Bifrost launches SALP 2.0, unlocking unlimited liquidity for slot derivatives

Polkadot Slot Auctions get their most awaited derivatives program: A Crowdloan through SALP 2.0 expands possibilities for higher incomes.

Bifrost Finance

Published in

Bifrost — One Stake, Endless Opportunities.

8 min readJun 20, 2022

Introduction

Since the so-called DeFi Summer in 2020, the Decentralized Finance has overgrown. Therefore, the resulting financial products have made DeFi the primary path for the systemic growth of major public chains. Polkadot was born with its technical advantages of interoperability and cross-chain communication. It combines multiple blockchains into a unified and scalable network, aiming to solve the isolation and separation between single blockchains, raising this innovative technology to a new level.

Polkadot’s popularity is not only due to its technological innovation: From the users’ perspective, various DApps in the Polkadot ecosystem have brought excellent benefits. At the same time, its subsystem framework supports the value transfer between different blockchains. Therefore, investors can get a more consistent and convenient experience and reduce their cross-chain threshold and cost.

Since the launch of Rococo V1, Polkadot’s special parachain test-net published by one of the Polkadot co-founders at the end of 2020, DOT has increased its value. Last year, the Polkadot Parachain Slot Auction attracted many project parties and investors, which paid attention to the market dynamics and got their spot in the parachain slot auction, making significant profits. On the other hand, users felt the pain of fixed assets and limited investment behavior during the parachain slot auction lock-up period. Today, Bifrost Finance, with the latest SALP 2.0 launch, proposes a liquidity release scheme to solve the lock-up of slot auction assets, providing investors with unlimited liquidity paths.

Slot Auction and Liquidity

First, it is worth spending some time explaining a bit of context to novice readers and investors. As a typical PoS blockchain, Polkadot has set up a Staking mechanism with two purposes: network security and the bottom layer of consensus, which can ensure stability with a high mortgage rate and guarantee the user’s income.

The Polkadot Slot Auction is a project based on Polkadot characteristics, and its underlying financial layer is Staking. Polkadot consists of a Relay chain, parachains, and transfer bridge. The relay chain is the center of the Polkadot network and is responsible for the security and control of the system; Parachains connect and interact with the Relay chain through slots. Therefore, if a new Parachain wants to access the ecosystem and interact with other parachains, it must use the slot to acknowledge the business interaction. 80% of the slots in Polkadot are commercial slots, which are opened by auction.

Polkadot designed an auction method that allows the project to bid for the right to use the slots within a specific lease period, locking a certain amount of Tokens. Only after the lease term ends these tokens can be unlocked, and assets returned. It is worth mentioning that DOT participating in the mining process cannot be used on the auctions. In addition to large projects and institutional parties, retail investors can join a Crowdloan, increasing the number of DOT locked in. In this way, they will increase their chances of success. Naturally, the project will encourage users to participate with an incentive mechanism.

Whether it is a staking, farming or crowdloan auction, there is a pain point of Staking behavior: Staking assets cannot be used during the lock-up period, so users bear the opportunity cost and rely on market risk. The same is true for slot auctions. Therefore, to better address the impact of slot auctions, such as insufficient liquidity, locked assets, and reduced market behavior, Bifrost proposed SALP (Slot Auction Liquidity Protocol). It releases liquidity and brings an effective liquidity solution to users, the Polkadot ecosystem, and even the blockchain networks.

SALP - vsToken & vsBond

SALP aims to release KSM/DOT liquidity locked in crowdloan by generating derivatives. SALP will significantly improve the fund utilization rate of crowdloan and attract more participants who have concerns about the lock-up period to support the slot auction. SALP increases the possibility of successful bidding in an auction for a project. To build a rich ecosystem, SALP can release the power of the locked-up liquidity. Therefore, KSM/DOT could gain more value based on users’ strategies and behaviors.

Participating in a Crowdloan through SALP gives access to two derivatives: vsDOT/vsKSM (Voucher Slot Token) and vsBond (Voucher Slot Bond). vsDOT/vsKSM is the derivative token of the DOT/KSM locked in the slot auction, while vsBond is determined by the supported auction items. If users vote for Parachain A, they will get vsBond — Parachain A, and if they vote for Parachain B, they will get vsBond — Parachain B. Please note that vsBond — Parachain A and vsBond — Parachain B are qualitatively different.

Bifrost started with the Token attribute of participating in the Crowdloan, decoupled its asset attribute from its equity attribute, and designed vsToken and vsBond. In addition to the differences between homogeneous and non-homogeneous characteristics, there are differences in specific performance and use. vsToken can trade at any time or cooperate with vsBond for 1:1 redemption after the end of the parachain lease term. The vsBond can be traded through the vsBond trading market built-in in Bifrost without considering liquidity.

SALP 2.0

Since its launch, the SALP (Slot Liquidity Protocol) has launched derivatives such as vsKSM and vsDOT, successfully participated in the Kusama Slot Auction, and has been linked to Kusama as a parachain. A total of 42 eco-partners have participated in the auction through SALP, with 6,963 active Crowdloan addresses and a TVL of $21,000,000. The amount of derivative liquidity generated by SALP has reached $508,113. These data reflect the remarkable achievements and positive role of SALP in releasing liquidity, helping project bidding, facilitating user market behavior, and reducing opportunity costs.

But as we all know: What is good can continuously be improved. So, based on many market trials and continuous optimization, SALP 2.0 will be launched with some brand-new features to help our users participate in slot auctions, improve asset freedom and release unlimited liquidity strategies.

SALP’s design of vsToken and vsBond has solved the problem of releasing the liquidity of some lock-up KSM/DOT. Nonetheless, users encountered various issues: vsKSM cannot be accepted rigidly alone, the vsBond mechanism is seriously fragmented, and some users’ transaction experience and the whole efficiency in the actual process need to be optimized.

Based on this, SALP 2.0 introduces the mechanism of mutual conversion between vsToken and vsBond. Using the system pricing mechanism, different conversion exchange rates are determined according to different redemption periods to obtain a more accurate vsBond value to realize the conversion from non-homogeneous vsBond with additional value to entirely homogeneous vsToken. It makes the circulation of vsBond smoother and meets users’ needs to release total liquidity quickly.

The specific conversion rules are as follows:

Users participating in crowdloan can convert vsBond into a certain amount of vsKSM at the system pricing exchange rate;
Retail users can purchase vsKSM and convert vsKSM into vsBond at another system exchange rate;
vsBond → vsKSM exchange rate is about 0.6 → 1 (Opportunity cost and Staking annualized income);
When the exchange rate of vsBond → vsKSM is 0.6, the exchange rate of vsKSM → vsBond is 1.25 (The actual exchange rate is 1.666).

vsKSM/vsBond Convert: https://bifrost.app/swap?tab=convert
Bond Market: https://bifrost.app/bond

Not only those who participate in crowdloan but also those who want to invest in derivatives and try different ways of operating at this time can seize the opportunity from the vsToken & vsBond swap mechanism of SALP 2.0 and obtain higher returns.

For example, when the price of vsKSM is stable at 0.5 KSM, a stable rate of return can be obtained according to the lock-up time. The longer the lock-up time, the higher the annualized rate of return: When the price of vsKSM drops, the arbitrage yield of the whole period increases, and the yield of vsBond close to the redemption period increases significantly.

The Bond Market

SALP 2.0 not only updates and optimizes the existing mechanism but also enables users already familiar with Bifrost Dapp to have a better experience and obtain higher revenue and unlimited liquidity. At the same time, it has also launched two new functions: Bond market and Current pledge, which are outstanding derivatives investment options for new users.

The Bond market is a function that automatically matches a vsToken and a vsBond to package their redemption period and yield. It has the same attributes as the traditional bond market. Of course, new users do not need to pay attention to the operating mechanism and underlying structure of slot auctions and crowdloan. They only need to know the primary financial instrument of traditional bonds: seize the favorable opportunities such as interest rate fluctuation and redemption period, improve the yield and obtain the return on investment.

Improved liquidity of vsKSM

The launch of the liquidity staking function improves the liquidity of vsKSM, ensures the liquidity of the Bond market, and provides a more stable environment for user arbitrage. The bottom level and performance of its functions are: support users to carry out vsKSM single currency mining and obtain higher incentives while contributing to the liquidity of vsKSM. When the liquidity of vsKSM is improved, the exchange transactions of vsBond and vsKSM are increased, the number of vsBonds in the SALP 2.0 agreement is also increased, which can provide more vsBonds to the market and increase the matching of vsKSM-vsBond.

What is Bifrost

Bifrost is a web3 derivatives protocol that provides decentralized cross-chain liquidity for staked assets. By leveraging the cross-consensus message (XCM) it can supply cross-chain liquid staking services for multiple chains.

Bifrost’s mission is to provide standardized cross-chain interest-bearing derivatives for Polkadot relay chains, parachains, and heterogeneous chains bridged with Polkadot. Furthermore, by aggregating over 80% of PoS consensus chains’ staking liquidity through cross-chain derivatives, our protocol lowers users’ staking threshold, increases the multi-chain staking ratio, and improves the application of the ecosystem interest base by creating a three-way positive cycle for the StakeFi ecosystem by empowering users, multi-chains, and ecosystem applications.

Bifrost has raised over USD 2M from top-tier venture capital firms by the likes of NGC, SNZ, DFG, CMS, and other institutions. In addition to being an early receiver of a Web3 Foundation Grant, Bifrost is also a member of the Substrate Builders Program and the Web3 Bootcamp.