Polkadot And The Problem Of Liquidity Solution

While the industry's focus shifts from scaling Bitcoin to scale up Ethereum, hệ sinh thái Polkadot vẫn đang phát triển tích cực. Với việc các parachain của Kusama and Polkadot is slowly going into stable operation, whichever solution it is, it is solving the problem of growing cryptocurrency demand on a fundamentally inefficient architecture.

Founder Polkadot, Gavin Wood, foresaw this problem during his time as CTO of Ethereum and incorporate some great solutions into the basic engineering architecture of Polkadot.

Polkadot's core architecture uses a two-tier model consisting of Relay Chain and Parachain to enforce separation between consensus security and application performance. Meanwhile, Ethereum 2.0 optimizes Beacon Chain + fragmentation or layer 2 system. This type of layered design has become and is becoming the fundamental consensus in the design of public chains or protocols.

Difficult about the liquidity of the chain or the public protocol

Regarding the basic architecture of Polkadot, both Relay Chain consensus security and Parachain resource usage have staking needs DOT Specifically. Both require liquidity lock DOT simultaneous. After the popularity DeFi, people started making trade-offs between earning revenue through staking and DeFi. Revenue through staking maintains the consensus of the underlying network, while revenue through DeFi is geared towards ecosystem development.

Therefore, how to balance the competition between the two to avoid losing one's money to the other is a necessity that all public chains must consider. There are many solutions to liquidity problems, such as Lido, Bifrost, Acala, Stafi,…

While, Lido has in turn opened support for Terra, Solana as well as other mainstream public chains and will further support Polkadot's ecosystem.

What happens to parachain's locked liquidity?

Starting from the Polkadot ecosystem, let's first talk about solving the liquidity problem in the parachain auction process.

After Relay Chain ensures network security, the project owner has the right to use parachain's resources by auction. However, since the project owner needs to hold a significant amount of DOT/KSM if it wants to succeed but is considered impractical for most projects, Polkadot has come up with a mechanism Crowdloan (borrowed from the community). With the help of this mechanism, project owners can mobilize DOT/KSM from users and use it to acquire parachain resources. It significantly limits the liquidity problem.

However, a similar problem arose. Each parachain runs with a different DOT/KSM key level. As more and more DOT/KSM is locked, the liquidity of DOT/KSM will be less and less. Reduced liquidity will essentially limit the growth of the Polkadot ecosystem.

With the development of DeFi providing users with rich wealth management tools, user demand for DOT/KSM liquidity could significantly exceed demand for rewards through staking.

Liquidity solutions available in the Polkadot . ecosystem

For this liquidity problem, there are currently 3 top solutions:

Acala

Acala is a well-known project in the Polkadot ecosystem, committed to act as a decentralized financial center and platform. stablecoins. Acala has 4 main business activities: systems stablecoins Cross-chain multi-asset collateral, liquidity release protocol, trading platform DEX (decentralized exchange) and oracle machine. Acala is also a smart contract platform.

Để giải quyết vấn đề thanh khoản, Acala giải phóng thanh khoản của token nền tảng đã cam kết bằng cách tạo ra tài sản phái sinh LDOT (mạng trước đó của nó là Karura tương ứng với LKSM). Dự án một mặt sử dụng LDOT làm tài sản thế chấp trong hệ thống stablecoin, mặt khác bổ sung hỗ trợ thanh khoản thông qua DEX and empower derivatives by applying these two measures, thus giving LDOT sufficient liquidity.

Some liquidity issuance protocols can generate federated certificates. For example, affiliate certificate ETH in Lido is called stETH and the DOT associate certificate in Stafi is called rDOT.

We can learn its operating model through Karura products that are working well. The product below mainly has the mentioned core functions, such as kUSD minting, DEX swap and Liquid staking.

Source: Karura

Liquidity pledge currently only supports KSM and uncommitted LKSM. KSM has pledged not to be used to maintain underlying consensus security nor to auction parachain positions. Therefore, LDOT or LKSM is more like a layer of encapsulation, similar to the difference between ETH and WETH. In short, Acala does not seem to be the complete solution to the liquidity problem.

Currently, Acala has 213,000 Twitter followers and 36,000 Telegram users. Acala is the first parallel chain to be successfully voted for Polkadot. This shows the widely accepted solution. Tokens KAR of Karura – Acala's first network has a market value of about $88 million and the ACA token on Polkadot is not yet in circulation.

Source: Tradingview

Bifrost

Bifrost is a DeFi protocol specialized in the trading of liquidity release of linked assets. Bifrost releases liquidity of staking ETH 2.0 and provide liquidity release for Polkadot's position auction and Kusama.

By staking through Bifrost, users receive staking revenue and corresponding derivatives, can buy, sell, transfer, and participate in various DeFi activities. Derivatives can be exchanged for a certain percentage of the original asset, and they also continue to earn staking rewards, which is a profitable asset.

Because crowdloan As an essential feature of the Polkadot ecosystem, Bifrost also becomes the gateway crowdloan important. Bifrost's liquidity crowdfunding solution currently supports both Kusama and Polkadot.

Source: Bifrost

Regarding the specific execution mechanism, there are different rental periods and rewards during the placement auction, which generates many tokens with different equity. The Bifrost solution separates token properties from equity properties and designs two derivative assets: vsToken (Voucher Slot Token) and vsBond (Voucher Slot Bond).

Specifically, vsToken (vsDOT/vsKSM) is a replaceable token and an affiliate certificate for users, representing the user's asset attribute in the parachain auction token. vsBond is a non-fungible token that has different equity properties during the rental cycle of the location and the auction reward to support the parachain.

With such a mechanism, it is possible to sell vsDOT/vsKSM without affecting access to parachain rewards.

To solve vsKSM's liquidity problem, Bifrost has set up a liquidity pool in Zenlink's DEX and by adding liquidity to Zenlink, LP link on official website. Accordingly, very high profits can be obtained. vsBond's liquidity is settled by order book pending buying and selling on the official website (vsBond is a non-fungible token and a more efficient order book method).

Source: Bifrost

There are 4 assets available for supporting the project by depositing DOT/KSM on Bifrost's liquid crowdloan platform: Bifrost derivatives vsToken and vsBond, Bifrost's native token BNC and token rewards from the project.

Bifrost has now minted a total of 170,000 vsKSM and 1.23 million vsDOT. Including support for ETH 2.0 and liquidity in the DEX, the entire Bifrost ecosystem has a total of nearly $150 million in locked assets.

It is important to note that Bifrost has only one lead network, so the issued BNC tokens will exist in both the Kusama and Polkadot networks. After becoming parachain on Kusama, the next milestone for Bifrost is continuing to be parachain on Polkadot.

There are now 79,000 Bifrost Twitter followers, nearly 30,000 Telegram users, and the mainnet's BNC token has a market cap of $17.56 million.

Source: Tradingview

Parallel Finance

Parallel Finance is a decentralized cryptocurrency market on blockchain Polkadot and Kusama. A protocol that aims to bring more liquidity to the Polkadot/Kusama ecosystem. With the increasing popularity of DeFi, the lending demand of DOT/KSM holders (e.g. DOT/KSM) is also higher. Therefore, Parallel Finance is designed to support 3 main functions: borrowing, lending and crowdloan.

Like Bifrost, Parallel allows holders to deposit assets into Parallel Finance's account and receive "vouchers", known as c-assets in Parallel, for cDOT and cKSM respectively.

Supporting a project through Parallel's crowdloan feature generates 3 types of tokens:

– Parallel platform token rewards.

– Token rewards for project owners.

– An LP asset for derivatives and assets of projects.

Source: Parallel

Parallel's core module features a lending system in which users deposit cDOT/cKSM assets into the marketplace for additional interest rewards. Furthermore, cDOT/cKSM can also be used as collateral to participate in lending. In addition, cDOT is tied to the liquidity of project tokens in the form of LPs, so derivatives on Parallel are also equipped with certain liquidity conditions.

The platform has raised 21.34 million DOT and 57.3 million KSM, locking in a total cumulative liquidity of $550 million. Parallel is also one of 5 parallel chains on Polkadot today.

Parallel has 53,000 Twitter followers and 8,000 Telegram users. Its tokens are currently not circulating on either network.

The table below compares the development status of the three projects:

		Acala	Bifrost	Parallel
Liquidity release	Liquidity layer 0	No support	Support available	No support
Liquidity layer 1	No support	Support available	Support available
Assets arise	Voucher	LDOT/LKSM	vsDOT/vsKSM/vsBOND	cDOT/cKSM
Authorization approach	Stablecoin collateral DEX	DEX, staking	Collateral loan, LP
DeFi	Staking, Swapping, Circulating	Support available	Support available	Support available
Circulating Market Cap	Kusama	KAR = 80 million dollars	BNC = 17 million dollars	Not circulating
Polkadot	Uncirculated ACA

Add title

While the industry's focus shifts from scaling Bitcoin to scale up Ethereum, the Polkadot ecosystem is still in active development. With the Kusama and Polkadot parachains gradually coming to life, either solution is solving the problem of growing crypto demand on a fundamentally inefficient architecture.

Founder Polkadot, Gavin Wood, foresaw this problem during his time as CTO of Ethereum and incorporated some great solutions into Polkadot's underlying technical architecture.

Public chain or protocol liquidity difficulties

Regarding Polkadot's underlying architecture, both Relay Chain consensus security and resource-intensive Parachain have specific DOT staking needs. Both require a DOT liquidity lockout at the same time. After the popularity of DeFi, people started making trade-offs between earning revenue through staking and DeFi. Revenue through the staking mechanism maintains the consensus of the underlying network, while revenue through DeFi goes towards the development of the ecosystem.

Therefore, how to balance the competition between the two parties to avoid losing one's money to the other is a necessity that all public chains must consider. There are many solutions to liquidity problems, such as Lido, Bifrost, Acala, Stafi, etc.

Meanwhile, Lido has opened support for Terra, Solana as well as other mainstream public chains and will further support Polkadot's ecosystem.

What happens to parachain's locked liquidity?

Starting from the Polkadot ecosystem, let's first talk about solving the liquidity problem in the parachain auction process.

After Relay Chain ensures network security, the project owner has the right to use parachain's resources by auction. However, since project owners need to hold a significant amount of DOT/KSM if they want to succeed but it is considered impractical for most projects, Polkadot has introduced a Crowdloan mechanism. With the help of this mechanism, project owners can raise DOT/KSM from users and use it to acquire parachain resources. It significantly limits the liquidity problem.

With the development of DeFi providing users with rich wealth management tools, user demand for DOT/KSM liquidity could significantly exceed demand for rewards through staking.