Parallel Finance: decentralized money market protocol for Polkadot

Polkadot began the last part of its journey before the final release by starting parachain auctions on Kusama. We are already seeing a plenty of successful projects gaining traction (like Moonriver) but there are still many interesting projects hiding out there without a bigger publicity — one of the being the Parallel Finance!

We have a “common good” parachain for minting tokens (Statemine), DeFi parachains (Karura, Bifrost), smart contracts ones (Moonriver, Shiden) and those which deal with the private data (Khala, Calamari). But we still don’t have any lending protocol that is worth this awesome ecosystem. And this is why Parallel Finance with its canary Heiko is waiting on the sidelines. But for how long?

Parallel Finance explained

Parallel finance is a decentralized money market protocol that allows you to lend, stake and borrow in the Polkadot ecosystem. Let’s take a closer look at the key features of Parallel finance as well as some important characteristics.

Easy-to-use interface

In a very intuitive and easy-to-use interface, you can lend and stake your DOT and KSM tokens and at the same time earn double the interest yield and use your assets as collateral for borrowing as well. All of these functions literally with one click!

Normally, when you unstake your DOT tokens you need to wait 28 days for them to be liquid. For KSM it's 7 days, but still, it’s not instant. With Parallel, there is no need for the unbonding period to be fulfilled, you can use your coins instantly for whatever action you want.

Automated validator selection

When you stake your DOT tokens in polkadot.js wallet, you need to go through the manual selection of up to 16 validators from a list of hundreds. When doing so, you need to watch their reputation and if they are not oversubscribed. But it’s not a one-off process, every once in a time you need to re-check those, otherwise, your staking rewards might be decreased.

Parallel Finance fixes this by having an advanced staking validator selection strategy, that automatizes this process with high efficiency and maximization of staking yields. It uses the reputation-determining algorithm that is applied automatically to the validators and their behavior.

Parallel as an institutional-grade DeFi parachain

Parallel Finance will become the money market protocol on Polkadot by enabling all the necessary implementations. That involves lending and borrowing assets, liquid staking, margin staking and auction loans.

Liquid staking

There is a serious competition issue between lending and staking. By staking your assets, you are securing the network such as Polkadot or Kusama and you receive a staking reward in return. But what if the reward is lower than the possible gain from lending the tokens in the lending protocol? Will you sacrify the network security for more gains? Well…many pragmatic people will do so because it’s more profitable.

Staking-lending dilemma, source

By using the Staking derivate protocol of Parallel Finance, you can benefit from both rewards while still securing the network! And that's a good deal, don't you think so? You simply use bond tokens, DOT or KSM in our example, in a protocol that enables liquid staking and you will get not just staking rewards, but also a liquid version of the token like aDOT in Acala that you can lend or further use in the DeFi ecosystem.

Leverage staking

You can double or triple your interest yields using leverage staking/margin staking.

Leverage staking

Let’s look at an example to get you in. You have a DOT token and stake it with Parallel Finance. By doing so, you get back xDOT that you can now lend on a money market and borrow more DOT. Then you can send those borrowed DOT to the Automated Market Maker and receive more xDOT.

Leverage staking, source

Parallel Insurance Pool

Parallel also provides insurance in case something bad happens — such as a selected validator is slashed (together with your stake) or when your funds might be liquidated when the price of the collateral asset falls below the liquidation limit.

By using Parallel Insurance Pool, the conversion rate between like-kind assets tokenized through Parallel is guaranteed by an insurance pool. This pool also protects against the risk of liquidation if collateral dips below the liquidation threshold due to an unfavorable conversion rate.

Insured staking

For example, if the price of xDOT falls below the expected time-bound conversion rate, a user’s position can be liquidated as a result. But the protocol will use funds collected by the insurance pool to prevent the liquidation.

Dynamic AMM curve

The Interest Rate Curve in Parallel uses an advanced formula to calculate the borrow interest rate depending on utilization.

Dynamic AMM curve

In comparison to Compound or Aave, when utilization falls below 80%, Parallel has a smoother interest rate curve. Meaning that as a borrower, you can expect a smooth upward growth versus the other curves that are quite sharp and can cause a higher interest for a borrower. By having a smoother interest rate curve, it’s also much more user-friendly.

Parallel’s interest rate curve, source

Auction loan

One of the upcoming features is called auction loan. With this solution, individual users will be able to source their auction loans through Parallel Finance’s interface. We have already seen this feature in the form of SALP from the Bifrost that gives users the ability to stay liquid while their KSM/DOT are locked in the crowdloan for the time of the lease period.

Auction loan, source

Cross-chain wallet

Another upcoming application of Parallel will be their cross-chain wallet that will simplify the access of users fund across all the parachains and other bridged networks (like Ethereum).

Canary network: Heiko Finance

Parallel Finance, similarly to other projects like Acala, Moonbeam or Phala, decided to test its functionality in the canary environment using their network Heiko Finance.

Even when/if both Parallel and Heiko will secure their own parachains on Polkadot respectively Kusama, they decided to keep one interface for both projects resulting in a better user experience.

At this moment, Heiko sits in 5th place of the second batch of auctions and it seems that they will secure a parachain slot in the auction #10!

You can join their crowdloan that offers a reward of at least 50 HKO tokens for each 1 KSM, that you lock. Crowdloan can be joined following this link.

Tokens

Parallel Finance will have its own governance token PARA, while Heiko will use HKO. There is not yet information about PARA, but HKO will have a total supply of 1,000,000,000 where 2% of it will be used as a reward for crowdloan participants.

Team

Parallel has a strong team of developers that comes mostly from Stanford University. CEO of Parallel Finance is Yubo Ruan, who is also a founder of 8 Decimal Capital.

Partners

In Parallel Finance project, there are involved top-tier investors such as Pantera Capital, Polychain Capital or Alameda Research. That is a superb list of supporters in our opinion. Besides that, Parallel Finance received a grant from the Web3 Foundation, which is a sign of solid development as well.

Conclusion

Parallel Finance and its canary Heiko will be definitely become an important player in the DeFi ecosystem on both Polkadot and Kusama because a lending protocol is still a missing in this ecosystem.

With their great user-friendly UI, an innovative lending and borrowing system, and margin staking that will allow you to massively increase your interest yields, they’re on their way to success.

If you consider the top tier investors that include Pantera Capital, need for a successful lending protocol on Polkadot backed by significant capital and amazing features offered by Parallel to their users — well, you just found a hidden gem in the Polkadot ecosystem :-)

Source: Parallel finance white paper

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Czech bloggers & community builders. We are validators of Polkadot, Kusama, Darwinia, Crab, Bifrost, HydraDX, StaFi, Centrifuge under the name: POLKADOTTERS