Bifrost is a DeFi parachain uniquely designed to utilize derivatives models to unlock user’s liquidity of their staked assets. As a foundation, Bifrost has designed and tailored a liquidity release mechanism for multiple staking scenarios and introduced the native staking derivative vToken. For further details, please refer to “New DeFi Track: How to Balance staking voting rights and rewards”. Through staking derivatives, Bifrost will import a large number of high-quality assets from other public chains for the Polkadot ecosystem.

Article — New DeFi Track: How to Balance staking voting rights and rewards

https://medium.com/bifrost-finance/new-defi-track-how-to-balance-staking-voting-rights-and-rewards-part-i-52775b818fe3

https://medium.com/bifrost-finance/new-defi-track-how-to-balance-staking-voting-rights-and-rewards-part-ii-7c498b1436a8

What is a Slot Auction ？

A Slot Auction is a resource competition model unique to Polkadot. Polkadot is designed as a sharded network consisting of relay chains and parachains. The essence is that by letting the validator of the relay chain be responsible for verifying the blocks of the parachain, the shared security of the parachain can be realized. But in this mode, the number of Parachains that the relay chain can access is limited.

In order to allocate the limited parachain slots to more valuable parachains, Polkadot will use auctions to allow parachain projects to compete for slot leases. The way of competition is to stake DOT to the relay chain. The more the stake amount, the more likely it is to obtain a slot. This process is called Slot Aution.

Parachains can raise DOT from their respective communities through Crowdloan when bidding for slots, and DOT holders can choose to stake their DOT Contribute to any bidding project they are optimistic about. But in this process, Crowdloan participants inevitably lose the liquidity of the DOT they hold.

What Bifrost is trying to do is to unlock liquidity by issuing Slot Aution derivatives, allowing crowdloan participants to use the derivatives to trade at any time and avoid the opportunity costs associated with staking, while also allowing bidding project owners to attract more DOT holders who are not willing to lose opportunity costs and increase the success rate of bidding.

Design points for Slot Auction Derivatives

When we design staking derivatives, the key is to solve the problem of the Non-fungible of derivatives caused by choosing different validators and how to settle the staking reward. For the former, we uniformly select validators for users through the voting market, eliminating the problem of Non-fungible. For the latter, we use the exchange rate change mechanism of derivatives and underlying assets to express interest-bearing attributes.

The difficulty with the Slot Aution derivative design is the inability to erase Non-fungible: DOTs/KSMs contributed to different projects do not have the same exit time, as different projects receive different lease expiry dates for their parachain slots.

This leads us to create different derivatives for different parachain projects, and creating different derivatives will limit the liquidity of the derivatives.

Bifrost SALP Solution

Derivatives Decoupling

Bifrost has developed SALP (Slot Auction Liquidity Ptotocol) based on the idea of “decoupling” to solve these problems.

SALP will create two derivatives for Contributor, splitting the fungible and Non-fungible of the Slot Auction derivatives into two derivatives, vsDOT (Voucher Slot DOT ) and vsBond (Voucher SLot Bond).

vsDOT is a fully fungible asset that can be used to circulate on exchanges or used in DeFi.

vsBond is a semi-fungible asset, which is given to different projects and will create different derivatives due to different lease expiry dates. For example, if Parachain A participates in an auction and is awarded a lease for the slot 2022/1/20–2023/10/20, then SALP will create vsDOT for the participant and an equivalent amount of vsBond-2023/10/20. vsBond expresses a time that is not related to the start of the lease, but only to the end of the lease, because it can only be redeemed after the lease ends. This is because redemption is only possible after the end of the lease.

Coupling and Redemption

vsBond can be synthesized 1:1 with vsDOT at any time, and then converted into fDOT (Future DOT) after synthesis. fDOT, like vsBond, is a semi-fungible asset with an expiration date. After fDOT expires, it can be redeemed the same amount of DOT.

For example, 1 vsDOT and 1 vsBond-2023/10/20 can synthesize 1 fDOT-2023/10/20, and 1 fDOT-2023/10/20 can be used to redeem 1 DOT on and after 2023/10/20. Before the redeemable date, fDOT is essentially a futures asset that can redeem DOT on a specific date in the future.

Although users can use vsDOT and vsBond to synthesize fDOT at any time, in order to achieve better liquidity, we recommend holders to synthesize and redeem them directly on the expiry date. The reason is that the liquidity of vsDOT is much greater than that of fDOT and vsBond. Compared with holding 1 vsDOT +1 vsBond, about half of the value of holding 1 fDOT is realizable at any time.

Derivatives Liquidity

While vsDOT can achieve its liquidity in the DEX of Polkadot Ecology, vsBond will require Bifrost to build a separate trading marketplace, which Bifrost plans will support trading not only in vsBond but also in fDOT.

Derivatives Price Expectations

The value of an fDOT depends on how long it has left until it is redeemable. The price of an fDOT can be estimated by multiplying the price of the DOT by a certain discount rate. Suppose on 20 October 2022 you have an fDOT — 2023/10/20 and the discount rate at that time is 10%, then the price of this fDOT is 0.9 DOT.

If you are holding not 1 fDOT but 1 vsDOT and 1 vsBond-2023/10/20, and we know that you have 0.9 DOT for both of them combined, what are 1 vsDOT and 1 vsBond-2023/10/20 worth respectively? Our prediction is that 1 vsDOT ≈ 0.5 DOT and vsBond-2023/10/20 ≈ 0.4 DOT, as the discount rate is fully reflected in vsBond and the actual price will fluctuate up and down from an equilibrium value, depending on the exact supply and demand situation in the market.

For fDOT and vsBond, there is a situation to be aware of: the price of fDOT will increase as it gets closer to the redemption date, but after the redemption date, its value will no longer increase. Because there is no difference between the utility of the overdue and unredeemed fDOT and the fDOT that has just expired. For example, on October 20, 2023, 1 fDOT-2023/10/20 and 1 fDOT-2022/12/30 can only be redeemed immediately Back to 1 DOT, no more. The same is true for vsBond. vsBond that is not synthesized after the expiration date will not continue to increase in value. Therefore, for users who hold expired vsBond or expired fDOT, they should redeem them in time, and there is no need to continue holding them.

Why do we need fDOT?

Some of you may be wondering why there is an additional intermediate step of synthesis, fDOT, when you can just redeem DOT’s using vsDOT and vsBond. This is because, as an asset with similar price properties to traditional futures, fDOT may be easier to understand than vsBond, potentially leading to a broader liquidity scenario. In contrast, vsBond is still somewhat “alien” to the traditional financial derivatives market and not easily compatible. So adding a derivative would leave more possibilities for the derivatives trading scenario.

SALP Technical Implementation

The core of the technical implementation of SALP is cross-chain, to implement the logic of Contribute Mint and Burn Retire through trusted cross-chain messaging.

Contrbitue Mint

The user Contribute on the relay chain, the message of a successful Contribute is passed to the Bifrost chain, which is the user Mint derivative.

Burn Retire

The user initiates a Burn on the Bifrost chain, the message is passed to the relay chain, the Bifrost SALP module on the relay chain operates the Retire for the user, the Retire success message is passed to the Bifrost chain and the derivative Burn transaction is completed.

Bifrost plans to bid for Polkadot’s Parachain slot and once it becomes a Parachain, the above cross-chain logic can be implemented using Polkadot’s XCMP cross-chain messaging protocol. However, when Bifrost is not yet a Parachain, or when other constraints (e.g. XCMP is not yet stable) make it impossible to implement cross-chain messaging based on XCMP, multi-signature plan will also be used to implement SALP first.

Multi-signature plan uses a team of technically competent and reputable notaries to validate and deliver cross-chain messages, and performs Contribute and Retire through a multi-signature account they manage instead of the SALP module.

SALP Next Step

Kusama is Polkadot’s Canary network. Bifrost’s SALP business has been put into practice on the Kusama network, and it has supported the slot auction of six networks including Bifrost itself, and has mint a total of 137,757.7455 vsKSM and vsBond. The remaining six are Basilisk, Altair, Kinssugi, Parallel Heiko, Picasso, Bitcountry and Quartz.

Nevertheless, SALP, as the first version of the Slot Auction Liquidity solution we developed, is still in the experimental stage, and will undergo the test of Liquidity construction and Redeem scenarios in the future. Bifrost will continue to iterate and optimize based on feedback.

With Polkadot’s official website announcing that Oct 11th will open the Polkadot mainnet slot auction, Bifrost has deployed the SALP business on Polkadot on November 9th, opened the vsDOT voting channel, and supports more bidding for parachain candidate projects. For voting tutorials, please refer to Article: Tutorial | How to participate in the Polkadot slot auction through Bifrost SALP, minting vsDOT. At the same time, it is planned to open vsDOT Derivatives minting and Transfer on November 11th to upgrade version v0.9.8. Users can view the number of vsDOT and vsBond through the My Salp module after Contribute.

We see that Polkadot is working step by step to realize its RoadMap. An ecological picture of the Web3.0 era has taken root deeply and sprouted. Bifrost will be committed to serving more Liquidity release scenarios and becoming an important infrastructure in the Polkadot ecological landscape.