Last summer, Polkadot made his own little story after confirming the first five projects to occupy a parachain slot machine on his canary network Kusama. Inconsistent blockchains that attach to the Polkadot main message chain to ensure security, but are otherwise independent, pair chains represent a new way of doing business in the blockchain, a maximum vision that aims to increase flexibility and management at the same time and allow for seamless upgrades . The five projects were Karura, Moonriver, Shiden, Khala and Bifrost.
Fast forward to today, and the first batch of parachute chains will expire, releasing over 1 million locked Kusama (KSM) tokens to the market. Given that KSM’s current supply is 9 million, basic economics says that the price will suffer, as previously inaccessible tokens will suddenly return to circulation. Price fluctuations, of course, affect mortgages and liquidity – although the latter innovation allows users to use their symbols even when locked.
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To have your cake and eat it
We all know mortgaging: This is the process of “locking” tokens into a system as collateral for the purpose of securing a network. In exchange for a person’s participation in such an effort, a prize is collected.
Within Polkadot’s complex Nominated Evidence (NPoS) ecosystem, shareholders can be either nominees (whose role is to nominate a creditor they trust) or a creditor, but in both cases the same economic incentive applies. The problem, as described above, is what happens at the end of the mortgage period. It’s all well and good to get a generous reward for securing the message chain (not to mention a few parallel chains), but if the price of the native symbol drops it could make the whole project fun.
While a liquidity component does not protect the underlying price of the assets being pledged, it allows users to securely open up the liquidity position in the chain and take advantage of the yields offered by numerous distributed applications. This is made possible by issuing a special symbol that represents the value of a person’s share. As this liquid derivative actually acts as a native symbol in the market, the risk of sudden price volatility after the end of the non-binding period is addressed.
This model allows users to maintain their liquidity position and leverage the underlying symbol, whether it is through bank transfer, spending or trading as they see fit. Indeed, stakeholders can even use their derivatives as collateral to borrow or lend across different ecosystems to participate in other decentralized financing options (DeFi). And the best part is that mortgages continue to accrue on the original assets that are locked into the mortgage agreement.
Connected: How liquid mortgages interfere with the auction of parachain on Polkadot
But what happens when the mortgage period ends, I hear you ask. Well, the derivatives are simply reversed for the native currency to maintain a steady supply in distribution.
In short, it’s about having the cake and eating it.
The future of proof of an object?
The agreement to prove the stock has been under an increasingly bright spotlight, especially as we get closer to the PoS version for Ethereum 2.0. The blockchain’s protracted transition to proof of an object is expected to reduce its energy consumption by more than 99%, leaving environmental critics to distrust Bitcoin and its controversial proof-of-work model.
There is no doubt that PoS is an environmentally friendly option, even if some PoW criticism is overwhelmed by the improving energy rally favored by miners. Despite the many improvements that the solidarity system has made to its predecessor, there is still work to be done. Far from being a solid science, proof of an object is an innovation that can and should be refined. And we can start by increasing the number and capacity of PoS certifiers.
This was the idea behind Polkadot’s NPoS model, which sought to combine the security of PoS with the increased benefits of stakeholder voting. In my opinion, floating bets are based on these advantages by solving the long-standing problems that users face: whether to lock their tokens or use them in DeFi distributed applications (DApp).
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Of course, this problem not only affects users; it generally damages the DeFi landscape. For some cryptocurrencies, the percentage of supply available in mortgages may exceed 70%. At the time of writing, for example, almost three-quarters of Solana’s SOL tokens are at stake – and over 80% of BNB, according to Statista. It does not take a genius to know that having only 30% of the identification inventory available for use in DApps is a net negative for the industry as a whole.
While evidence needs an active community to ensure security, DApp programmers want to facilitate trading – and trading needs tokens. The advent of floating mortgages has therefore been welcomed by both parties and especially by DApp authors, who have been forced to offer higher and higher APYs to convince users that their assets are best used in lucrative DApps than mortgage agreements.
By maintaining a steady supply spread, dealing with worrying price fluctuations and helping users create higher rewards (payouts in collateral plus DApp returns), betting participation is one of the brightest innovations in the short history of DeFi. Let’s hope that more parties come to that conclusion.
This article does not include investment advice or advice. Every investment and business involves risk and readers should do their own research when making a decision.
The views, thoughts and opinions expressed herein are the sole responsibility of the authors and do not necessarily reflect or represent the views and opinions of the Cointelegraph.
Lurpis Wang is one of the founders of Bifröst and a pioneer in the field of Web3. He was an early developer of Sina Weibo in full stack. After Lurpis founded Bifrost in 2019, the platform became the first group of teams to use Substrate, it received a grant from the Web3 Foundation and it won the first Substrate hackathon award.
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