How to Do DeFi on Polkadot: A Tutorial for DeFi Strategies Using Parallel Finance
Polkadot’s value proposition is simple: low transaction fees and interoperability. Interoperability gives the Polkadot ecosystem a very wide range of blockchain services to offer. In general, blockchains can be used for many different applications like social apps, gaming, data storage, banking, medical records, and of course decentralized finance (or DeFi, for short). Currently, the only DeFi platform available in the Polkadot ecosystem is Karura, a very interesting and sophisticated project built on Kusama. In the near future, a project called Parallel will be launching on Kusama and Polkadot as well. Parallel is a lending and staking platform that has some very unique characteristics, which we will explore in this article.
DeFi Strategies
If you’re bullish on interoperability, you might want to hold on to your DOT and KSM, but you might also want to make short-term trades, leaving you with a dilemma. Holding a token always entails an opportunity cost of not having another token. For instance, a user might want to buy a token on a dip, so they can sell the local top to capture profits (often called a snipe or scalp). Or they might want to capture value from the downward trends of other assets by borrowing a token that they expect to depreciate in value (commonly called shorting). But, if all of a user’s funds are allocated, they might think they’re unable to make these trades. However, specific maneuvers like these are possible via money market protocols, even when a user doesn’t have more capital to invest. On a money market, you can lend tokens you want to keep, and borrow other tokens for a small, continuous fee.
Margin Staking
Parallel is a money market platform, but unlike other money markets, Parallel allows users to borrow from their staked assets specifically, like DOT and KSM. Until Parallel, there wasn’t a way to borrow against staked assets natively. Instead, the user would have to use a project that offers “liquid staking,” and lend their liquid staked tokens to a money market. Liquid staking is just a way of tokenizing the user’s stake, so that you can continue to trade against it while it continues to be staked, thereby staying liquid, and continuing to secure the network. Parallel takes this concept one step further by allowing the user to borrow from their stake natively, which actually increases the yield for stakers through a phenomenon known as “margin demand.”
Margin Demand
Using margin lending, Parallel users can earn higher yields than they would with staking alone, because it combines two types of sustainable yield in DeFi. The first is staking, which is only available on proof-of-stake blockchains like Kusama and Polkadot (and Ethereum, soon). Although staking entails quite complicated arithmetic, in general, user’s are incentivized to stake their assets for rewards, and validators are disincentivized to produce bad blocks by slashing their stake. Margin demand is the second, and it’s much simpler. When user’s lend their assets on Parallel, other users can borrow for a fee, which is paid to the lender. The higher the demand for holding an asset on margin, the higher the lending yields will be for the lender.
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Disclaimer:
This article contains forecasts, projections, goals, plans, and other forward-looking statements regarding Parallel’s financial results and other data. Such forward-looking statements are based on Parallel’s assumptions, estimates, outlook, and other judgments made in light of information available at the time of preparation of such statements and involve both known and unknown risks and uncertainties. Accordingly, plans, goals, and other statements may not be realized as described, and actual financial results, success/failure or progress of development, and other projections may differ materially from those presented herein. Even when subsequent changes in conditions or other circumstances make it preferable to update or revise forecasts, plans, or other forward-looking statements, Parallel disclaims any obligation to update or revise this article. Information concerning risk or returns (including features under development) contained herein is not intended as advertising or as financial advice.
