Parallel Heiko Money Market — Earn Additional Yield from Lending or Collateralizing your Assets
Money markets are at the core of DeFi’s attempt to revolutionize traditional finance by revamping how conventional lending and borrowing are done. They form one of the most fundamental mechanisms of a healthy economy. They allow users to put their idle assets to work — enabling them to borrow money by supplying collateral to the market and allowing others to deposit (lend) their assets to earn yield and compound their rewards. Due to this, their protocols locked the highest value in the industry alongside liquidity protocols.
While DeFi remained a game-changer in finance, the fundamental design and purpose remain primarily unchanged — lending, borrowing, and supplying collateral. However, with DeFi, an era of permissionless and fully decentralized protocols that allow people to interact with and utilize their assets for additional return was birthed.
As a trade-off for borrowing assets supplied by lenders to the money market, borrowers pay interests that are allotted to lenders as incentives for their deposits. The interest rate is usually a function of the supply and demand rate of the asset to ensure that there is enough liquidity for market participants (borrowers and lenders) every time. Usually, when the supply of an asset is high and its demand is low, the interest rate is generally lower, and vice versa. There are a lot of money markets in the DeFi industry, and they compete based on the interest rates they offer and other market parameters such as collateral rates.
Parallel Heiko Money Market
Parallel Heiko Money Market is the native decentralized money market of the DeFi super DApps protocol. It offers lending, borrowing, and a unique form of staking functionality called liquid staking. Our liquid staking functionality features an algorithm that selects the highest performing nodes to maximize staking yield for users. With liquid staking, when someone deposits an asset, e.g., KSM, into the money market, they will receive a minted derivative token (sKSM) that represents their staked amount and can be used to redeem it at a 1:1 ratio. With composability at the core of the Heiko Money Money Market, this derivative token can also be used to participate in leverage staking, where users can lend their derivative token to the market to earn double rewards and compound their yield. Users can further opt to borrow against sKSM to increase leverage.
How does Heiko Money Market Works?
The way the Heiko money market operates is simple and unique. It currently supports KSM and sKSM and will be open to other assets to solidify our financial services layer. Users will be able to use KSM and other assets on the parachain as collateral to borrow. Because of its design, there is room for innovation in the money market project.
The Money Market pallet features a lend tab where suppliers can provide liquidity by lending their assets to the money market and they are rewarded with some of the borrower’s interests for providing liquidity. Parallel Heiko adopts the jump interest model to calculate the interest rate paid by borrowers. When the utilization rate exceeds the kink, the excess portion will apply the jump rate. Kink reflects the utilization rate at which the slope of the interest rate goes from gradual to steep. That is, below this utilization rate, the slope of the interest rate curve is gradual, and above it, it is steep.
*Borrowing and lending rate on Heiko
This interest rate model also helps mitigate the risk of running out of liquidity to satisfy withdrawals since the interest rate is based on the utilization rate of the assets in the market, which defines how much of lenders’ assets go out to borrowers.
If the utilization is less than the jump rate, the interest rate will be calculated as:
utilization * (jump_rate — zero_rate) / jump_utilization + zero_rate
In a situation where the utilization rate is greater than the jump rate, the interest rate will be computed as:
(utilization — jump_utilization)*(full_rate — jump_rate) / ( 1 — jump_utilization) + jump_rate
Users can also decide to collateralize their assets for borrowing other cryptocurrencies in the money market. This helps them hedge when the asset price significantly fluctuates and threatens their trade position. Each currency in the market has a different collateral rate, which reflects the stability of its price. The more stable an asset is, the higher its collateral rate and vice versa. Heiko calculates collateral rate using the following function:
CollateralValue = CurrencyPrice x CollateralRate x CollateralAmount
The collateral utilization ratio represents the percentage of the total borrowed amount that is in the money market, computed as:
The interest rate of the supplied asset is proportional to the collateral utilization rate and borrow rate, and it is deduced as follows:
SupplyInterestRate = BorrowInterestRate x UtilizationRate x (1 — ReserveFactor)
ReserveFactor is the fraction of the interest currently set aside for reserves. We convert a portion of borrow interests into reserves, which may be used for incentives, liquidation protection, emergencies, and others.
When a supplier deposits an asset to the money market, the derivative tokens he receives are issued based on the initial exchange rate, and he can earn interest through the appreciation of the derivative exchange rate. This is computed as:
Parallel Heiko calculates the estimated supply and borrows returns in terms of annual percentage yield (APY). APY is the rate of return gained over the course of a year, although a user may decide not to borrow from or lend assets to the money market for up to a year.
Here is the Parallel Heiko money market guide, and you can also check the lending and borrowing process below to understand how the money market works.
Liquidation
Parallel Heiko understands the importance of liquidation for the money market to thrive and implements a Substrate Off-chain Liquidator. In a situation of sharp price fluctuation, the market health factor will go down to reduce systemic risk and liquidation is triggered. This health factor is the maximum amount you can borrow after you add collateral to the market and it depends on the deposited value and the available liquidity. It is triggered once it is ≤ 1.1 and it is computed as follows:
Health Factor = (Σ Collateral in asset * Liquidation Threshold) / Total borrow in asset
The Substrate Off-chain liquidator is made up of three key components: Auto-liquidation Algorithm, On-Chain Liquidation Pool, and Flash Liquidation. The auto-liquidation algorithm works by calculating the market health factor by fetching the debt, collateral and liquidation ratio of all borrowers in the money market and also the prices of assets from the oracle. If there’s a need for liquidation, it automatically sends a liquidation transaction to the on-chain liquidity pool.
The On-chain liquidity pool is the portal that executes liquidation on the money market. Although a reserve fund is provided in the pool, liquidators can still trigger liquidation with their own fund without any capital in the reserve fund. Once a user sends a liquidation transaction, the liquidation pool will invoke a function in the lend and borrow pool to promote liquidation. In the event of liquidation, there will be a penalty for the borrower and a bonus for the liquidator. The liquidator’s bonus comes from borrowers’ collateral discount and borrowers’ penalty.
Flash Liquidation is Heiko’s new way of liquidation that allows users to send liquidation transactions without any capital. It features a function interface that allows users to liquidate without any assets, aiming to provide a DeFi Lego component with Flash loan, DEX.
About Parallel Heiko
Heiko is the Kusama blockchain-based sister network to Parallel Finance. The platform is committed to building a decentralized future that empowers the community to increase DeFi capital efficiency, security, and accessibility. It features a suite of DeFi super dApps that include Staking, AMM, v2 Decentralized Crowdloan, Wallet, Farm, Cross-Chain Bridge, and Decentralized money market.
We are one of the largest parachains in the Polkadot space with over $700M+ TVL and 200K+ active users and have some of the best investors, including Sequoia, Founders Fund, Coinbase, Polychain, etc. The platform has a rapidly growing global team of over 70 doers from top organizations in and outside the cryptocurrency space, including The World Bank Group, Dash, Crypto.com, ChainLink, Meta, Polygon, Ledger, JP Morgan, Standard Chartered, Amazon, BlockFi, etc. and we are still hiring!
Stay in touch with us.
Website: https://parallel.fi
Twitter: https://twitter.com/ParallelFi
Telegram: https://t.me/parallelfi_community
Discord: https://discord.gg/buKKx4dySW
