A Nosedive into Pilot Protocol
Note: This excerpt represents the second part of the article series “Explaining the Pilot Protocol”. Read the previous article “What exactly is Unipilot?”
The Pilot Protocol
In the last article, we discussed the broad overview of Unipilot and what it has to offer. Now, it’s time to explore further and take a deep dive into each component to understand how they work and fit together to power the first universal automated liquidity optimizer.
These components include the functioning of Pilot vaults, the introduction of a decentralized mechanism known as “concentration incentives” and the prediction of liquidity ranges. In this article, we will discuss the first two components.
Vaults are at the core of Pilot protocol, they behave similarly to liquidity pools on Uniswap, and are used to store and manage the liquidity positions of users who provide liquidity through the Pilot protocol.
But How do Vaults Work?
Users can start earning fees on Unipilot by depositing their liquidity into a ‘Vault’. For each pair of tokens, e.g. (ETH/USDT) a new vault has to be deployed by the first user.
When creating a new vault, the Pilot protocol will interact with Uniswap v3 and create a new NFT for that vault. This process has to be followed once whenever a new vault is being deployed.
However, once the vault is deployed and NFT is created, new users will just join that vault. The Uniswap NFT on the other hand will represent the cumulative liquidity of the vault.
When a vault becomes operational, Unipilot allows the liquidity of the user to be managed on autopilot. Users can simply sit back and accumulate maximized fees as the protocol continuously works to keep their liquidity in the optimal range. Much like Uniswap, Unipilot is a fully decentralized protocol where anyone can create or join a Vault without needing any restriction or limitation.
Fees and Fares
When users deposit their liquidity into the Vault, they can accumulate trading fees on their capital just like on Uniswap. However, upon withdrawal of the fees, the Pilot protocol offers them two options:
- When an LP chooses to withdraw their LP fee tokens, there will be a 15% fare on the fees generated (current rate, which can be changed through governance) of their fee tokens will be sent to the Index Fund.
- When an LP chooses to claim their fees in PILOT tokens, they’ll receive 95% of their fees in PILOT tokens, while the fees generated will be sent to the Index Fund.
Let’s try and illustrate the point through an example.
Suppose “Jenny” decides to deposit her liquidity in an ETH/USDT Vault in the Pilot protocol. After a day of trading, Jenny accumulates $100 worth of tokens in total fees.
When she wants to withdraw her fees and pay the fare, she will have two options:
a) Withdraw $85 worth of tokens and pay a small “Vault fare” (15% initially, can be changed through governance). Jenny would keep $85 and $15 would be sent to the Pilot Index Fund.
b) Collect $95 worth of her fees in PILOT tokens instead, and the fees generated in ETH/USDT will be sent to the Pilot Index Fund. $95 worth of PILOT tokens will be minted and sent to Jenny, and all $100 of her token fees will be sent to the index fund.
Note: We will explore more how index funds work in the coming articles.
How liquidity is kept in the optimum range?
The Vaults continuously regulate the liquidity price ranges through a decentralized mechanism called a “Concentration incentive”, Whereby, the community is rewarded for readjusting the liquidity range if it deviates from the current trading price. Users or bots can send a transaction to trigger the readjustment, which a smart contract will verify and adjust the range accordingly. The rewards for doing so will be paid out in the native PILOT token with an additional premium on top.
Those who are responsible for monitoring and optimizing the liquidity are referred to as “Captains” of the Vault and their efforts are paramount to the success of the protocol.
In the first phase after launch, Unipilot will build the initial Captains with open-source code in the form of automated bots that detect and readjust any out-of-range liquidity.
The community will then have the freedom to optimize the Vault range directly through the dapp or with their own custom bots by simply sending a transaction and getting incentivized for doing so.
Note: Captain don’t decide the range or do the calculation, this is all done in smart contracts.
They just send transaction to trigger readjustment.
Add Liquidity with a Single Token
Unipilot also offers its users the convenience of providing liquidity with only a single token.
Suppose a user wants to add liquidity to the DAI/USDT pool due to its high trading volume, but he only possesses ETH.
In normal circumstances, he would have to individually swap ETH for both of the assets and then add it to the liquidity pool. However, Unipilot solves this problem by allowing the user to do the same process in an extremely simplified manner.
With just a single click, the protocol will handle all the necessary swaps in a single transaction. In this way, the user avoids the hassle of sending three different transactions. Once the liquidity is deposited, the user will receive a Pilot NFT from the protocol and he can start earning trading fees.
In the next article, we will shed light on the governance mechanisms of the Pilot protocol, understand the role of the Index fund i.e., how it underpins the value of the PILOT token and why it sets Unipilot apart from other liquidity optimizers. Furthermore, we have only seen how the “good actors” who want to contribute to benefit the protocol are rewarded. This begs the question “What about the bad ones who want to profit by not following the rules?”. Hence, we will also expand on the malicious users, their possible attack vectors, and how the protocol will penalize them, stay tuned for more.