Like Liquid Staking Parachain Auctions on Polkadot. disturbs

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A Crowd Loan is a Polkadot (DOT) crowdsourcing event in Polkadot that enables the community to support project bids in upcoming parachain slot auctions. Users contribute DOT, receive rewards in project tokens, and get their DOT back in two years (a standard slot lease period). This mechanism helps projects raise significant capital in DOT tokens, which can even exceed a face value of a few hundred million dollars.

The obvious downside for users is the need to lock their DOT for two years if they don’t have access to their liquidity during that lockup period.

In mainstream finance, there are private companies and lock-up arrangements for initial public offerings (IPOs). The lockup agreements prohibit corporate insiders – including employees, their friends, family, and venture capitalists – from selling their shares for a period of time. These shares are “blocked” to ensure that their owners do not enter the public market too soon after the public offering.

To get around restrictions on lockup stocks, people could enter into arrangements whereby they would secure their profits or even get some cash upfront for the day they could sell their stocks. Corporate lawyers began banning these agreements because they would create unnecessary market pressure and, in some cases, introduce the legal risks that lockups are designed to avoid.

The concept of liquid staking

Fortunately, this exam has nothing to do with the blockchain space, which is not constrained by the concerns of private attorneys. We can very well create entitlement rights to the blocked assets by issuing a special type of derivative token that represents these rights to the main underlying assets.

Derivative tokens are usually minted in a 1 to 1 ratio for the blocked tokens. They can be issued by a liquid staking provider when users can send initial assets to their custodian address or the target staking protocol can send derivative tokens directly to each depositor for ease of bookkeeping. The latter mechanism is widely used in Ethereum-based automated market makers (AMMs) and pooled credit protocols that issue liquidity pool tokens – e.g. B. AAVE, Compound or Curve.

In any case, there is always a clear arbitrage between the market and the eventual custodian. Any user can claim the underlying asset at some point by sending derivative tokens back to the staking protocol. If the arbitrage happens instantly, the ratio of derivative tokens to locked assets approaches 1 to 1. Otherwise it may differ, depending on how quickly the base value can be activated.

This concept opens up an emerging market for many decentralized finance projects (DeFi). You may already see some of them bringing liquidity for various types of collateral, active participation in proof-of-stake (PoS) protocols, and other non-liquid assets. For example, Lido has absorbed over $ 6.7 billion worth of Ether (ETH) invested in Ethereum 2.0 (that’s nearly 19% of all ETH involved in Ethereum 2.0 deposit contracts). Marinade Finance has managed to lock Solana’s SOL worth over $ 1.6 billion through their log on Solana.

The success of liquid staking providers depends heavily on the potential size of the locked assets and the activity of the investors they target.

Liquid staking and crowdloans on Polkadot

The design of Polkadot crowdloans naturally marries with fluid staking. The expected volume of liquidity to be tied up in crowdloans can reach 20% of the DOT supply (which amounts to an impressive eight billion US dollars). Second, crowdloan participants tend to be the most active investors, always looking to maximize their profits. Liquid staking seems like an attractive option for them.

Surely Polkadot’s most advanced DeFi teams are already using this use case. Each of them have introduced their version of liquid DOT, which is imprinted on their chains in a 1 to 1 ratio for the initial DOT locked across their platforms. This is what these projects currently offer their users:

Liquid staking is pretty much an excellent opportunity for Polkadot-based DeFi projects to grow their Total Value Locked (TVL) significantly right from the start. Liquid DOT will be the liquidity that will remain with you for the entire parachain lease term of two years.

Even the major market participants could not miss this opportunity. For example, there is a liquid DOT introduced by Binance called BDOT, and the exchange plans to use this liquidity in both trading and speculation. However, we will only consider liquid staking through ecosystem projects, so Binance USD (BUSD) and wrappers on other exchanges are outside of our current scope.

Previous traction from Liquid DOT

Before we dive into the actual mechanics behind each setup, let’s look at some numbers we gathered on November 15th at 9:00 p.m. UTC:

As we can see, Parallel and Acala are the clear leaders here. Acala handles this enormous amount thanks to its primary positioning as a top project in the ecosystem. At the same time, they managed to get a good head start by offering DOT contributors bonuses in Parallels’ native token PARA as well as special bonuses from supported projects.

Equilibrium has also announced additional bonuses in its native Token EQ for every DOT that is locked through its xDOT platform. In addition to bonuses, the project has started a referral program that makes it possible to earn EQ for every use at xDOT via referral links.

As such, crowd loan investors can enjoy an exclusive opportunity to earn regular crowd loan rewards while keeping their DOT liquid and receiving additional rewards through liquid staking. It seems like these pleasant additional perks may even increase over time as competition intensifies between providers of liquid staking.

Now that we’ve looked at the landscape, let’s take a closer look at each project.

Acala

Users will contribute DOT to Acala’s crowd loan using Acala’s Liquid Crowdloan DOT (lcDOT) option. The contributions go to the Acala proxy account, which is managed by the Acala Foundation. Users get 1 lcDOT for every 1 locked DOT. Users also get Cardano (ACA), although it is not clear whether these are attributed to initial DOT contributors or lcDOT holders. Currently, lcDOT only supports contributions to one project, Acala.

lcDOT can be used as collateral for the minting of the decentralized stablecoin (aUSD) of the Acala dollar. Plus, it will likely be listed on their Uniswap-like AMM for couples with DOT and Liquid DOT (LDOT).

Initially, Acala will collect DOT on a proxy account controlled by a multi-signature wallet from the Acala Foundation. When the Acala Parachain is live, the ownership of the proxy account is transferred from the Multisig to the Acala Parachain account, which is completely trusted and controlled by Acala’s on-chain governance.

Despite a sizeable over 80% percentage of whales and institutions re-affirming the Pareto Rule, we are seeing an impressive number of contributions from retail users. Additionally, there is no other option on their website other than lcDOT to contribute to Alcala’s crowd loan. Given the staggering DOT 27 million raised during his crowd loan, this retail activity is to be expected.

Parallel

Users will contribute DOT with Parallel’s cDOT mechanics. Parallel supports several projects and offers users who participate in crowdloans via cDOT additional bonuses both in PARA tokens and from their “partner” projects.

The cDOT tokens from Parallel are started when Parallel secures a Parachain slot. These tokens are used within the DeFi system by Parallel as security for borrowing items or as loan items in their connection-like money market protocol.

The technical structure is similar to all of the above, although there is initially a multisig custody of user contributions that are jointly coordinated for other projects. At the time of going to press, no open information was available about the multisig participants.

It is pretty predictable that most of the DOT will be staked out for parallel. Their website does not offer any other options for participating in their crowdloan than cDOT.

It remains unclear how Parallel Moonbeam will support Crowdloan from a purely technical point of view, as Moonbeam’s Parachain does not currently contain a multi-signature palette. It may even be impossible to distribute Moonbeam’s crowdloan rewards in GIMR, the native Moonbeam token, which arrives at Parallel’s address, which is managed under multi-signature permissions. Even so, the amount of DOT they have raised for Moonbeam is impressive.

Interestingly, the picture is very similar to that of Acala. Parallel even has a single mega contribution of 1.5 million DOT from a single address that DOT has pledged for Astar, Clover, Moonbeam and Parallel.

Bifrost

Users will contribute DOT using Bifrost’s SALP protocol. SALP supports several projects that are technically suitable for processing multisig transactions. Bifrost offers its users two types of tokens: vsBond and vsToken. vsBonds are tied to specific projects and allow crowd loan rewards to be collected.

They can be traded on the “buy-in-price” pending order exchange. vsTokens, on the other hand, are not tied to a specific project and, in combination with corresponding vsBonds, enable users to redeem DOT at the end of the lease term. vsTokens trade in a bancor and 1-to-1 peg pool when due. vsBond and vsTokens can also be used within Bifrost’s DeFi ecosystem.

Technically, the solution is similar to that of Acala. Until Bifrost is not a parachain, they first use a multisig address controlled by Bifrost. After the project wins a Parachain slot, multisig control is given to the Parachain account. The prerequisite for this is the proper functioning of the Polkadot XCM protocol.

Astar is the clear beneficiary here, especially thanks to the single fat stake of 300,000 DOT. This money comes from the DFG, a venture capitalist (VC) firm that contributed to Astar’s crowd loan through Bifrost’s liquid DOT solution.

Similar to Acala and Parallel, the Pareto rule also works perfectly here, since the share of institutions is around 80% of the total DOT deployment. In the case of Bifrost, however, whales largely dominate over private and average investors compared to the first two projects.

balance

Users contribute DOT through Equilibrium with their xDOT. Equilibrium supports projects that are technically capable of handling multisig transactions. Equilibrium also reportedly provides ledger support for users who contribute to Equilibrium through the xDOT platform.

An xDOT token will be available for different projects, while Equilibrium will handle xDOT and project tokens separately. Equilibrium will price xDOT on an AMM with a special yield and promise to issue these tokens first in Genshiro (their Canarian network based in Kusama). Then xDOT is started in Equilibrium as soon as the project receives a parchain slot on Polkadot. xDOT use cases on Genshiro include borrowing, lending, and using them as margin for trading.

Equilibrium’s technical solution also uses a multi-signature wallet. It is noteworthy that the keys to this multisig are held by well-known VCs including Signum Capital, DFG, Genesis Block Ventures, and PNYX.

It is to be expected that Equilibrium’s stake as the xDOT originator will overtake most of the others. As with Bifrost, Astar maintains a leadership position and this most likely testifies to the efficiency of Astar’s business development and its partnership bonuses.

In contrast to Bifrost, the activity of private users in xDOT outweighs other investor groups. The project has yet to take so many institutions on board based on the numbers above. However, Equilibrium’s loyalty program, which accumulates additional EQ tokens for DOT deposited through xDOT, can become very attractive to large interest groups.

Is Liquid DOT Staking Bulletproof?

Now that we’ve taken a closer look at each project, we might want to clarify a few other questions. The first natural is what additional utility projects will be offered on their liquid DOT since users essentially want to do something with their liquidity. Otherwise what is the real use of it?

Related: The evolution of DeFi and its unique token distribution mechanics

This largely depends on the functionality of the underlying projects. Another aspect is how quickly they can connect with other projects that may be willing to support these tokens. From the information obtained above, we can assess the first application cases on a project-specific basis.

It looks like there are potential use cases for Liquid DOT, and its continued adoption across the ecosystem will largely depend on the success of the business development. Those who manage to convince other ecosystem participants to use their liquid DOT will benefit the most in the long run.

The next question relates to the redistribution of bonuses. If users contribute via liquid DOT mechanics, are they eligible for the bonus projects offered for “classic” trusted contributions?

Not much information is floating around about this right now, but for all we know, Acala will be offering its regular subscribers all of the bonuses it has on offer. Parallel has spoken to at least two projects to offer additional crowd loan bonuses, while Equilibrium and Bifrost will most likely be able to support the common crowd loan bonus structure. However, this can change drastically as nothing prevents Equilibrium or Bifrost from making similar arrangements with projects running their campaigns.

Last but not least, how secure is the technical facility? Given the number of hacks in DeFi, this question becomes crucial.

The approach here is similar across the board: a depot address for DOT, which is initially managed under multi-signature authorizations. And it’s a reasonable solution, as multisigs have become a golden industry standard for keeping assets safe. Once the project that dumps liquid DOT becomes a parachain, the setup becomes completely trustworthy.

Related: How much intrigue is behind Kusama’s parachain auctions?

The bottom line

Liquid DOT is a nice mechanism to release the liquidity from locked DOT that has caught the attention of several projects in the ecosystem. However, all of them offer similar technical solutions.

The extent to which these different liquid DOT variations (lcDOT, cDOT, vsBond, or xDOT) will successfully mature depends largely on the business strategies of those projects and how much use they can provide for their DOT derivatives.

This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.

Alex Melikhov is CEO and founder of Equilibrium, an interoperable DeFi conglomerate on Polkadot, which consists of a cross-chain credit platform and an order book-based decentralized exchange. With over 14 years of entrepreneurial and fintech experience, Alex has been working in the world of cryptocurrencies since 2013. His current project Equilibrium aims to solve the problem of liquidity fragmentation in DeFi.