https://notion-ga.ohwhos.now.sh/collect?tid=G-LN38M2V4HZ&host=parcl.co&page=/Parcl-v2-6f27eaed8a5e46e29762a9de128ba0f9

Abstract

Parcl v2 is a noncustodial automated market maker (”AMM”) designed for perpetual synthetic assets that cannot otherwise support liquid trading markets. For example, markets where participants get exposure to statistically computed values such as aggregate real estate prices or macroeconomic measures. Parcl v2 employs a novel architecture that offers solvency, zero credit risk, capital efficiency, and price execution at oracle prices.

Introduction

Parcl v2 borrows from both traditional AMMs and synthetic asset protocols to produce an efficient and simple synthetic asset AMM. The term “automated market maker” typically refers to exchange smart contract protocols that use mathematical functions for price discovery. The term “synthetic asset protocol” typically refers to smart contract protocols that collateralize synthetic exposure, use oracles for an underlying price, and use on-chain mechanisms to enforce or promote settlement at the underlying price.

Key Features

• Isolated Pools: Pools are isolated markets where traders can get exposure to a price feed and LPs can provide liquidity. Each pool has its own long-short skew and funding rate.
• Solvency: The exchange rate between the pool’s collateral token—a stablecoin like USDC—and its liquidity token initialized at pool creation acts as this architecture’s “bonding curve.” The exchange rate forces solvency because trader performance and payout is in liquidity tokens. This accounting model ensures that positions ultimately clear into collateral at available resources in the pool as opposed to a dollar for dollar accounting model.
• Price Execution: All positions are opened and closed at the current price of a pool’s oracle price feed. Positions maintain their price peg because they can only be opened and closed with the core smart contract.
• Zero Credit Risk: The protocol does not offer borrowing on margin. Instead, traders can select leverage up to 10x to be applied to price movements. The pool is compensated for this risk in long-short funding and skew impact fees.
• Optional Liquidity Provision: Liquidity providers are optional because traders trade against one another and the pool’s exchange rate acts as the proxy for an insurance fund or similar liquidity backstop. Participating liquidity providers (”LPs”) provide collateral in exchange for liquidity tokens at the current exchange rate. Any party holding liquidity tokens implicitly earns reinvested fees and takes on the other side of net trader profit and loss (”PnL”). Liquidity tokens are redeemed for collateral at the current exchange rate.
• Skew Management: The pool has two mechanisms to manage open interest imbalances (”skew”): long-short funding and skew impact fees. Impact fees are only applied to positions that worsen the imbalance. Traders in balanced pools are less likely to incur any principal risk when redeeming liquidity tokens for collateral after closing positions.
• Delayed Settlement: Collateral leaving the protocol is delayed. This protects all stakeholders in the event of an emergency because the protocol admin can pause the protocol and mitigate risk.

Pools

Pools are isolated trading markets in which traders can get long or short exposure to a price feed. A pool has a single collateral stablecoin and a single price feed. Both are set once at pool creation. LPs provide liquidity on a per pool basis as each pool is an isolated market. Each pool has three token vaults for storing collateral, trader liquidity tokens, and protocol fees.

Accounting Model

Each Parcl v2 pool uses a unique liquidity token to account for pool ownership as well as position PnL accounting. All closed positions are paid out in liquidity tokens, which means that all traders become implicit LPs at position open and become explicit LPs at position close. This is the mechanism that forces solvency because traders are not paid out dollar for dollar in collateral. The exchange rate for adding and removing liquidity is the ratio of the total collateral in the pool to total liquidity tokens outstanding.

$$ R_{liquidity} = \frac{Collateral_{pool}}{Liquidity_{supply}} $$

The liquidity token exchange rate most materially changes as traders close positions. During a close position transaction, the protocol mints or burns liquidity tokens in direct proportion to the position’s profit or loss at the current liquidity token exchange rate. PnL is comprised of leveraged price movement and funding.

Trader PnL