Parallel Deep Dive 1: Unlock the Potential of your Assets with Parallel Liquid Staking

This is the first article in the series of deep dives to introduce Parallel Finance product offerings and the ecosystem built around them. The DOTSAMA ecosystem is burgeoning with different Parachains that are designed to bring about flexibility, scalability, and adaptation of highly specific use cases. Parallel Finance is one of these Parachains and the protocol is set to bring decentralized finance to 1 billion people with its end-to-end DeFi products that allow users to manage their assets with a highly improved capital efficiency. One of these products is the Parallel Liquid Staking, and this treatise will carry out an exhaustive examination of it to help users understand how it works.

Introducing Parallel Liquid Staking

Parallel Finance is a DeFi super Dapp protocol and the first to launch a liquid staking product on the Polkadot network. Apart from liquid staking, other products in the protocol’s Dapp suite include Swap — an AMM-based decentralized exchange for non-custodial autonomous trading and liquidity provision, Decentralized Money Market, XCM-styled Cross Chain Bridge, a native multi-asset Wallet, and Decentralized Crowdloan to help projects securing Parachain slots among others. Interestingly, this suite of DApps is 100% composable, allowing users to perform sophisticated DeFi strategies with their assets on multiple products at the same time.

Conventional staking products require users to lock up their assets in the staking pool for a specified period of time to earn a reward. This method reduces capital efficiency and the utilization rate of said assets and prevents users from accessing other DeFi products that will give them additional yield on the same asset. Parallel Liquid staking is built to solve this problem. The design of liquid staking allows users to unlock the potential of their assets and turn a single asset into a profit-spinning capital by increasing its utilization rate without locking their assets or maintaining staking infrastructure.

Parallel Liquid Staking pallet allows users to deposit their tokens ($DOT and $KSM) in the staking pool and receive a derivative token (sDOT and sKSM) in return. The derivative tokens are interest-bearing, meaning that their value relative to the underlying assets will gradually increase as the staking reward accrue. They can also be used to perform other DeFi activities within the Parallel ecosystem. Some use-cases of sTOKEN include:

• Supplying sDOT to the money market to earn extra interest
• Use sDOT as collateral to borrow other assets
• Trade sDOT for other assets with Parallel Swap

The interface features a stake and unstake tab as well as an information section displaying the real-time staking fee, platform fee, mint value of the derivative asset, and the exchange rate (i.e., of DOT to sDOT) to ensure absolute transparency.

The liquid staking pallet offers an attractive APY of up to 18.5% (15.09% staking APY + 3.41% lending APY) if the users supply their derivative asset (sDOT) to the Money Market, thanks to the composable nature of the Parallel ecosystem. Liquid Staking unlocks the liquidity that has been previously locked away by the conventional PoS staking method and it helps to increase capital utilization efficiency without compromising network security.

Follow this liquid staking guide for a step-by-step tutorial on how to stake your DOT and what you can do with your sDOT.

Unstaking your Asset

Unlike the native Polkadot and Kusama staking where a 28 or 7 days unbond period is required, Parallel liquid staking offers an instant unstake option. This feature allows users to instantly unbond their sDOT into the underlying asset (DOT) for a fixed fee, and the built-in routing function will automatically choose to either swap sDOT for DOT on AMM or unstake through Money Market for the best exchange rate. . The Instant Unstake Option provides liquid staking users a reliable last resort for extreme situations for a predictable exit cost.

Why is Staking Important?

Staking allows blockchain protocols that use the Proof-of-Stake (PoS) consensus mechanism to validate transactions, create new blocks, and secure the blockchain network. ​​Polkadot’s Relaychain uses a derivative of this consensus mechanism referred to as nominated Proof of Stake (nPOS) to secure its network. Most parachains also have a simplified PoS mechanism to incentivize their collators to produce valid blocks.

There are two major stakeholders in the staking process. They are validators and nominators. Validators are active network participants that engage in block production by running their nodes. Nominators are passive network participants. They stake their tokens to earn rewards and are responsible for electing validators.

DOT serves as the staked assets which will be locked when nominating the validators and the collators. However, since Parallel uses liquid staking, users are given a derivative asset equivalent to the staked asset at a 1:1 ratio that they can use to perform other DeFi activities in the protocol. The staked assets can be slashed if the validators do harm to the network. Such design imposes economic risks for the holders of staked assets and requires the holders to have sufficient knowledge to choose validators. In the best interest of users, Parallel Finance algorithmically selects validators with the most reliable nodes recommended by the relaychain (Polkadot network) to minimize slashing risk and the algorithm selects based on delegated staking and a lending pool with a bounded rate.

After deducting the validators’ commission, the staking reward (sKSM) is distributed pro-rata to all stakers in subsequent eras. An era consists of six epochs and lasts ~6 hours.

Parameters for Choosing Validators by Parallel Algorithm

There are a few dimensions when choosing validators in Parallel’s protocol. Here they are in order of priority, from high to low:

• The reputation of the node operator

— The validator should trigger payout regularly

— Single operator with more validators has a higher probability to be slashed if downtime happens

• The commission rate and nomination volume of the validator
• The downtime and luckiness which wraps era points on Polkadot network and slash records in the past
• The amount should not be controlled by one account, nor one active nomination
• Less than 200 DOT will be dropped (it is acceptable on Kusama since there are enough validators on the Kusama network)

Nomination Workflow

• Assign derivative index, bond to Relaychain via XCM,
• Nominate validators are chosen by the Parallel protocol based on the above strategy.
• Distributing funds to each derivative account, based on the fund distribution algorithm
• Bond extra DOT with Stash account if new fund comes in.
• Unbond a certain amount of DOT if a request for unstaking occurs
• Withdraw unbounded and transfer to the Parallel’s system account which holds the unstaked assets.

Extrinsics:

• bond: stash account
• bond_extra: stash account
• unbond: controller account, max unbond queues: 32
• rebond: controller account
• withdraw_unbonded: controller account
• nominate: controller account
• payout_stakers: check validators do submit this call before the deadline.

Delegated Staking

The holders deposit their staked assets into Parallel liquid staking in exchange for sDOT which represents the ownership of the staked assets and shares the revenue of staking activities on the Relaychain. Parallel’s liquid staking protocol then nominates validators with a funded system account. sDOT can also be used as collateral assets in the lending market. Below is the exchange rate between sDOT and DOT:

• TotalActiveBonded, include all derivative accounts’ active bonded amount on relaychain.
• TotalStake, including the total stake amount by all users during the current era.
• TotalUnstake, including the total unstake amount by all users during the current era.
• sTokenIssuance, total issuance amount of sDOT

Interest Lending Pool with Bounded Rate

Parallel’s system account can borrow DOT from the staking pool without collateral, and it won’t be liquidated. To maintain liquidity, the system’s accounts can’t borrow anymore if the utilization ratio is higher than a specific threshold, around 80%. It also starts unbonding staked tokens and repays the outstandings to maintain healthy liquidity in the pool. To mitigate the attack vector on the limited ROI of staking, the interest rate of such a pool is bonded to not exceed the evaluated ROI of staking, which is around 7.5% on Kusama.

The Risk Associated with Liquid Staking

The major risk associated with liquid staking is slashing and it occurs when a validator conducts itself in a way that the system can be negatively impacted such as going offline or acting maliciously toward the network (e.g., running modified software or attacking the network).

In a situation where slashing occurred due to a faulty runtime causing forcing validators offline through no fault of their own, the slashes may be reversed since the slashed asset is added to the treasury. However, if the slashing is legitimate, stakers (nominators) can purchase insurance for their holdings. With this, the slash will be covered off-chain so that users are not penalized. The cap of the compensation will be defined by governance and details about this will be released in the future.

It is essential to mention that the risk of slashing is low since the Parallel nomination algorithm selects only the most reliable validators based on the parameters and metrics mentioned earlier.

Fees Associated with Liquid Staking

Like other DeFi use cases, there are some fees associated with using the liquid staking product. This fee is an insignificant percentage that is charged when users stake their assets and use the instant unstake feature.

Stake fee: When users stake on parachain, in fact, the reward will be calculated after one era, so a portion of the staked amount that equals one era’s reward will be deducted in advance, this part will be reserved on parachain.

Instant unstake fee: Normally, an unstake operation requires a 29 days period for users to receive their assets. However, users can now pay a small fee if they want to redeem their assets back instantly.