Parallel Finance: A Money-Market and a DeFi Hub on Polkadot

In this article, we’re going to provide a deep dive into Parallel Finance. Parallel finance is a parachain on the Polkadot network that is designed to bring together money-markets and Decentralized Finance (DeFi). This will create a powerful hub where users can access a wide range of financial services. Let’s take a brief look at the history of Parallel Finance and find out what its goal is. Then we’ll move on to discussing its main features, as well as what PARA token utility it has and how the governance works.

In basic terms, Parallel Finance is a DeFi Hub that is continuously developing in many different directions. On the one hand, Parallel finance develops its product and service portfolio by continually adding new financial technologies to its platform. On the other hand, Parallel finance, which is based on Polkadot, is growing to other ecosystems such as Ethereum and Solana.

What is Parallel Finance?

Parallel Finance Polkadot - What is Parallel Finance

Parallel Finance is a decentralized money market protocol on Polkadot that runs as a parachain. Its mission is to get DeFi to one billion people. Staking, lending, and borrowing services will be available through the protocol. The platform also offers additional incentives to users that participate in Polkadot and Kusama crowdloans. It’s a win-win situation. It allows projects to tap into additional capital when fundraising for parachain slots, increasing their chances of success.

Despite their original aim of establishing a money market protocol, Parallel Finance has blossomed into a strong DeFi Hub on Polkadot, providing a wide range of applications and services. Parallel Finance also offers liquid staking, liquid crowdlending, yield farming, and stream protocol services to Decentralized Autonomous Organizations. It also has an Automated Market Maker that supports both dynamic and stable swaps.

Another key element in development is Omni, which wants to be the first NFT money market on Ethereum. After that, it will expand to Solana and Polkadot.

The core team at Parallel Finance Inc. currently maintains control of the project. However, as the protocol advances, governance will be transferred to the community and elected council members.

A Brief History of Parallel Finance

Parallel Finance Polkadot - Parallel Finance History

Yubo Ruan launched Parallel Finance in April 2021 as a means to enhance liquidity and accelerate the widespread adoption of the Polkadot ecosystem. The protocol is based on Substrate from Polkadot. Heiko Finance, the sister project of Parallel Finance on Kusama, was introduced in October 2021. Parallel Finance followed shortly after, winning Polkadot’s fourth ever parachain auction on December 17th 2021. The protocol’s lease slot will last until October 2023. Protocol upgrades will initially be launched on Kusama and Heiko for testing purposes before being rolled out across Polkadot as with other protocols in the ecosystem.

Parallel Finance is the first decentralized finance protocol built on top of Polkadot. Users may connect their Clover or PolkadotJS wallets to access both Parallel and Heiko Finance through the same app. The support for additional wallets such as the Parallel Wallet, Metamask, and Phantom will be updated gradually. The mainnet of the protocol is live. Users may already engage in money markets, staking, liquid crowdlending, and AMM on the platform.

In 2021, Parallel Finance raised a total of $22 million in three funding rounds. In June, the protocol raised $2 million in a Seed round with Polychain Capital, Pantera Capital, Sequoia Capital, and Alameda Research as investors. In November, Parallel Finance raised an additional round of funding from Sequoia Capital, Futures Fund, and Shima Capital.

Parallel Finance’s Components

Parallel Finance Polkadot - Parallel Finance Protocols

Parallel Finance is a Polkadot parachain that runs on the Substrate framework. The protocol will provide the following decentralized finance services to the Polkadot ecosystem, with some planned for the Ethereum and Solana ecosystems as well.

Money Markets / Lending & Borrowing

Parallel Finance will employ a pool-based approach for its borrowing and lending services. Users will be able to deposit tokens into the pool in order to earn interest. Over-collateralized loans enable users to borrow from the pool. Rates are set by demand. When the pool’s usage proportion rises, Parallel Finance’s curve interest rate model ensures that interest rates rise in tandem. To keep money market liquidity, this encourages lenders to supply greater capital. The loan-to-value ratio of a particular borrow market determines borrowing restrictions.

When a borrower’s loan-to-value ratio dips below a pre-determined threshold, their underwater collateral is put up for sale at a liquidation discount. This will be triggered by an off-chain liquidator running on Substrate. Information is retrieved by the off-chain auto liquidation algorithm to compute the health factor of outstanding loans. Pricing information is provided by an oracle. The algorithm then transmits liquidation orders to the on-chain liquidation pool, where liquidators may execute trades. Parallel Finance will also allow users to make flash liquidations, allowing them to act rapidly without needing any money.

Leverage Staking / Liquid Staking

Parallel Finance introduces the idea of Leveraged Staking to help DOT/KSM stakers earn more yield and liquidity. Stakers on Parallel Finance are given a derivative, xDOT, as a proof-of-stake for staked DOT. xDOT will be useful in Parallel Finance’s money markets and AMM, allowing stakers to earn additional income on top of their staking benefits or use their xDOT to borrow more capital, which will further leverage their position.

Steam Protocol – DAOFi

DAOFi is a decentralized financial architecture that allows organizations and people to exchange funds. The term “DAOFi” combines the words “DAO” and “finance.” Parallel finance’s DAOFi strives to establish a more equitable and transparent ecosystem in which decentralized projects or groups can manage their treasury toward their goal of decentralization.

The group was aware of the problems that occurred with Wonderland on Avalanche, as well as how dangerous it is to handle a fund alone. There are no approved processes in the Polkadot ecosystem for validating that decentralized projects have a secure set of fund management. Secure and transparent fund management is more important than ever as the financial system expands, which is why it’s a must-have for builders and operators. The DAOFi offers fund management solutions that can help to mitigate the problems.

Liquid Crowdloans / Auction Loans

Parallel Finance’s platform allows users to participate in auctions for a variety of parachain crowdlending opportunities. Parallel Finance may work with projects that are bidding for parachain slots on the platform to be listed. Users are enticed with extra rewards from projects and, in PARA, to provide DOT/KSM via the auction loan feature. This allows initiatives to access more liquidity, which helps parachain bidding performance.

There are several benefits to lending in the secondary market. Individuals who contribute to crowdlending on other platforms must put their DOT/KSM away for the duration of the lease. On Kusama, projects can rent parachain slots for up to 48 weeks and on Polkadot up to 96 weeks. These locked tokens provide no return. Parallel Finance aims to alleviate this liquidity problem by providing derivative tokens cDOT/cKSM as a receipt to contributors. 

Parallel Finance will use the aforementioned utility tokens to build liquidity in the money market. These tokens will be tradeable in the AMM and will have value in the parallel finance economy. After a project’s lease term has ended, users will need their derivative tokens to claim their DOT/KSM.

The multi-sig wallet and the Auction Bot are used to secure a bid loan. Parallel Finance has drawn up a list of 12 prominent industry participants who will join them as multi-sig signers. The multi-signature signers are in charge of the funds’ custody. The Auction Bot sends the contributions to the correct crowdloans after a transaction is finalized.

Parallel Wallet

The Parallel Wallet extension is the non-custodial multi-asset native wallet solution of Parallel Finance that aims to provide a one-stop DeFi experience for users. Users can use this product as an entry point to help them protect and grow their assets using Parallel Finance DeFi solutions. Users may authorize transactions and deploy on the Parallel Finance super DApp platform, such as asset transfer, staking, swap, and lending.

Automated Market Maker & Yield Farming

Parallel Finance will release two AMM’s. Users may create yield by providing liquidity. The dynamic AMM will be used for assets without a 1:1 ratio, and the constant product formula for price discovery will be utilized. This is the same formula pioneered by Uniswap.

The stable AMM is based on Curve and will allow for the seamless exchange of different versions of DOT and other 1:1 assets such as USDC-USDT. To minimize slippage, a mix of constant sum and constant production equations will be utilized. 

The AMM will include a three-sided pool made up of a native token, an interest-bearing token, and a stability pool. The stability pool is used to guarantee slippage in swaps that use up to 1/6 of the pool. Slippage will occur if the swap involves more than 1/6 of the pool.

NFT Money Market – Omni

Omni is a decentralized protocol that aims to provide lending and borrowing services for a variety of assets on the Ethereum blockchain. Users may lend their NFTs and ERC-20 tokens in order to earn interest income. Furthermore, users can use their lent assets as collateral for borrowing assets.

The Omni protocol’s aim is to provide users with access to money and profits without having to sell their assets. Users contribute their assets to a pool, which generates interest and allows them to borrow from the pool, securing their assets with the collateral.

The Omni builders are confident that tokenized assets will proliferate in the future, with various forms of usefulness, apps, and connection to real-world assets. The creators’ ultimate goal is to improve price discovery and liquidity in the NFT ecosystem by adding value to it through protocol upgrades.

Users who deposit their NFTs and ERC-20 tokens to the protocol can benefit from:

  • Earn interest yield: Borrowers that use the NFT’s can earn interest in the form of sOMNI tokens, while ERC-20 tokens supplied earn interest in sOMNI tokens as well as a portion of the interest paid by borrowers.
  • Borrow from the lending pool: Users can borrow funds from the ERC-20 lending pool after they have been given an asset. Users may keep their borrow positions as long as the collateral value is high enough to meet the liquidation threshold. Borrowers can pay back their loans over time.

Users of Omni may keep the utility and safety of their possessions by keeping them in NFTs without having to sell them. The protocol includes a claims reserve, flash claims, and airdrop insurance, as well as tokenized NFT and escrow.

Parallel Finance Token Utility (PARA)

Parallel Finance Polkadot - Parallel Finance Token - Parallel Finance Crypto

Parallel Finance’s PARA Token is the native coin of Parallel Finance on Polkadot, given to important participants and relationships in the ecosystem. The HKO utility token, which is Parallel’s sibling project, will have comparable capabilities mirrored on Kusama.

The first and primary function of PARA is to serve as a governance token. Through governance, including governance action, referenda, network upgrades, council elections, parameter changes, integrations, modifications to incentives, and all other managerial activities, PARA holders will be able to vote on all aspects related to the management and administration of Parallel Protocol.

Second, PARA may also be used to pay network expenses directly. It will be required to complete all transactions, such as staking and lending, as well as crowd loans, trading, and other peer-to-peer and pool deals.

Third, PARA is also used to encourage collators and validators, the network’s decentralized node infrastructure. To reward collators, new PARA coins are created on a regular basis.

Finally, PARA can be staked to a security module in order to hedge risks and, as a result, insurance pool contributors will get compensated with PARA tokens. In the instance of a slashing, PARA token governance determines the insurance conditions.

Parallel Finance Governance

Parallel Finance Polkadot - Parallel Finance Governance

The core team, which included the original architects and developers, served as decision-makers at the outset. The first version of Parallel Finance began with centralized platform control. However, over the course of 2022, governance will decentralize as a result of the PARA token launch, allowing tokenholders to cast votes. Individuals may improve their reputation by using the platform frequently, which gives them more power to vote.

Parallel Finance’s token holder-elected council will perform daily activities like as issuing treasury motions, setting interest rates and collateralization ratios, in the same way as Polkadot’s mainnet. Both the council and token holders will have a say in what should be done. The success of each proposal will be decided by token-weighted voting.

Substrate allows for parallel evolution of the blockchain runtime without requiring a network fork or choke. On-chain deployment is planned for proposed runtime upgrades that get more approvals than vetos.

Parallel Finance’s on-chain governance is established using Substrate pallets, including the collective, democracy, membership, treasury, and elections-phragmen pallets. This is comparable to how Polkadot and Kusama are governed. The key governance components of Polkadot are as follows: Democracy, Council, Technical Committee, and Treasury.

Wrapping Up

Parallel Finance is a parachain on Polkadot that provides a money-market and DeFi hub. The project has a native coin, PARA, which serves several functions including governance, network expenses, and staking. Parallel Finance’s governance is established using Substrate pallets and is comparable to how Polkadot and Kusama are governed. Wrapping up, Parallel Finance is an interesting project to keep an eye on as it seeks to provide a one-stop-shop for all things DeFi-related.

Aris Ioannou
Aris Ioannou
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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