Polkadot Slot Auctions get their most awaited derivatives program: A Crowdloan through SALP 2.0 expands possibilities for greater incomes.
Since the so-called DeFi Summer in 2020, the Decentralized Finance has grown rapidly, and the resulting financial products have made DeFi the main path for a systemic growth of major public chains. Polkadot was born with its technical advantages of interoperability and cross chain communication.
It combines multiple different blockchains into a unified and scalable network, aiming to solve the isolation and separation between single blockchains, raising this innovative technology to a whole new level.
Polkadot’s popularity is not only due to its technological innovation: From the users perspective, various DApps in the Polkadot ecosystem have brought amazing benefits. At the same time, its subsystem framework supports the value transfer between different blockchains, so that investors can get a more consistent and convenient experience, and reduce their cross-chain threshold and cost.
Since the launch of Rococo V1, Polkadot’s special parachain test-net, which was published by one of the Polkadot co-founder at the end of 2020, DOT has increased its value. In the last year, the Polkadot Parachain Slot Auction has attracted many project parties and investors, which paid attention to the market dynamics and got their spot in the parachain slot auction, being able to make great profits. On the other hand, users felt the pain of fixed assets and limited investment behavior during the parachain slot auction lock-up period. Today, Bifrost Finance, with the latest SALP 2.0 launch, proposes a liquidity release scheme to solve the lock-up of slot auction assets, providing investors with unlimited liquidity paths.
Slot Auction and Liquidity
First of all, it worths to spend some time explaining a bit of a context to novice readers and investors. As a typical PoS blockchain, Polkadot has set up a Staking mechanism with two purposes: network security and the bottom layer of consensus, which can not only ensure stability with a high mortgage rate, but also guarantee the user’s income.
The Polkadot Slot Auction is a project based on Polkadot characteristics and its underlying financial layer is Staking. Polkadot consists of a Relay chain, parachains and transfer bridge. The relay chain is the center of the Polkadot network and is responsible for the security and control of the whole system; Parachains connect and interact with the Relay chain through slots. Therefore, if a new Parachain wants to access the ecosystem and interact with other parachains, it must use the slot to realize the business interaction. 80% of the slots in Polkadot are commercial slots, which are opened by auction.
Polkadot designed an auction method, which allows the project to bid for the right to use the slots within a certain lease period, locking a certain amount of Tokens. Only after the lease term ends, these tokens can be unlocked and assets returned. It is worth mentioning that DOT participating in the mining process cannot be used on the auctions. In addition to large projects and institutional parties, retail investors can also participate in a Crowdloan, increasing the number of DOT locked in and, doing so, increasing their chances of success. Naturally, the project will also encourage users to participate with an incentive mechanism.
Whether it is a staking farming or crowdloan auction, there is a pain point of Staking behavior: Staking assets cannot be used during the lock-up period, so users bear the opportunity cost and rely on market risk. The same is true for slot auctions. Therefore, in order to better address the impact of slot auction, such as insufficient liquidity, locked assets and reduced market behavior, Bifrost proposed SALP (Slot Auction Liquidity Protocol), which releases liquidity and brings an effective liquidity solution to users, the Polkadot ecosystem itself and even the blockchain networks.
SALP - vsToken & vsBond
SALP aims to release KSM/DOT liquidity locked in crowdloan by generating derivatives. SALP will greatly improve the fund utilization rate of crowdloan and attract more participants who have concerns about the lock-up period to support the slot auction. For a project, SALP increases the possibility of successful bidding in an auction. To build a wealthy ecosystem, SALP is able to release the power of the locked-up liquidity, so that KSM/DOT could gain more value, based on user’s strategies and behaviors.
Participating in a Crowdloan through SALP give access to two derivatives, named respectively vsDOT/vsKSM (Voucher Slot Token) and vsBond (Voucher Slot Bond). vsDOT/vsKSM is the derivative token of the DOT/KSM locked in the slot auction while vsBond is determined by the supported auction items. If users vote for Parachain A they will get vsBond - Parachain A, and if they vote for Parachain B, they will get vsBond - Parachain B. Please note that vsBond - Parachain A and vsBond - Parachain B are qualitatively different.
Bifrost started with the Token attribute of participating in the Crowdloan, decoupled its asset attribute from its equity attribute, and designed vsToken and vsBond. In addition to the differences between homogeneous and non-homogeneous attributes, there are also differences in specific performance and use. vsToken can trade at any time or cooperate with vsBond for 1:1 redemption after the end of the parachain lease term, the vsBond can be traded through the vsBond trading market built in Bifrost, without considering liquidity.
Since its launch, the SALP (Slot Liquidity Protocol) has launched derivatives such as vsKSM and vsDOT, successfully participated in the Kusama Slot Auction, and has been linked to Kusama as a parachain. A total of 42 eco-partners have participated in the auction through SALP, with 6,963 active Crowdloan addresses and a TVL of $21,000,000. The amount of derivative liquidity generated by SALP has reached $508,113. These data reflect the remarkable achievements and positive role of SALP in releasing liquidity, helping project bidding, facilitating user market behavior, and reducing opportunity costs.
But as we all know: What is good, could always be improved. So, based on a large number of market trials and continuous optimization, SALP 2.0 will be launched with some brand new features, to help our users participating in slot auctions, improve asset freedom and release unlimited liquidity strategies.
SALP’s design of vsToken and vsBond has solved the problem of releasing the liquidity of some lock-up KSM/DOT. Nonetheless, users encountered various issues: vsKSM cannot be accepted rigidly alone, the vsBond mechanism is seriously fragmented, and some user’s transaction experience as well as the whole efficiency in the actual process need to be optimized.
Based on this, SALP 2.0 introduces the mechanism of mutual conversion between vsToken and vsBond. Using the system pricing mechanism, different conversion exchange rates are determined according to different redemption periods to obtain more accurate vsBond value, so as to realize the conversion from non-homogeneous vsBond with different value to fully homogeneous vsToken. It makes the circulation of vsBond smoother and meets the needs of users to quickly release full liquidity.
The specific conversion rules are as it follows:
Users participating in crowdloan can convert vsBond into a certain amount of vsKSM at the system pricing exchange rate;
Retail users can purchase vsKSM and convert vsKSM into vsBond at another system exchange rate;
vsBond → vsKSM exchange rate is about 0.6 → 1 (Opportunity cost and Staking annualized income);
When the exchange rate of vsBond → vsKSM is 0.6, the exchange rate of vsKSM → vsBond is 1.25 (The original exchange rate is 1.666).
Not only those who participate in crowdloan, but also those who want to invest in derivatives and try different ways of operating at this time can seize the opportunity from the vsToken & vsBond swap mechanism of SALP 2.0 and obtain higher returns.
For example, when the price of vsKSM is stable at 0.5 KSM, a stable rate of return can be obtained according to the length of lock up time. The longer the lock-up time, the higher the annualized rate of return: When the price of vsKSM drops, the arbitrage yield of the whole period increases, and the yield of vsBond close to the redemption period increases significantly.
The Bond Market
SALP 2.0 not only updates and optimizes the existing mechanism, but also enables users who are already familiar with Bifrost Dapp to have a better experience and obtain higher revenue and unlimited liquidity. At the same time, it has also launched two new functions: Bond market and Current pledge, which are very good derivatives investment options for new users.
The Bond market is a function which automatically matches a vsToken and a vsBond to package their redemption period and yield. It has the same attributes as the traditional bond market. Of course, new users do not need to pay attention to the operating mechanism and underlying structure of slot auction and crowdloan. They only need to know the basic financial mechanism of traditional bonds: seize the favorable opportunities such as interest rate fluctuation and redemption period, improve the yield and obtain the return on investment.
Improved liquidity of vsKSM
The launch of the liquidity staking function improves the liquidity of vsKSM, ensures the liquidity of the Bond market, and provides a more stable environment for user arbitrage. The bottom level and performance of its functions are: support users to carry out vsKSM single currency mining and obtain higher incentives while contributing to the liquidity of vsKSM. When the liquidity of vsKSM is improved, the exchange transactions of vsBond and vsKSM are increased, the number of vsBonds in the SALP 2.0 agreement is also increased, which can provide more vsBonds to the market and increase the matching of vsKSM-vsBond.