An in depth look at the mechanics behind the Collective Zap-in an initiative for projects to bootstrap liquidity, pioneered by Minswap DEX.
In a previous article, we introduced the Minswap Launch Bowl, a set of new and potent DeFi primitives offered directly on the Minswap platform with the aim of enabling other projects to bootstrap their Liquidity. The first project on the Launch Bowl was Mocossi, which leveraged the LBE as a Service, getting over 1.6 million $ADA supplied! As you might know, Launch Bowl initiatives not only benefit the projects conducting them, but also the Minswap DEX, as it increases TVL, Trading Volume, and by taking a fee of the resulting Liquidity Pools, so does the Protocol-Owned-Liquidity of the Minswap DAO Treasury.
In the Minswap Launch Bowl article, we briefly touched on the Collective Zap-in, a new method to bootstrap liquidity for projects that already have a Liquidity Pool on Minswap. We also promised more detailed resources diving into this novel approach that we are pioneering. So, given the infrastructure is ready, and a CZI might be on the horizon, it’s timely to have a more in depth look into what the Collective Zap-in is, how it works, as well as the incentives and risks for participating in it.
Whats is the Collective Zap-in
Let’s start from the beginning, when we talk about “Zap-in” it refers to a simple way of easily providing liquidity in a Liquidity Pool with only one of the assets in the Pair. So if you wanted to provide liquidity in the $ADA/$MIN Pair, you could do it in a single transaction by having only one of the assets ($ADA or $MIN). That’s what Zap-in does, half of the $ADA would get converted to $MIN (or the other way around), and paired automatically with the rest of the $ADA in the $ADA/$MIN Pair.
Now, the Collective Zap-in (CZI) is a bit different. It’s an event for projects who want to significantly increase their liquidity by offering incentives to participants. For our example going forward, let’s say a project called Project “XYZ” with the token $XYZ was going to conduct a CZI on Minswap. The CZI is designed in the following way: participants have a 10 day period to provide $ADA. The moment the $ADA is supplied, it gets paired with some $XYZ tokens that Project XYZ had allocated to the event, and at the end participants can claim $ADA/$XYZ LP Tokens, as though they had all collectively Zapped-in their $ADA for $ADA/$XYZ LP Tokens.
Participants can become Liquidity Providers for the $XYZ Token by just supplying $ADA and they all receive the $ADA/$XYZ LP Tokens at the same price, regardless of when they deposited the $ADA within those 10 days. In addition, CZI participants are incentivised in that they will be able to stake their LP Tokens in an Exclusive Farming Pool with higher yields than the Normal Pool. Projects can also opt to incentivise participation by providing NFTs with certain utility within their scope to CZI participants. Meanwhile, the Project increases the liquidity in their pool and retains the other ≈50% of the resulting Liquidity Pool, which de facto becomes Protocol-Owned-Liquidity for them.
How does the Collective Zap-in work?
There are 2 distinct phases in the Collective Zap-in:
- Discovery Phase: During this 10 day phase, anyone can participate by supplying $ADA. Participants who deposit $ADA receive a token in exchange that acts as a receipt, just like the purrADA from the Minswap LBE. In the case of Project XYZ, let’s say it was xyzADA. This xyzADA acts as a receipt, which you will later be able to convert to $ADA/$XYZ LP Tokens. However, users who have deposited $ADA in the CZI will not be able to redeem it back to $ADA within the 10 days of the event. So, once you have deposited $ADA to the CZI, you cannot redeem it back for $ADA. Only after the event is over, for $ADA/$XYZ LP Tokens.
Throughout this Phase, users will be able to trade in the $ADA/$XYZ Pool as they normally would, as well as deposit liquidity; but only those who participate in the CZI and redeem xyzADA for $ADA/$XYZ LP Tokens will have access to the Exclusive Farming Pool.
- Encounter Phase: Participants can exchange their xyzADA obtained during the Discovery Phase for $ADA/$XYZ LP tokens and stake those tokens in the Exclusive Farming Pool. The number of LP Tokens redeemed will be equal to the share their xyzADA represents in the $ADA/$XYZ share of the Liquidity Pool that was a result of the CZI.
As an example, let’s say you deposited 100 $ADA in the Project XYZ CZI during the Discovery Phase and the price of $XYZ was 1 $XYZ = 0.1 $ADA. If the price remained the same after the CZI, you would be able to redeem 100 xyzADA for $ADA/$XYZ LP Tokens representing 50 $ADA and 500 $XYZ. However, since the Pool is open to trading throughout the CZI, this also means participants will be exposed to impermanent loss should the ratio of $ADA-$XYZ change from the moment they deposited the $ADA, to the moment they redeem their LP Tokens. Essentially, CZI participants are all together ACAing ($ADA-Cost-Averaging) their Liquidity Provision into the $ADA/$XYZ Pool.
A Collective Zap-in is over when one of these two things happens:
- All the tokens that the project allocated to the event have been used in the CZI and paired with $ADA deposited by participants.
- The 10 day period has gone by.
Incentives to participate
Projects are interested in incentivizing the Collective Zap-in because it allows them to bootstrap substantial liquidity. A liquid pool is essential for projects because the deeper the liquidity in your pool, the less price impact there is (the difference between market price and the price users are going to get) when trading the token, making holding it much more attractive.
As such, there are 2 main mechanics used to incentivise the CZI, in the form of 2 NFTs:
- The Functional NFT: is the ticket to participate in the Exclusive Farming Pool with a higher APR and Triple Farm tokens ($XYZ + $ADA + $MIN). This means you cannot stake in the Exclusive Farming Pool without this ticket because it is available only to CZI participants. The Functional NFT has encoded in its name the amount of LP Tokens participants got during the CZI and hence the number of LP Tokens that can be staked in the Exclusive Farming Pool. For example, if you deposit 1,000 $ADA and the price of $XYZ is 0.1 $ADA, you would receive 1M LP tokens and an NFT named 1M.
- The Project NFT: projects can opt to introduce this NFT to reward participants and can embed utility to it within their scope, whether it is related to RealFi, Metaverse, DeFi, or others.
As such, given the structure of the CZI, this also means there will be 2 different Farming Pools for the same $ADA/$XYZ Pair once the CZI is over:
- Exclusive Pool: with higher yields, only for CZI participants
- Normal Pool: for everyone else staking $ADA/$XYZ LP Tokens
The higher yields of the Exclusive Pool are determined via a Ratio of Exclusive:Normal. As you can see, in the beginning, the recommendation is for it to be skewed towards the Exclusive such as 95:Exclusive and 5:Normal. This means 95% of the $MIN, $ADA and $XYZ rewards allocated to the $ADA/$XYZ Pool go to the Exclusive Pool. Over time, this can be reduced as you can see below. The ratio is dynamic and can be adjusted by projects ad hoc.
There are 3 main risks that we have identified for Participants. Firstly, there is the risk of impermanent loss, as participants are essentially providing liquidity in a Liquidity Pool that is trading so the price can change from the moment they deposited $ADA to the moment they get the LP Tokens. Secondly, once participants have deposited the $ADA to the CZI in the Launch Bowl UI, they will not be able to redeem this $ADA back, they can only redeem LP Tokens later on. Thirdly, the process is conducted mainly off-chain. Protocol and Participants will have to trust the Minswap DEX and Team with their funds until the distribution of the LP Tokens.
Disclaimer: the content published herein shall not constitute an endorsement, investment advice, trading advice, or any other sort of advice and that the participants shall not treat any of the content as such. It is users’ responsibility to do their own research.
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