Sustainable Security and Yield
After Tarun Chitra’s seminal articles on the competition between staking and lending [1], it was clear that staking and lending need to be less competitive and more cooperative. Individual users shouldn’t have to choose between staking and lending. On Polkadot, staking rewards can approach 15% APY if the returns are compounded [2]. Even though this APY can be quite appealing, it comes with the opportunity cost of not being liquid, as stakers cannot easily borrow against their stake. Lending, on the other hand, generally does not generate as much yield as staking, but if a user were to lend their DOT, they would stay relatively liquid. Hence, this dilemma translates into stakers losing liquidity to maintain yield, and lenders losing yield to stay liquid.
TL;DR
Users can lend and borrow their staked DOT and KSM through Parallel’s platform.
Parallel uses an algorithmic node selection process to enhance yields.
Parallel’s lending, borrowing, and token rewards generate sustainable yield, with calculable risks.
Leverage Staking
Leverage staking solves the dilemma. When the user stakes DOT (and KSM as well, although this overview focuses on DOT) on Parallel, they receive a second token called xDOT. These tokens are completely liquid, and they entitle the user to their underlying DOT coins, as they continue to gather uninterrupted staking yield. Parallel refers to this system as leverage staking, because the user can lend their xDOT on Parallel to earn even more yield, or borrow against it, and lever up. The user can continue to add leverage to suit their risk profiles as their staked DOT continues to accrue yield, and as long as the user borrows xDOT, any yield the user receives from lending is ultimately redeemable for DOT when they choose to unstake. While the market is unpredictable and highly efficient, we hope that leverage staking will lead to increased lending yield compared with other lending platforms, as users seek the appropriate levels of leverage for their staked assets.
Algorithmic Efficiency
When a user stakes with Parallel, our platform algorithmically selects the highest performing nodes to stake with. Using advanced techniques, the protocol determines the reputation of the various validators, and moves between the nodes with the highest extractable value. While the governance platform does have a degree of input into which nodes to select, the process for selecting nodes in real time is determined by the protocol. In addition, every time a user stakes on Parallel, a nominal fee is collected. This fee is saved in an insurance fund in the event that slashing occurs. If a slashing event takes place due to bad node behavior or a systemic outage, the insurance fund will be used to guarantee users a stable staking yield. This translates to yields approaching 15%[3] on staking alone, which is higher than one might receive at Binance (12.78%) [4], Kraken (12%) [5], or KuCoin (10%) [6]. This is possible because Parallel’s node selectors proactively determine risk profiles in ways these custodial services currently do not.
If you want to see more detail on how our formula is constructed, check out our docs here.
Protocol Rewards
In addition to the rewards created by leverage staking, users will be able to earn protocol incentives granted to the users who participate in staking and lending. With these three incentives (staking, lending, and protocol rewards), alongside the algorithmic enhancements of staking, users will be able to earn higher yield on their staked DOT than they can earn anywhere else, and they will be able to do it with calculated levels of risk and exposure. For example, users that are seeking the lowest risk can simply stake DOT and hold their xDOT on Parallel’s staking interface. If the user would like to increase their risk and potential reward, they can “lever up” to increase their yield on lending. Whenever the user stakes through Parallel, their staking rewards will be optimized algorithmically, and they will be eligible for protocol rewards from Parallel.
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References
- https://arxiv.org/abs/2001.00919;
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3629988 - https://www.stakingrewards.com/calculator/polkadot
- https://launchpad.binance.com/en/
- https://support.kraken.com/hc/en-us/articles/360037682011-Overview-of-On-chain-staking-on-Kraken
- https://www.kucoin.com/news/en-ksm-staking-and-dot-staking-now-available
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.
