Are you a farmer? A staker? A Bruce Lee fan?
Regardless of the label, today you are all three combined!
It is our pleasure to announce that $SWISE is now trading on 1inch Exchange with some lucrative incentives for LPs.
The $SWISE / $1INCH liquidity pool has been chosen for a joint liquidity mining campaign between StakeWise and 1inch. LPs in the pool can farm up to 150K $1INCH and 2M $SWISE tokens for the next 28 days, starting on 27 April (1pm UTC).
We are super happy to debut on 1inch and look forward to a successful campaign 🚀
https://twitter.com/stakewise_io/status/1386994604768174082?s=20
Read our guide on how to add liquidity to the $SWISE / $1INCH pool and earn farming rewards here.
How does liquidity provision work?
Liquidity provision allows earning a return by depositing capital into a pool, where its presence enables trading in a certain pair of assets in exchange for trading fees. By choosing to provide some dollar value (e.g. $1,000) of capital, you split it 50/50 into the assets of the pair (in our case, 50% $SWISE worth $500 and 50% 1inch worth $500). Traders from both sides can then swap Asset 1 for Asset 2 (e.g. $1inch for $SWISE) and back without requiring an order book. Providers of liquidity earn a small commission (0.05–0.30%, depending on the pool) on every trade. Hence, total earnings for the liquidity provider are equal to volume * commission, and the APR is 24h volume * commission * 365 / total value locked in the pool.
What are the risks?
The main risk involved in liquidity provision is the risk of impermanent loss i.e. small loss of capital due during large swings in the prices of the asset pair.
When prices are stable, liquidity providers can deposit $500 worth of liquidity from each side ($SWISE and $1inch, for example) for a total of $1,000, and leave with this $1,000 even if more $SWISE was bought than sold, leading to an inventory change (e.g. $300 worth of $SWISE, $700 worth of $1inch). In this case, we say that no impermanent loss is suffered.
This relationship breaks down during periods of wild swings in the price of one asset vs another. Due to the mechanics of the liquidity pool formula, LPs suffer ~5–6% impermanent loss every time one asset rises 100% relative to the other (e.g. $SWISE appreciating 100% relative to $1inch). The process is described in more detail here.
The best way to combat impermanent loss is to generate enough trading fees to offset it. To offset a 5–6% impermanent loss, LPs need to generate at least 5–6% in trading fees to not lose capital, and exceed this amount to make liquidity provision worthwhile. Assuming a 5% APR target from liquidity provision, volume must be ~31 times the total value locked in the pool, only to cover for the 100% appreciation of one asset versus another. Achieving this is a tough feat.
What is the risks and opportunities of the $SWISE / $1INCH pool?
Risks:
- Impermanent loss — depending on the price of tokens at which you deployed the liquidity, $SWISE appreciation might eat into your capital via impermanent loss.
- Mitigating factors: 1inch employs the concept of positive slippage (also called the Spread Surplus) to keep the difference between the quoted price and the execution price for the LPs in the pool. This means that during periods of volatility, LPs earn several times the amount that would be earned in a similar pool on Uniswap, as trading fees are supplemented with a spread surplus. In the experience of founders that listed their tokens on 1inch, the revenue generated from the two factors fully compensates for even 15–20% impermanent loss within a couple of weeks. This makes us confident in the safety of funds of the $SWISE / $1INCH LPs.
- Abrupt ending of the incentives — without a clear plan to continue allocation of liquidity mining rewards to this pool or another pool, $SWISE could experience a rapid loss of liquidity and depreciation vis-a-vis $1INCH, undoing any prior positives from launching on 1inch.
- Mitigating factors: the team has a clear plan for the next steps of liquidity mining for the $SWISE token and will execute on it in a timely manner.
Opportunities:
- Farming incentives — current APY from from $1INCH and $SWISE farming combined is ~500%, making it worthwhile for LPs to deploy capital in the pool.
- Trading fees — currently work out to ~800% APY, certainly mitigating any amount of impermanent loss sustained by LPs on the $SWISE appreciation.
- Broader exposure for the StakeWise protocol — 1inch is a great platform for token launch, giving us a wide exposure to farmers and ordinary users alike. Achieving decentralization of ownership is important for the consequent listing on centralized exchanges, and the 1inch listing is a great first step in that direction.
Join thousands of other stakers in the trustless StakeWise Pool to embark on your ETH staking journey 🚀
