What liquidity solutions does Polkadot Eco have?

Polkadot solves the problem of expansion through the relay chain + parachain method, what about the liquidity problem? This article will explain to you the liquidity problems faced by Polkadot and current solutions.

When the industry focus shifted from the past Bitcoin expansion problem to the Ethereum expansion problem, the Polkadot ecology is still undergoing positive changes, and the parachains of Kusama and Polkadot have begun to operate steadily, no matter what the solution is, In fact, they are all solving the problems of increasing encryption demand and inefficient underlying architecture.

Polkadot founder Gavin Wood had anticipated the existence of this problem during his time as the CTO of Ethereum, so he incorporated a variety of excellent solutions into Polkadot’s underlying technical architecture.

Polkadot’s core architecture uses a double-layer architecture of relay chain + parachain to achieve the separation of consensus security and application performance, while Ethereum 2.0 is optimized through the beacon chain + sharding or Layer 2 scheme. This hierarchical design has become a basic consensus in the public chain or protocol design process.

The liquidity problem of public chains or protocols

For Polkadot’s underlying architecture, whether it is the consensus security of the relay chain or the resource usage of the parachain, there are certain pledge requirements for its platform currency DOT, and both requirements will lock the liquidity of the DOT at the same time.

After the popularity of DeFi, people began to weigh the benefits through the Staking mechanism and the benefits through DeFi. The former maintains the consensus of the underlying network through the Staking mechanism, and the latter is the inevitable direction of ecological development. Therefore, how to effectively balance the two The competitive relationship between users and avoiding the situation where one loses the other is a problem that all public chains need to consider.

There have also been many solutions to this liquidity problem, such as Lido, Bifrost, Acala, Stafi, etc.

The most representative of these is Lido. Lido is currently the largest liquidity solution in Ethereum. At the same time, Lido has successively opened support for mainstream public chains such as Terra and Solana, and will add support for the Polkadot ecology in the future.

How to release the locked liquidity of Polkadot Parachain?

Today, we will not discuss the differences of this kind of schemes, but start from the Polkadot ecology and talk about how to solve the liquidity problem in the parachain auction process.

After ensuring network security through the relay chain, the project party obtains the right to use the resources of the parachain through bidding. However, because the project party needs to hold a lot of DOT/KSM to be successful in the election, this is for most projects. It is impractical, so Polkadot provides a mechanism called Crowdloan. With this mechanism, project parties can raise DOT/KSM from users to participate in the competition of parachain resources. Lowered the threshold for parachain elections.

But a similar problem has appeared again. The operation of each parachain will lock DOT/KSM for a different period. As more and more DOT/KSM are locked, the liquidity of DOT/KSM will become lower and lower, and the liquidity of DOT/KSM will decrease. The reduction in sex will substantially restrict the development of Polkadot’s ecology.

The rise of DeFi provides users with a wealth of asset management tools, and users’ demand for DOT/KSM liquidity may greatly exceed the demand for rewards through pledges.

Three current liquidity solutions of Polkadot Ecosystem

In view of this liquidity problem in the Polkadot ecology, there are currently three main solutions.

Acala:

Acala is a well-known project of Polkadot ecology, committed to becoming a decentralized financial center and stable currency platform. Acala mainly has four parts of business: cross-chain multi-asset mortgage stablecoin system, liquidity release protocol, DEX trading platform and oracle. Acala is also a smart contract platform.

In solving the liquidity problem, Acala releases the liquidity of the pledged platform currency by generating derivative assets called LDOT (the pioneer network Karura corresponds to LKSM), and on the one hand, it supports the use of LDOT as collateral in the stable currency system. On the other hand, through DEX to add liquidity support, through the use of these two measures to empower derivative assets, so as to make L assets have sufficient liquidity as much as possible.

In fact, some liquidity release agreements we have seen will generate a corresponding pledge certificate. For example, the certificate for pledge of ETH in Lido is called stETH, and the certificate for pledge of DOT in Stafi is called rDOT. Due to the liquidity problem of tokens, these derivative assets are different from the original Assets always have a certain degree of discount before, so how to make derivative assets have higher liquidity has become the key to attracting users to pledge assets.

Through the products of its well-functioning pioneer network Karura, we can basically understand its operating mode. The products in the figure below mainly include stable currency kUSD minting (Mint kUSD), decentralized exchange DEX (Swap), and liquidity pledge ( Liquid Staking) and other core functions mentioned earlier.

What liquidity solutions does Polkadot Eco have?

Karura product interface

Liquid staking currently only supports KSM staking and LKSM de-staking. The pledged KSM is neither used for the maintenance of the underlying consensus security, nor is it used for the bidding of parachain slots, so LDOT or LKSM is more like a layer of encapsulation , Similar to the difference between ETH and WETH, so Acala does not seem to be thorough in solving liquidity issues.

At present, Acala has 213,000 Twitter users and 36,000 Telegram users. Acala has successfully been selected as the first Parachain of Polkadot, which shows that it has been widely recognized. Acala’s leading network Karura platform currency KAR has a current market value of 81 million US dollars, and the token ACA on Polkadot has not yet circulated.

Bifrost

Bifrost is a DeFi protocol that focuses on the liquidity release business of pledged assets. Bifrost not only carries out the liquidity release business of ETH2.0 Staking, but also provides liquidity release business for the slot auctions of Polkadot and Kusama.

Staking through Bifrost allows users to obtain staking benefits while also obtaining corresponding derivative assets. Derivative assets can be traded, transferred, and participated in various DeFi activities. Derivative assets can be exchanged with native assets in a certain proportion, and they can continue to receive staking income, which is an interest-bearing asset.

Since crowdloan has become an important function of the Polkadot ecology, Bifrost has also become an important crowd loan portal. Currently, Bifrost’s liquidity crowd loan solution supports both Kusama and Polkadot.

What liquidity solutions does Polkadot Eco have?

Bifrost crowd loan interface

In terms of the specific implementation mechanism, because of the different lease periods and rewards during the slot auction process, many tokens with different rights and interests will be generated. Therefore, the Bifrost solution decouples the asset attributes of the tokens from the rights and interests attributes, and designs two Derivatives: vsToken (Voucher Slot Token) and vsBond (Voucher Slot Bond).

Among them, vsToken (vsDOT/vsKSM) is a homogenized token and a pledge certificate of the user, representing the asset attribute of the user participating in the parachain bidding token. vsBond is a non-homogeneous token, which represents the different rights and interests of users supporting parachain’s slot rental cycle and auction rewards.

With this mechanism, vsDOT/vsKSM can be sold at any time without affecting the parachain rewards.

In order to solve the liquidity problem of vsKSM, Bifrost has set up a liquidity pool in Zenlink’s DEX. By adding liquidity to Zenlink and staking lp on the official website, a very high rate of return can be obtained. The liquidity of vsBond is solved by the way of order book pending orders on the official website (vsBond is a non-homogeneous token, and the order book method is more effective), as shown in the following figure:

What liquidity solutions does Polkadot Eco have?

Bifrost vsBond order interface

When you support a project by depositing DOT/KSM on Bifrost’s mobile crowd-lending platform, you can get 4 kinds of assets: Bifrost’s derivative assets vsToken and vsBond, Bifrost platform currency BNC rewards, and project party token rewards.

At present, Bifrost has cast a total of 170,000 vsKSM and 1.23 million vsDOT. With the support of ETH2.0 and the liquidity in DEX, the entire Bifrost ecosystem has locked up nearly 150 million US dollars in assets.

What needs to be explained here is that Bifrost has only one main network, so the BNC tokens issued now will exist in both Kusama and Polkadot networks, so after Bifrost becomes a parachain on Kusama, the next phase of the goal is to continue to be Parachain on Polkadot.

Currently, Bifrost has 79,000 Twitter users and nearly 30,000 Telegram users. The mainnet token BNC has a market value of 17.25 million US dollars.

Parallel

Parallel Finance is a new decentralized currency market on the Polkadot and Kusama blockchains. The agreement aims to bring more liquidity to the Polkadot/Kusama ecosystem. With the continuous popularization of DeFi, there is more and more borrowing demand for Polkadot/Kusama asset (such as DOT/KSM) holders. Therefore, Parallel Finance supports three main functions in the design: borrowing, lending and crowd lending.

Parallel is similar to Bifrost. Token holders can deposit their assets into Parallel Finance’s account and obtain a “voucher” asset. Parallel is called c asset, and the corresponding ones are cDOT and cKSM.

Supporting a project through Parallel’s crowd lending function will receive 3 types of tokens: one is the Parallel platform token PARA reward, the other is the project side token reward, and the other is the lp asset of derivative assets and project assets.

What liquidity solutions does Polkadot Eco have?

Parallel crowd loan interface

There is a lending system in the core module of Parallel. Users can deposit cDOT/cKSM assets in the lending system to obtain additional interest income. In addition, cDOT/cKSM can also be used as collateral to participate in lending. In addition, cDOT is bound to the liquidity of the project party’s token in the form of lp, so the derivative assets on Parallel also have certain liquidity conditions.

Parallel currently supports many projects. The platform has raised 21.34 million DOTs and 57,300 KSMs, and has locked a total of 550 million US dollars in liquidity. Parallel is also one of the current five Polkadot parachains.

At present, Parallel has 53,000 Twitter users and 8,000 Telegram users, and the tokens of its two networks are not in circulation.

The following table compares the development status of the 3 projects:

What liquidity solutions does Polkadot Eco have?

Comparison of 3 plans

Summarize

Polkadot’s ecological development is still in its early stages. Although there are not as many cases as Ethereum and other mainstream public chains, the popularity of DeFi has strengthened users’ demand for asset liquidity.

For the Polkadot framework, this kind of liquidity includes both the liquidity in the main chain token pledge process and the liquidity in the slot auction, so the liquidity problem is more complicated.

The existing solutions can be described as precautions. On the one hand, liquidity is released through derivative assets, and on the other hand, derivative assets are empowered and improved through different methods such as lending, trading, and mortgage assets.

Polkadot is the underlying facility of Layer0. With the continuous improvement of the liquidity release agreement, the barriers and barriers to participating in Polkadot slot auctions continue to decrease, and the ecology on it is expected to achieve rapid development. The continuous development of the ecology will in turn strengthen the lock-up scale of the liquidity solution. If the scale is large enough, it can form a huge network effect and capture the dividends of Polkadot’s ecological development.

The above content is for reference and communication only, and does not constitute investment advice. If there is an obvious understanding or data error, feedback is welcome.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-liquidity-solutions-does-polkadot-eco-have/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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