As the industry’s focus shifts from the problem of scaling Bitcoin to the problem of scaling Ethereum, the Polkadot ecosystem continues to develop positively. Since the parachains Kusama and Polkadot are already working well, whatever the solution may be, the problem of growing demand for cryptocurrencies with inefficient underlying architectures is being addressed.
The founder of Polkadot, Gavin Wood, foresaw this problem during his time as CTO of Ethereum and incorporated several excellent solutions into Polkadot’s core technical architecture.
The basic architecture of Polkadota uses a two-layer relay chain architecture + parachain to implement the separation of consensus security and application performance. At the same time, Ethereum 2.0 optimizes beacon chain + fragmentation or Layer2 schema, and this layered design has become a basic consensus in the public chain or protocol design process.
The liquidity dilemma of public chains or protocols
As for the basic architecture of Polkadot, both the security of the relay chain consensus and the use of parachain resources have a specific share demand for DOT, and both requirements will simultaneously lock in the liquidity of DOT. After the popularization of DeFi, people began to compromise between gaining revenue through the Staking mechanism and gaining revenue through DeFi. The first maintains a fundamental network consensus through the Staking mechanism, while the second is the inevitable direction of environmental development. It is therefore necessary for all public chains to consider how competition between the two can be balanced to avoid losing money for the other. This is an issue that all public chains must consider. There are many solutions to this liquidity problem, such as Lido, Bifrost, Acala, Stafi and others.
Meanwhile, Lido has one by one opened support for Terra, Solana and other mainstream public chains and will add support for the Polkadot ecosystem.
What will happen to the locked liquidity of the parachain?
Starting with the Polkadot ecosystem, let’s talk about solving liquidity problems in the parachain auction process.
Once the relay chain guarantees network security, the project owner gets the right to use the parachain resources through an auction. However, since a project owner must have a significant amount of DOT / KSM to be successful, which is unrealistic for most projects, Polkadot offers a mechanism called Crowdloan. With this mechanism, the project owner can collect DOT / KSM from the beneficiaries, and the project owners can raise the DOT / KSM from the beneficiaries to compete for parachain resources. This dramatically reduces the liquidity problem.
However, a similar problem arises again. Each parachain works with a variable DOT / KSM locked. As more DOT / KSM are concluded, the liquidity of DOT / KSM will be less and less, and the reduced liquidity will significantly limit the development of the Polkadot ecosystem.
With the rise of DeFi, which provides customers with rich asset management tools, customer demand for DOT / KSM liquidity can significantly exceed demand for rewards through investment.
Current liquidity solutions in the Polkadot ecosystem
There are currently three leading solutions to this liquidity issue:
Acala is a renowned project in the Polkadot ecosystem, dedicated to serving as a decentralized financial hub and platform for stable coins. Acala has four main business parts: a multi-chain collateralized stable system with multiple assets, a liquidity release protocol, a DEX trading platform, and a prophecy machine. Acala is also a platform for smart contracts.
To solve the liquidity problem, Acala releases the liquidity of the platform’s pledged token by producing a derivative asset called LDOT (its previous Karura network corresponds to LKSM). The project also uses LDOT as collateral in a stable system on the one hand, and adds liquidity support through DEX on the other hand, and strengthens derivative assets by adopting these two measures, thus making L assets sufficiently strong in liquidity.
Some of the liquidity release protocols we have seen can generate a pledge confirmation. For example, the pledge certificate for ETH in Lido is called stETH, and the pledge certificate for DOT in Stafi is called rDOT.
We can find out about his work model through his well-run first network, Karura’s products. The product below mainly contains the basic functions mentioned earlier, such as mint kUSD, DEX swap and Liquid staking.
The liquidity pledge is currently only supported by the KSM pledge and the unpaid LKSM pledge. Coated KSM is not used to maintain fundamental consensus security or to bid on parachain slots. Therefore, LDOT or LKSM is more like an encapsulation layer, similar to the difference between ETH and WETH. Therefore, Acala does not seem to be a complete solution to the liquidity problem.
Currently, Acala has 213,000 Twitter users and 36,000 telegram users. Acala was the first parallel chain successfully selected in Polkadot, which shows its wide recognizability. Acala’s first network, Karura’s KAR token, has a mobile market value of $ 81 million, and the ACA token on Polkadot is not yet in circulation.
Bifrost is a DeFi protocol specializing in the liquidity release of pledged assets. Bifrost performs liquidity release work in the ETH 2.0 role and offers liquidity release work for bids for Polkadot and Kusama slots.
By investing through Bifrost, users receive income from Staking and related derivative assets that can be traded, transferred and participate in various DeFi activities. Derivative assets can be exchanged for a certain percentage of the original assets, and they also continue to earn investment income, which is interest-bearing assets.
As Crowdloans have become an essential feature of the Polkadot ecosystem, Bifrost has also become a key portal for Crowdloan, and Bifrost’s ongoing Crowdloan solution currently supports both Kusama and Polkadot.
Regarding the specific implementation mechanism, there are different lease periods and rewards in the vending machine auction process. They will generate many tokens with different capital. The Bifrost solution separates token asset attributes from capital attributes and designs two derivatives: vsToken (Voucher Slot Token) and vsBond (Voucher Slot Bond).
In particular, vsToken (vsDOT / vsKSM) is a replaceable token and pledge credential for the user, which is an attribute of the user’s assets in the parachain bidding tokens. vsBond is a fixed token, denoting the various attributes of capital in the cycle of leasing user slots and bidding prizes to support parachain.
With such a mechanism, vsDOT / vsKSM can be sold without affecting access to parachain rewards.
To solve the liquidity problem of vsKSM, Bifrost has set up a liquidity pool in Zenlink’s DEX, and by adding liquidity to Zenlink and advocating for LP on the official website, a very high return can be achieved. The liquidity of vsBond is solved by the order book pending purchase and sale on the official website (vsBond is a fixed token, and the order book method is more efficient). The order book is more efficient, as shown in the image below.
Four funds are available when supporting a project by placing DOT / KSM on Bifrost’s liquid mass lending platform: Bifrost’s derivative funds vsToken and vsBond, Bifrost’s original BNC token and project-side token rewards.
Bifrost has currently minted a total of 170,000 vsKSMs and 1.23 million vsDOTs. With support for ETH 2.0 and liquidity in DEX, the entire Bifrost ecosystem has total locked assets of nearly $ 150 million.
It is important to note that Bifrost has only one lead network, so the now issued BNC tokens will exist in both Kusa and Polkadot networks. After becoming a parachain on Kusami, the next milestone for Bifrost is to continue to become a parachain on Polkadot.
There are currently 79,000 Bifrost Twitter users, nearly 30,000 telegram users, and the BNC mainnet token has a market value of $ 17.25 million.
Parallel Finance is a decentralized cryptocurrency market on Polkadot and Kusama blockchains. The protocol aimed to bring more liquidity to the Polkadot / Kusama ecosystem. With the growing popularity of DeFi, there is a growing demand for lending to property owners Polkadot / Kusama (eg DOT / KSM). Therefore, Parallel Finance is designed to support three main functions: borrowing, lending, and mass borrowing.
Like Bifrost, Parallel allows token holders to deposit their assets into a Parallel Finance account and obtain a “voucher” asset, called c-assets in Parallel, which corresponds to cDOT and cKSM.
Project support through the Parallel feature of the group loan will result in 3 types of tokens:
- Prize for parallel platform tokens
- Token award for project owner
- LP assets for derivative assets and project assets
In the basic module of Parallel there is a lending system in which users can deposit their cDOT / cKSM assets in their hands to get additional interest. Moreover, cDOT / cKSM can also be used as collateral to participate in borrowing. In addition, the cDOT is tied to the liquidity of the project token in the form of an LP, so the assets of the derivatives on Parallel are also equipped with certain liquidity conditions.
The platform raised 21.34 million DOTs and 57.3 million KSM, concluding a cumulative liquidity of $ 550 million. Parallel is also one of the five current Polkadot parallel chains.
Parallel has 53,000 Twitter users and 8,000 telegram users, and its tokens for both networks are not in circulation.
The table below compares the development status of three projects:
The development of the Polkadot ecosystem remains in its early days. Although there are not as many enforcement cases as Ethereum and other mainstream public chains, the popularity of DeFi has strengthened users’ liquidity needs for assets.
For the Polkadota system framework, the liquidity issue is a bit more complicated, as this liquidity is both in the process of pledging the primary chain token and in the slot auction.
Existing solutions can be considered proactive, releasing liquidity through derivatives on the one hand and strengthening derivatives in various ways such as lending, trading and pledging assets to improve liquidity.
With the continuous improvement of the liquidity release protocol and the lowering of the thresholds and barriers to participation in the Polkadot slots competition, the rapid development of its ecosystem is expected. A growing ecosystem will strengthen the liquidity solution lock scale. If the scale is large enough, a huge network effect can be formed to capture the dividends of Polkadot’s environmental development.
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