Tokenomics Guide - Parallel Finance
Often overlooked by fledgling crypto investors and Web3 natives-in-training, tokenomics is a central element in the success of a blockchain or cryptocurrency. A combination of “token” and “economics,” tokenomics is a broad term to describe the study of token scarcity. Specifically, it addresses scarcity as it pertains to distribution, allocation, and supply. The tokenomics of a project can help a prospective investor better determine if a project is strong and has long-term potential — and ultimately, whether it’s a good investment or not.
As an explanation may not be enough, we will break down what goes into tokenomics by taking a closer look at the tokenomics of Parallel Finance’s own $HKO and $PARA tokens.
Tokenomics of PARA and HKO
PARA is the native token of Parallel Finance on the Polkadot Deployment, while HKO is the utility token for Heiko — Parallel’s sister program on Kusama. Both have mirrored functions on their own respective ecosystems, even though they’re on separate chains. For instance, a user who stakes their DOT will receive PARA rewards, while a user who stakes KSM will receive HKO.
Key Utility Functions
- Protocol Governance
- Transaction Fees
- Network Utility and Incentive
- Security Module Staking
- Kusama Validator Insurance and Incentivization
Protocol Governance decentralizes control by distributing it among the entire network and community, with token holders being able to vote. It is a central aspect of blockchain and decentralized networks. Parallel users who hold PARA or HKO have the ability to vote on all aspects relating to the management and administration of the Parallel protocol. Governance on Parallel includes referenda, network upgrades, council elections, governance action, and more. Just recently, the Parallel community participated in an on-chain vote and decided that HKO should be listed on cryptocurrency exchanges.
While some may shudder at the mention of transaction fees, they are an essential part of keeping a protocol or blockchain running efficiently and securely. Network participants pay fees each time they make a transaction. PARA and HKO are used to pay network fees on Parallel. They are required for all transactions, which include staking, lending, borrowing, crowdloans, swaps, and any other usage of the platform.
Security Module Staking lets PARA and HKO be staked to a security module, in order to hedge risks in case of staking slashes. In return, contributors to this insurance pool will be compensated with PARA and HKO tokens. The insurance parameters are determined by PARA/HKO token governance in the event of a slash.
To keep the network running smoothly, and to ensure that people are utilizing the network, incentives must be in place. Tokens play a significant role in network utility and incentivizing. Think of it this way: a decentralized system requires a decentralized node infrastructure. This decentralized node infrastructure, in turn, is powered by the network of validators and collators. These validators and collators are rewarded in native tokens to incentivize them to keep helping run the network. PARA and HKO are minted on a continuous basis in order to reward collators, and they are also used to incentivize you, the user, with the high reward rates that Parallel is known for.
Continuing the incentives discussion, PARA and HKO will play a part in Kusama Validator Insurance and Incentivization. Kusama non-active validators require PARA/HKO to increase their chances of being selected as an active validator based on our algorithm. The PARA/HKO will be used as the reserve in the insurance pool to cover for slashing risks.
With a newfound understanding of token utility in general, and token utility as it pertains to Parallel — it’s time to take a closer look at tokenomics.
Supply of Tokens
As previously mentioned, tokenomics zooms in on token scarcity — or more simply put — supply and demand. Supply is a great starting point when looking closer at a project’s tokenomics. Note that there is more than one number to look at when considering the supply of tokens. The circulating supply is the number of tokens in circulation currently, the total supply is the number that currently exists, and max supply is the maximum number of tokens that will ever be generated. Each of these numbers are important when looking at a project’s tokenomics from a broader perspective.
For instance, a network that issues an unlimited supply of tokens will likely see a decrease in demand and value, unless a mechanism is in place to burn tokens or slow the increasing supply. When a token is burned, it is removed permanently from circulation. Burning often occurs to decrease the number of tokens in circulation, or to make the asset less inflationary.
The max supply of PARA tokens is 10 billion, while the max supply of HKO is 1 billion. Remember: max supply is the total number of tokens that will ever have been issued, which means the amount in circulation is a much lower number. PARA/HKO will continue to be created in order to reward network participants for using Parallel. The initial circulating supply of PARA/HKO came from crowdloan rewards vesting and liquidity mining.
Excellent! That’s token supply in a nutshell — but how exactly are these tokens actually given out?
Token Distribution and Allocation
Token distribution looks at how tokens are allocated and issued to different groups of people or network participants, and how the distribution is carried out. Tokens can be distributed among many groups, including investors, partners, developers, and team members. Knowing the distribution breakdown can help answer questions like, “Was there a pre-mine, which lets select investors, institutions, and individuals access tokens before they’re offered publicly?” How much are going to validators? Are the tokens concentrated within a small group of holders who can heavily influence the price?
To give you an idea, here is a breakdown of the PARA and HKO token distribution on Parallel.
PARA Token Distribution
HKO Token Distribution
To control the number of tokens in circulation and keep supply and demand stable, tokens are often released over time on a schedule. This way, the circulating supply of tokens doesn’t go up drastically in a short period of time, which helps avoid additional volatility in the market. In addition to tokens being released over time, there is also a locking component in token distribution — this brings us to vesting.
Vesting is the process in which purchased tokens are locked and distributed over time (vesting period). Vesting applies to project team members, advisors, and other early investors who either received or purchased tokens privately, prior to a public sale. A cliff is a set time lock put on tokens ahead of the vesting schedule. Having a vesting period and cliff not only allows early supporters to purchase tokens at a significantly discounted price, but it also helps prevent excess selling pressure placed by early investors dumping their tokens the moment they receive them.
For more details, take a look at the Vesting Schedule and Token Release Schedule for PARA:
PARA Allocation and Vesting Schedule
PARA Release Schedule
Similarly, here are the Vesting Schedule and Token Release Schedule for HKO:
HKO Allocation and Vesting Schedule
HKO Release Schedule
Final Thoughts
Tokenomics may seem like a broad area of study, and in all honesty, that is because it is. There is no single definition on what “tokenomics” means, as tokenomics can look completely different from one project to the next. Hopefully the case study of Parallel’s PARA and HKO tokens served as a helpful framework for this deep dive.
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About Parallel Finance
Parallel Finance is a user-focused DeFi protocol that has evolved into a hub for DeFi use cases and solutions. It features a highly secure suite of DeFi super Dapps that include Staking and v2 Decentralized Crowdloan. The platform is committed to building a decentralized future that empowers the community to increase DeFi capital efficiency, security, and accessibility.
We are also one of the largest parachains in the Polkadot space with over $700M+ TVL and 200K+ active users, and we are backed by some of the most accomplished investors in venture capital and veterans of the financial services space, including Sequoia, Founders Fund, Coinbase, Polychain, etc.
Parallel Finance has a rapidly growing, close-knit team of 90+ professionals. Their backgrounds combine technology expertise with decades of experience in product management, finance, and marketing, coming from top organizations including The World Bank Group, Dash, Crypto.com, ChainLink, Meta, Polygon, Ledger, JP Morgan, Standard Chartered, Amazon, BlockFi, etc., and we’re still hiring.
Stay in touch!
Website: https://parallel.fi
Twitter: https://twitter.com/ParallelFi
Telegram: https://t.me/parallelfi_community
Discord: https://discord.gg/buKKx4dySW
