Reimagining Parachain Auctions with an Ethereum Vault Strategy
Amidst all of the hype in the DeFi space over parachains, Composable Finance is introducing a new solution which allows for participation in our parachain with ETH or any ERC-20 token asset, rather than purchasing DOT/KSM and leaving it to sit. With our novel approach, we expand our ability to stake DOT/KSM and allow for users to continue to gain profits on their staked assets.
This new solution comes at a critical time; Polkadot’s canary-network Kusama recently announced the deployment of test parachain auctions, a crucial step to full roll-out.
Why Parachains are Important:
For Composable Finance, Polkadot capability is the centerpiece of our ecosystem.
Securing and maintaining a parachain is essential to achieving our mission of composability and interoperability in the blockchain space. We are building a cutting-edge parachain on the Polkadot network which allows for a multitude of different kinds of smart contracts to run together. Our multi-pronged approach allows for expansive possibilities and facilitates interoperability and composability. Due to the unique use case, we sought to make our strategy for parachain procurement innovative, and have the potential to set the example for other organizations seeking parachains in the future.
For cross-chain bridges on the Polkadot blockchain to occur, parachains with smart contract functionality are connected to a central relay chain. Projects that hope to work in the space must obtain parachains by winning limited auction slots by staking the protocol’s native DOT tokens. Slots are limited, and can only be secured through an auction mechanism. In order to win an auction, projects must have a winning amount of DOT. DOT tokens, the governance currency of Polkadot, are used in the system’s proof of stake consensus mechanism and to manage parachain leases. As a result, DOT staking in a parachain is crucial in ensuring a Polkadot-related project’s launch and survival.
How Composable Improves Parachain Procurement:
Similarly, on Polkadot’s Canary network Kusama, the platform’s native KSM token must be staked and a parachain must be purchased in auction using this currency. Thus, the same opportunity cost persists.
In order to maximize our chances of winning a parachain slot, we’re working to reward users who help us stake DOT/KSM with a novel ETH vault strategy.
Typically, projects seeking a parachain rely on Polkadot’s crowdloaning functionality instead of funding the project entirely themselves, or relying on limited grants. This crowdloaning mechanism asks users to migrate their assets over to Polkadot, and stake them in the ecosystem. Or rather, if they are staked in the relay chain, need to relinquish the 20% APY + in staking rewards, to stake into a parachain. Ultimately, DOT/KSM are largely used as assets which are locked up in some manner or another. This is a far cry from the complex DeFi world where receipt tokens and yield farming allow for a trader’s assets to work for them. Overall, this means that the actual contributors of DOT/KSM are not very well rewarded for performing this essential functionality.
In our system, users will deposit their ETH/ERC-20 assets in an unlocked vault. While the asset is in the vault, the assets will be routed through our yield farming strategies in order to increase gains. 50% of the yield from the strategy will be automatically routed to buying more DOT/KSM and increasing the user’s stake in our parachain. The rest will be returned to the user as a reward for staking. The earned APY will be used to purchase DOT/KSM in a centralized manner (there will be future ways to purchase DOT/KSM in a decentralized manner). This DOT/KSM will be used to secure our parachain auction (first from Kusama, then moving on to Polkadot) and allow for the continuation of the protocol.
Users will also receive a receipt token memorializing their stake in the vault, which can be further used to mint Equal Cash (EQLC), our soon-to-be released stablecoin.
This uniquely beneficial strategy is depicted below:
Thus, return for staking in our ETH vault, users receive the following value adds:
- Exposure to Composable Tokens
- Exposure to Polkadot parachain auction
- Exposure to DOT/KSM
- Yield on staking
- Minting Equal Cash off the receipt token from the vault
This simplifies user experience greatly, as well as improving incentives and capital efficiency. All the user has to do is show up with digital assets — we will do all the work to yield farm and create DOT/KSM on the back-end, while the user is able to be rewarded.
Staking DOT/KSM for parachains has a built-in opportunity cost — meaning rewards for stakers are limited in current models. Our goal is to remove this cost with the issuance of receipt tokens and implementation of strategies for maximizing yield. With our ERC-20 based vault, users can get cross-chain exposure, while supporting our parachain. This is an entirely new mechanism that allows for parachain auctions to be more participatory, as anyone with an Ethereum asset can show up and join. Thus, we believe our novel methodology for procuring and running a parachain has the potential to completely change the Polkadot landscape.
In addition to its direct benefits to users, this strategy fits into our overall mission as a platform; one of our main goals is connecting the spaces of Ethereum and Polkadot, and that begins even at the parachain auction level.
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