Polkadot solves the expansion problem through the relay chain + parachain method, but what about the liquidity problem? This article will explain to you the liquidity problems Polkadot faces and the 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 parallel chains 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 requirements and inefficient underlying architecture.
Gavin Wood, the founder of Polkadot, has anticipated the existence of this problem when he was the CTO of Ethereum, so he integrated a variety of excellent solutions into Polkadot's underlying technical architecture.
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Liquidity problems 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 is a certain pledge requirement for its platform currency DOT, and both requirements will lock the liquidity of DOT at the same time.
After DeFi became popular, people began to balance between obtaining income through the Staking mechanism and obtaining income through DeFi. The former maintains the underlying network consensus through the Staking mechanism, and the latter is the inevitable direction of ecological development. Therefore, how to effectively balance the two It is a problem that all public chains need to consider in order to avoid the situation of competing with each other and avoiding the situation of focusing on one thing and losing the other.
There are also many solutions to this liquidity problem, such as Lido, Bifrost, Acala, Stafi, etc.
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How to release the liquidity locked in the Polkadot parachain?
Today we will not discuss the differences of such schemes for the time being, 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 resource usage rights of the parachain through bidding. However, since the project party needs to hold a lot of DOT/KSM to be able to win the election, this is not the case for most projects. It is impractical, so Polkadot provides a mechanism called Crowdloan. With this mechanism, the project party 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 parallel chain will lock DOT/KSM for different periods. As more and more DOT/KSM are locked, the liquidity of DOT/KSM will become lower and lower. The reduction of sex will seriously restrict the development of Polkadot ecology.
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Polkadot Ecosystem currently has 3 liquidity solutions
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Acala
Acala is a well-known Polkadot ecological project, committed to becoming a decentralized financial center and stable currency platform. Acala mainly has four parts: cross-chain multi-asset mortgage stablecoin system, liquidity release protocol, DEX trading platform and oracle machine. Acala is also a smart contract platform.
To solve the liquidity problem, Acala releases the liquidity of the pledged platform currency by generating a derivative asset called LDOT (its leading network Karura corresponds to LKSM). At the same time, it supports LDOT as collateral in the stable currency system. On the other hand, add liquidity support through DEX, and use 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 protocols we have seen will generate a corresponding pledge certificate. For example, the certificate for pledging ETH in Lido is called stETH, and the certificate for pledging 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 with high liquidity becomes the key to attracting users to pledge assets.
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Karura product interface
Liquidity staking currently only supports the pledge of KSM and the unstaking of LKSM. The pledged KSM is neither used for the maintenance of the underlying consensus security nor for the auction 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 the liquidity problem.
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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 Polkadot and Kusama slot auctions.
Staking through Bifrost, users can obtain corresponding derivative assets while obtaining Staking benefits, and derivative assets can be traded, transferred, and participate in various DeFi activities. Derivative assets can be exchanged with original assets in a certain proportion, and can continue to obtain Staking income. It is an interest-bearing asset.
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Bifrost crowd lending interface
In terms of the specific implementation mechanism, because there are differences in the lease period and rewards in the slot auction process, many tokens with different rights and interests will be generated. Therefore, the Bifrost solution decouples the token asset attributes from the equity attributes, and designs two Derivatives: vsToken (Voucher Slot Token) and vsBond (Voucher Slot Bond).
Among them, vsToken (vsDOT/vsKSM) is a homogeneous token, which is also the pledge certificate of the user, representing the asset attribute of the user participating in the parachain auction token. vsBond is a non-homogeneous token, which represents users supporting the different equity attributes of the slot lease cycle and auction rewards of the parachain.
With this mechanism, vsDOT/vsKSM can be sold at any time without affecting the acquisition of parachain rewards.
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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 minted a total of 170,000 vsKSMs and 1.23 million vsDOTs. 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 parallel chain on Kusama, the next stage goal is to continue to become Parachains on Polkadot.
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Parallel
Parallel Finance is a new decentralized currency marketplace on the Polkadot and Kusama blockchains, a protocol designed to bring more liquidity to the Polkadot/Kusama ecosystem. With the increasing popularity of DeFi, there are more and more borrowing needs for holders of Polkadot/Kusama assets (such as DOT/KSM), so Parallel Finance supports three main functions during design: borrowing, lending and crowd lending.
Parallel is similar to Bifrost. Token holders can deposit their assets into a Parallel Finance account to obtain a "voucher" asset. Parallel is called c asset, which corresponds to cDOT and cKSM.
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Parallel crowd lending interface
There is a lending system in the core module of Parallel, and users can deposit their 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, and cDOT is bound to the liquidity of the project 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 a total of 21.34 million DOTs and 57,300 KSMs, and has locked up a total of 550 million US dollars in liquidity. Parallel is also one of the current five Polkadot parallel chains.
At present, there are 53,000 Parallel Twitter users and 8,000 Telegram users, and the tokens of the two networks are not in circulation.
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Summarize
Summarize
Polkadot’s ecological development is still in its early stages. Although there are not as many executable 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.
Existing solutions can be said to be prepared for a rainy day. On the one hand, liquidity is released through derivative assets, and on the other hand, derivative assets are empowered through different methods such as lending, trading, and mortgage assets to improve liquidity.
As the underlying facility of Layer 0, Polkadot, with the continuous improvement of the liquidity release protocol, the threshold and obstacles for participating in Polkadot slot auctions are continuously lowered, 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 liquidity solutions. If the scale is large enough, it can form a huge network effect and capture the dividends of Polkadot's ecological development.
