The Path to the Creation of the First Slot Auction Liquidity Release Protocol SALP
Bifrost is a DeFi parachain uniquely designed to utilize derivatives models to unlock users’ liquidity of their staked assets. As a foundation, Bifrost has designed and tailored a liquidity release mechanism for multiple staking scenarios and introduced the native staking derivative vToken. Please refer to “New DeFi Track: How to Balance staking voting rights and rewards” for further details. Through staking derivatives, Bifrost will import many high-quality assets from other public chains for the Polkadot ecosystem.
Article “New DeFi Track: How to Balance staking voting rights and rewards”:
Slot Auction: what does it mean？
A Slot Auction is a resource competition model unique to Polkadot. Polkadot is a sharded network consisting of relay chains and parachains. The parachain’s shared security can be realized by letting the validator of the relay chain be responsible for verifying the blocks. But in this mode, the number of Parachains that the relay chain can access is limited.
To allocate the limited parachain slots to more valuable parachains, Polkadot will use auctions to allow parachain projects to compete for slot leases. The method of competition is to stake DOT to the relay chain. The bigger is the staking amount, the more likely it will obtain a slot. This process is called a Slot Auction.
Parachains can raise DOT from their respective communities through Crowdloan when bidding for slots. DOT holders can choose to stake their DOT and contribute to any project they support. In this process, Crowdloan participants inevitably lose the liquidity of the DOT they hold.
What Bifrost is trying to do is to unlock liquidity by issuing Slot Auction derivatives. It will allow crowdloan participants to use derivatives to trade at any time and avoid the opportunity costs associated with staking. Moreover, it will let bidding project owners attract more DOT holders who are not willing to lose opportunity costs and increase the success rate of bidding.
Design points for Slot Auction Derivatives
When we design staking derivatives, we aim to solve the problem of the Non-fungible derivatives caused by choosing different validators and settling the staking reward. We select validators through the voting market, eliminating the Non-fungible issue. For the latter, we use the exchange rate change mechanism of derivatives and underlying assets to express interest-bearing attributes.
The difficulty with the Slot Auction derivative design is the inability to erase Non-fungible: DOTs/KSMs contributed to different projects with different exit time. Various projects receive other lease expiry dates for their parachain slots.
It leads to creating different derivatives for different parachain projects, and building various derivatives will the liquidity limit.
Bifrost SALP Solution
Bifrost has developed SALP (Slot Auction Liquidity Protocol) based on the idea of “decoupling” to solve these problems.
SALP will create two derivatives for Contributor, splitting the fungible and Non-fungible derivatives of the Slot Auction into two derivatives: vsDOT (Voucher Slot DOT) and vsBond (Voucher Slot Bond).
vsDOT is a fully fungible asset that can be used to circulate on exchanges or used in DeFi.
vsBond is a semi-fungible asset given to different projects and will create various derivatives due to other lease expiry dates. For example, if Parachain A participates in an auction and is awarded a lease for the slot 2022/1/20–2023/10/20, then SALP will create vsDOT for the participant and an equivalent amount of vsBond-2023/10/20. vsBond expresses a time unrelated to the start of the lease, but only to the end of the lease. It is because redemption is only possible after the end of the lease.
Coupling and Redemption
vsBond can be synthesized 1:1 with vsDOT at any time and then converted into fDOT (Future DOT) after synthesis. fDOT is a semi-fungible asset with an expiration date (like vsBond). After fDOT expires, the same amount of DOT will be redeemed.
For example, 1 vsDOT and 1 vsBond-2023/10/20 can synthesize 1 fDOT-2023/10/20, and 1 fDOT-2023/10/20 can be used to redeem 1 DOT on and after 2023/10/20. Before the redeemable date, fDOT is essentially a futures asset that can redeem DOT on a specific date in the future.
Although users can use vsDOT and vsBond to synthesize fDOT at any time, to achieve better liquidity, we recommend holders synthesize and redeem them directly on the expiry date. The reason is that the liquidity of vsDOT is much greater than that of fDOT and vsBond. Compared with the holding of 1 vsDOT +1 vsBond, 1 fDOT is realizable at any time.
While vsDOT can achieve its liquidity in the DEX of Polkadot Ecology, vsBond will require Bifrost to build a separate trading marketplace. Bifrost plans to support trading in vsBond and fDOT.
Derivatives Price Expectations
The value of an fDOT depends on how long it has left until it is redeemable. The price of an fDOT can be estimated by multiplying the price of the DOT by a specific discount rate, for example, on October 20, 2022, you have an fDOT — 2023/10/20, and the discount rate at that time is 10%, then the price of this fDOT is 0.9 DOT.
If you are holding not 1 fDOT but 1 vsDOT and 1 vsBond-2023/10/20, and we know that you have 0.9 DOT for both of them combined, what are 1 vsDOT and 1 vsBond-2023/10/20 worth, respectively? We predict that 1 vsDOT ≈ 0.5 DOT and vsBond-2023/10/20 ≈ 0.4 DOT, as the discount rate is fully reflected in vsBond and the actual price will fluctuate up and down from an equilibrium value on the exact supply and demand situation in the market.
For fDOT and vsBond, there is a situation to be aware of: the price of fDOT will increase as it gets closer to the redemption date, but its value will no longer increase after the redemption date. There is no difference between the utility of the overdue and unredeemed fDOT and the fDOT that has just expired. For example, on October 20, 2023, 1 fDOT-2023/10/20 and 1 fDOT-2022/12/30 can only be redeemed immediately back to 1 DOT, no more. The same is correct for vsBond. vsBond that is not synthesized after the expiration date will not increase in value. Therefore, users who hold expired vsBond or expired fDOT should redeem them in time, and there is no need to continue holding them.
Why do we need fDOT?
Some of you may be wondering why there is an additional intermediate step of the synthesis, fDOT, when you can redeem DOT’s using vsDOT and vsBond. It is because fDOT may be easier to understand than vsBond (as an asset with similar price properties to traditional futures), potentially leading to a broader liquidity scenario. In contrast, vsBond is still somewhat “alien” to the conventional financial derivatives market and not easily compatible. Therefore, adding a derivative would leave more possibilities for the derivatives trading scenario.
SALP Technical Implementation
The core of the technical implementation of SALP is cross-chain, to implement the logic of Contribute Mint and Burn Retire through trusted cross-chain messaging.
The user contributes to the relay chain, the message of a successful Contribution goes to the Bifrost chain.
The user initiates a Burn on the Bifrost chain. The message goes to the relay chain, the Bifrost SALP module on the relay chain operates to Retire for the user. The Retire success message goes to the Bifrost chain, and the derivative Burn transaction completes.
Bifrost plans to bid for Polkadot’s Parachain slot, and once it becomes a Parachain, the above cross-chain logic can be implemented using Polkadot’s XCMP cross-chain messaging protocol. However, when Bifrost is not yet a Parachain, or when other constraints (e.g. XCMP is not yet stable) make it impossible to implement cross-chain messaging based on XCMP. A multi-signature plan will also be used to implement SALP first.
The multi-signature plan is used to validate and deliver cross-chain messages and perform Contribute and Retire through a multi-signature account they manage instead of the SALP module.
SALP Next Step
Kusama is Polkadot’s Canary network. Bifrost’s SALP business has been put into practice on the Kusama network, and it has supported the slot auction of six networks, including Bifrost itself, and has minted a total of 137,757.7455 vsKSM and vsBond. The remaining six are Basilisk, Altair, Kintsugi, Parallel Heiko, Picasso, Bitcountry, and Quartz.
Nevertheless, as the first version of the Slot Auction Liquidity solution we developed, SALP is still in the experimental stage. It will undergo the test of Liquidity construction and Redemption scenarios in the future. Bifrost will continue to iterate and optimize based on feedback.
With Polkadot’s official website announcing that the Polkadot mainnet slot auction opens November 11th, Bifrost has deployed the SALP business on Polkadot on November 9th, opened the vsDOT voting channel, and supports more bidding for parachain candidate projects. For voting tutorials, please refer to Article: [Tutorial | How to participate in the Polkadot slot auction through Bifrost SALP, minting vsDOT](https://forum.bifrost.finance/t/1524). At the same time, it is planned to open vsDOT Derivatives minting and Transfer on November 11th to upgrade version v0.9.8. Users can view the number of vsDOT and vsBond through My SALP module after Contribute.
We see that Polkadot is working step by step to realize its RoadMap. An ecological picture of the Web3.0 era has taken root profoundly and sprouted. Bifrost will be committed to serving more Liquidity release scenarios and becoming an essential infrastructure in the Polkadot ecological landscape.