This is an article written by Mercurial’s community member @tiddernips to explain multi token stable pools. Besides being very knowledgeable and passionate about Solana and Defi, he is one of most proactive and helpful members around. To chat with him and other members, join our discord!
Here are the translated versions by our awesome community members:
- Japanese (translated by @SoftgateJa)
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Since a successful launch of the MER token and several devnet iterations, the 3Pool Beta is finally here! In this post, I’ll aim to explain the most commonly asked questions around the Mercurial stable pools, including:
- What are multi-token stable pools?
- What are the benefits and risks of multi-token pools?
- What are LP tokens?
- What happens when these pools are imbalanced?
- How can these pools be utilized?
- What’s next for Mercurial?
Using the current 3pool as an example throughout the post, this will hopefully help clear up any confusion regarding Mercurial’s multi-token pools.
What are Multi-Token Stable Pools?
A multi-token stable pool is a liquidity vault where 3 or more tokens can be deposited to provide liquidity to a protocol . Multi-token pools have several unique qualities that make liquidity providing very user-friendly.
Looking to Deposit? Mercurial’s 3Pool gives the user 3 different options of stablecoin(s) to deposit, USDT, USDC, and/or PAI (Party Parrot Finance’s stablecoin). Since 3Pool is a multi-token pool, the user has the choice to deposit 1, 2, or all the assets into the pool making it extremely accessible for all users looking to participate. Being able to provide liquidity with just a single token is a differential factor for Mercurial’s pools compared to the competition.
Traditional dual-token pools such as those on Raydium require a user to pair two assets to one another (RAY-SOL) when depositing into a pool. Assets that are highly volatile are in high risk of impermanent loss.
This risk is not present in 3Pool because stablecoins are non-volatile assets pegged to $1. Impermanent loss occurs when the price of the assets you deposited begin to deviate from the prices at which you deposited at.
What are the Benefits and Risks of Multi-Token Pools?
To reiterate how Mercurial has phrased it, “the beautiful thing about 3pool is that one pool can share liquidity instead of needing to be split up across 3 separate pools.” This means that a multi-token pool like 3Pool can become a one-stop-shop for protocols looking to source for stablecoins. Without multi-token pools, liquidity would have to be divided amongst 3 or more separate pools, 3Pool = USDC/USDT, USDC/PAI, USDT/PAI.
This concentration of liquidity will help further drive the capabilities of other DeFi projects building out on Solana. Mercurial is aiming to be the primary source of liquidity for any protocol looking to source for stablecoins or deepen their own native stablecoin.
There are slight risks involved with multi-token pools, as with anything. One of which is that if one of the stablecoins inside the vault becomes compromised, the entire vault is at risk. This is why it is important to have established assets with reputable backgrounds.
What are LP tokens?
When a user deposits stablecoin(s) in the vault, in return for providing liquidity to the protocol, the user will receive LP tokens deposited into their wallet. These LP tokens represent their share of the pool that they have deposited into (3Pool in this case).
These LP tokens can later be used to redeem the capital that was deposited into the pool.
Users then have the choice of single token withdrawal or balanced withdrawals which will split the total deposit evenly between all stablecoins in the pool.
The caveat with single token withdrawals is there is a slight transaction fee involved. If a user wishes to withdraw their capital through single token withdrawal, Mercurial will automatically swap the other 2 stablecoins into the user’s stablecoin of choice. In the process of these token swaps, a small transaction fee will be applied to the user as any swap does on the platform. On the other hand, if a user selects a balanced withdrawal there will be no transaction fees involved.
What Happens When a Multi-Token Pool Becomes Imbalanced?
Multi-token pools become imbalanced when the proportion of all stablecoins within the pool are not equal to one another. In a perfect world, all the stablecoins would make up an even proportion of the 3Pool, however, that is not the case. USDC makes up ~47%, USDT ~40%, and PAI ~13% of 3Pool, making it fairly unbalanced.
So what happens for a user if the 3Pool is imbalanced?
Deposit. Let us say a user is looking to deposit stablecoin into the imbalanced 3Pool, what is the difference between depositing USDC (47% of pool), USDT (40% of pool), or PAI(13% of pool)? Liquidity Providers looking to deposit USDC or USDT into the 3Pool will end up penalized by receiving less LP tokens for contributing further to the imbalance of the pool. Users looking to deposit PAI instead of USDC/USDT will end up rewarded with more LP tokens for helping provide better balance to the pool. Why is this? The Pool is designed to have higher slippage on assets that are already high in supply. This is designed to help maintain a balanced pool and encourage users to deposit assets that are low in supply versus assets that are high in supply
Swap. Imbalanced pools also have an impact within swapping between assets. Let us say that the 3Pool consists of 60% USDC, 30% USDT, and 10% PAI for an example. This means that USDC has a high supply in the pool and PAI has a low supply in the pool. Users who swap tokens of low supply into tokens of high supply (PAI → USDC) will be incentivized by receiving more tokens for the swap. This is due to the fact that the user is helping remove high supply tokens from the pool, while adding tokens of low supply which balances out the pool more evenly. Users who swap from tokens of high supply into tokens of low supply will be penalized by receiving less tokens for the swap. (USDC → PAI). This reward/penalty mechanism is to encourage users to help balance out the pools.
Wondering why PAI is significantly lower in supply than USDC or USDT? Naturally, it is due to the fact Party Parrot Finance is a brand new protocol, like Mercurial, and still working towards rolling out the full features planned. As more PAI are minted and liquidity deepens, the pool should balance itself out more evenly over time.
How Can Multi-Token Pools Be Utilized?
3Pool and other vaults have the ability to play an essential role in the Solana DeFi ecosystem. Stablecoin assets are a vital source for most DeFi protocols, per Circle research report which details a little of the importances below.
“Investors looking for more yield than traditional fixed-interest investments — such as savings accounts, money market funds, or bonds — can digitize their funds to earn above-average yields in the DeFi market. Arguably, the easiest and safest way to do that is to tokenize US dollars into USDC, which can then be used to deposit into DeFi protocols.”
“According to a 2021 Q1 report by crypto research firm Messari, “The stablecoin monetary base reached over $65 billion in Q1 and continues to rise at an accelerating pace. Stablecoins also facilitated a whopping $1 trillion in transaction volume, more than the previous four quarters combined. USDC was the biggest winner, growing its share by 17%.””
Protocols looking to utilize stablecoin assets will need deep liquidity to help further drive success within their protocol, enter Mercurial multi-token pools. 3Pool and future Mercurial vaults will play an integral role in many DeFi projects. “Plug-in” integrations with Mercurial multi-token pools will give protocols the deep liquidity they need for future success.
What’s Next for Mercurial?
Overtime, as the Solana DeFi Ecosystem grows and new stablecoin assets are introduced, Mercurial can easily add more 3, 4, 5, or more token pools (4Pool, 5Pool, etc.). These multi-token pools’ ability to concentrate liquidity combined with Solana’s composability allows Mercurial’s vaults to play an integral part in further deepening the liquidity of any stablecoin.
This vast, stablecoin liquidity will become the bedrock of the Solana DeFi ecosystem. The team has worked tirelessly since inception to produce a quality product while also building a strong community in the process. They have listened to extensive community feedback to give the best user experience. This is only the beginning for Mercurial, with much more in store, the future entails limitless opportunities.
-Tiddernips
Sources:
https://www.circle.com/en/digital-dollar-stablecoin-solutions-for-defi
https://messari.io/article/q1-2021-defi-review-defi-booms-as-bull-market-heats-up
