eth, Uniswap issues you tokens that record the value of total liquidity you provided at the time. We can think of this in terms of dollar liquidity, so suppose you put in 1mm PAR and 2 Eth on day t_0, that is equivalent to $1,000 dollar liquidity. When you come to remove your tokens on day t_1, you will still have $1,000 dollar liquidity (plus the addition of fees accrued), however if the prices / ratios of Par to Eth has changed, you will not receive your original liquidity of 1mm par and 2 Eth, but rather some other ratio that is still equivalent (in the eyes of Uniswap) fo $1,000 dollar liquidity.

Here’s an example of what that looks like.

Let’s suppose you contribute 5% of the liquidity in pool Z for token X: ETH at ratio of 50 : 1 — you put in 50x and 1 eth (total pool is now 1000x : 20 eth). Now then let’s fast forward to when you want to pull out your liquidity, there are two scenarios where the ratio has changed — either its gone up or its gone down!

Let’s suppose the ratio has gone up, ie. the token has depreciated and become less valuable. Now the ratio is 60 : 1 (pool balance is 1,100x :18.3eth). Well you still own 5% of the pool, so when you remove your liquidity, you take out 5% of this new ratio, so you get 55x and .91eth. Wait, but you’ve now gained more tokens and less eth… this is because this is still the “pool equivalent” of what you put in. Let’s hope you wanted more tokens!!

Now, let’s suppose the opposite. Let’s say the ratio goes down, ie. the token has appreciated and become more valuable. Now the ratio is 40 : 1 (pool balance is 900x : 22.5 eth) and you own 5% of that, so when you remove your liquidity you are getting back 45x tokens and 1.125 eth. But now you have less tokens and more eth!!

Before you decide to add Liquidity you need to learn about impermanent loss (and PLEASE read this)

When you input liquidity into a pool, you will almost never get back the same ratio of tokens and eth you put in, because the ratio of the pool itself will have changed.

What does this really mean? Those who are providing liquidity are providing the support for the exchange and actually taking the most risk. If you are putting in liquidity to a pool, and users decide to sell a lot of token X for ETH, they essentially remove all of the ETH you have put into the pool and you are left with all of their Tokens. Now you hold all their tokens and they hold all your ETH. And the opposite — for really “hot” tokens, if users decide to buy all the tokens and sell ETH, you’ll be left with only ETH and nominal amount of tokens! Participating in a liquidity pool can be high risk — depending the outcome you are looking for. Please consider the upside and downside of providing liquidity, because they are both real.

In Sum

The next few months for Parachute are going to be HUGE. With Swaps cranking and new people using our products, we feel a push on Uniswap liquidity will provide the short-term support we need to launch Parachute’s first of many token driving features. As always, we want to make sure Parachuters understand how things work, which is why we dove in deep on Uniswap and its pooling abilities. If you understand how it works and want to jump in, we’ll provide the sunblock and floaties.

-Parachute

None of the previously mentioned descriptions, clauses, paragraphs, or any part of the incentive liquidity program should be construed as investment advice. Providers should be aware that providing liquidity to Uniswap pools inherently has high risk, and those risks can be exacerbated by large swings in prices. This is especially true for low market cap and lower liquidity coins, of which Parachute is currently a member of. One of the highest risks involved in providing liquidity is that you do not actively participate or decide on the prices of the tokens in the pool. They are decided by supply and demand of buyers and sellers, and as such you can end up holding all of token X and none of ETH, or all of ETH and none of Token X when you go to redeem your liquidity.

Additional Risks involved with Low Market Cap and Low Liquidity Crypto Currency Pools

Low liquidity pools are the largest risk because those who have the most tokens can take advantage of the other users. Owners of large amounts of tokens can quickly move the prices of low liquidity pools to their advantage. We briefly explore the most notorious “pump and dump” scheme below:

There are other Uniswap risks users should be aware of further, however Parachute would like to briefly warn users that no matter what the project — providing liquidity into a Uniswap pool (whether staking or directly), cannot guarantee that you will receive any of your initially staked tokens back. To the extent you are paid interest or a reward, similar to this program, even though the interest maybe paid via smart contract trustless mechanism — because of the mechanics of Uniswap it is impossible to guarantee your original principal is returned to you in whole. Parachute will not and cannot make this guarantee.

“Note: Abhijoy Sarkar (https://medium.com/@SarkarAbhijoy) is an Admin at Parachute and has Permissions to repost this to other sources”

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