With much of the Polkadot community locking up DOT amid the ecosystem’s first batch of parachain lease auctions, many participants are looking to contribute via projects offering innovative liquid staking products.
Ethereum pioneered smart contract functionality with its mainnet launch in 2015, however its developers quickly realized that greater scalability would be needed to meet its objective of becoming the world’s decentralized computer.
While Ethereum pledged to soon deliver a second version of the protocol validated by sharded proof-of-stake (PoS) consensus to achieve scalability, the long-awaited “Ethereum 2.0” upgrades have only been partially implemented today. The rollout is expected to finish sometime around the second quarter with the merge of the existing Ethereum chain and its recently launched proof-of-stake beacon chain.
In early 2021, Ethereum lead developer Vitalik Buterin announced that sharding has been further pushed back in the project’s roadmap until after the chain-merge, asserting that Ethereum’s growing Layer 2 ecosystem will provide sufficient scalability in the meantime.
Gavin Wood, one of Ethereum’s eight co-founders, walked away from the project in 2016, citing dissatisfaction with the project’s shift away from pursuing scaling through a decentralized sharded ecosystem. In 2017 Wood launched the Web3 Foundation and began working on Polkadot in a bid to realize his own vision for a sharded proof-of-stake Ethereum.
Since launching in May 2020, just Polkadot’s central relay chain is live. The relay chain exclusively supports a small range of transaction types, including DOT transfers and staking functions, and doesn’t support smart contracts. Advanced and specialized computation will be supported by up to 100 “parachain” shards that operate in parallel with the relay chain.
Polkadot’s upcoming auctions allocate parachain slots to projects building on top of the Polkadot network, realizing its vision for a scalable sharded blockchain ecosystem. Without parachains, the Polkadot network is unable to host DeFi protocols.
Parachains are allocated to projects building on Polkadot via lease basis, where they bid against each other by pledging to lock up large sums of DOT for three-month terms up to a maximum of two years.
The model has given rise to a novel token issuance model dubbed the parachain lease offering (PLO), where a project seeking to secure a parachain slot crowdsources the DOT put forward to bid in the auctions from their community.
Batches of Five
PLO participants will receive the native and governance tokens of major projects building within the Polkadot ecosystem, and will receive their DOT back if said project’s bid is unsuccessful or at the end of the parachain lease period if they secure a slot.
Auctions are conducted in batches of five that are each spaced one week apart, and auctions will take place for perpetuity as lease periods expire and are made available for re-auction.
Many projects have innovated liquid staking products that will allow PLO participants to contribute without losing the ability to manage the liquidity represented by their contributed DOT, including platforms facilitating access to a wide range of parachain auctions through a single interface.
Acala Network’s lcDOT
Acala Network, the self-styled “DeFi hub of Polkadot,” will issue Liquid Crowdloan DOT (lcDOT) tokens to participants who contribute to its two-year crowdloan directly on a 1:1 basis to the number of DOT locked up.
During the Acala’s parachain lease, PLO participants will be able to use lcDOT as collateral to mint Acala’s aUSD stablecoin, with Acala’s automated market maker (AMM) DEX also set to support lcDOT.
While the token will trade freely on Acala’s DEX and is not pegged to the price of DOT, the token will be redeemable in exchange for DOT on a 1:1 basis once the lease period has expired.
Parallel Fi’s cDOT
Many of the other liquid crowd-loan products being offered by platforms facilitate access to a wide range of parachain auctions through a single interface.
Parallel Finance is among the most popular platforms aggregating access to multiple PLOs and offering liquid derivatives to contributors.
Participants using Parallel will receive cDOT tokens representing the underlying DOT that has been locked for the lease period. The protocol also offers rewards with four units of its governance token PARA per DOT contributed via its platform.
Once Parallel’s parachain is live, cDOT holders will also be able to utilize the project’s money market and AMM to generate yield, provide liquidity, and trade the derivative token. cDOT is also redeemable for the underlying staked DOT once the lease is over.
Equilibrium is also offering a liquid staking token representing underlying contributions made via its auction platform in the form of its xDOT tokens.
xDOT will initially be available for minting on Equilibrium’s Kusama deployment Genshiro, where users will be able to earn yield on the token via Genshiro’s liquidity pool able to utilize the token to collateralize loans taken out in a variety of assets including stablecoins.
Many of the features currently enabled on Genshiro will go live on Equilibrium once the project has secured a parachain slot — at which point xDOT holders will be able to either claim their tokens on the Polkadot-native platform or bridge them over from Kusama.
Bifrost’s SALP tokens
Bifrost’s Slot Auction Liquidity Protocol (SALP) will also facilitate access to a wide range of PLOs through a decentralized application.
Unlike with other platforms, Bifrost users will receive two derivatives — Voucher Slot DOT (vsDOT) and Voucher Slot Bond (vsBond) tokens.
Bifrost describes vsDOT as fungible tokens that represents underlying DOT contributions and also accrues staking rewards, while vsBOND tokens represent the reward parameters specific to the particular auctions a user participates in — such as lease duration and expiry date.
The two tokens allow Bifrost to leverage fungibility to both aggregate liquidity representing DOT contributions using the vsDOT token, while also using the nonfungible vsBOND tokens to capture the unique properties of each PLO it supports.
The vsDOT tokens can be traded at any time in liquidity pools on Bifrost or third-party platforms. Describing vsBOND as an “equity token,” Bifrost stakes the derivative “does not require high-liquidity transactions” and can be traded using pending orders on its vsBOND market.
Both tokens are required to redeem the underlying dot contributed once a parachain lease has expired.