Crowd Loan is a Polkadot (DOT) crowddsourcing event at Polkadot that allows the community to support project bids in upcoming parachain vending auctions. Users deposit DOT, receive a reward in the project token and return DOT within 2 years (standard leasing period). This mechanism helps projects raise significant capital in DOT tokens, which could theoretically exceed several hundred million dollars.
The obvious disadvantage for users is the need for a two-year DOT lock as they do not have access to liquidity during this lock-in period.
The main financing is private companies and final listing agreements (IPO). Final agreements prohibit insiders in the company, including employees, their friends, relatives and venture capitalists, from selling their shares for a specified period of time. These shares are “closed” so that their owners are not listed on the stock exchange too early after the listing.
To circumvent freezing restrictions, people can make arrangements where they lock in their winnings, or even get money in advance on the day they can sell their assets. Corporate lawyers are starting to block these schemes because they will create unnecessary pressure in the market and in some cases reveal legal risks that the lockout intends to avoid.
Floating wedge concept
Fortunately, this research has nothing to do with the blockchain field, which is not limited to the concerns of private lawyers. We can create claim rights to locked assets by issuing a special type of derivative token that represents these rights to the underlying assets.
Derivative coins are usually minted with a 1: 1 ratio between locked tokens. It can be issued by a liquid betting provider if users send raw assets to the deposit address, or a targeting protocol can send the received tokens directly to each depositor for simpler accounting. The latter mechanism is widely used in Ethereum-based automated market makers (AMMs) and merged lending protocols that issue liquidity pool tokens such as AAVE, Compound or Curve.
Regardless, there is always a clear balance between the market and the final custodian. Each user can claim the base at some point by sending the received tokens back to the bet protocol. If arbitrage is spot, the ratio between the derivative tokens and the locked asset is close to 1 to 1. Otherwise, it may change depending on how quickly the underlying asset is opened.
This concept opens up an emerging market for many Decentralized Finance (DeFi) projects. You can already see quite a few of them providing liquidity for various types of collateral, active games in PoS protocols and other illiquid assets. For example, Lido has absorbed more than $ 6.7 billion in Ether (ETH) in Ethereum 2.0 (which is about 19% of all ETH limited in the Ethereum 2.0 deposit contract). Marinade Finance has secured more than $ 1.6 billion in Solana SOL through its Solana protocol.
The success of liquidity service providers depends to a large extent on the potential size of the closed assets and the efficiency of the investors they target.
Stacking and collecting liquid on Polkadot
The Polkadot Crewdloans design also fits perfectly with the floating wedge. The expected liquidity of group loans can be as high as 20% of the DOT inflow (equivalent to an impressive $ 8 billion). Second, audience members are usually the most active investors, always looking to maximize their profits. Stacking liquids seems like an attractive option for them.
Of course, the more advanced DeFi Polkadot teams are already benefiting from this utility case. They all offered their version of Liquid DOT, embossed on their chains in the ratio 1: 1 for the first DOT locked on their rigs. Here’s what these projects are currently offering their users:
Liquid staking is, by and large, a great opportunity for Polkadot-based DeFi projects to increase their Total Locked Value (TVL) significantly from the start. Liquid DOT is cash that you have over the two-year rental period.
This opportunity can not be missed by major market players. For example, Binance offers a floating DOT called BDOT, and the stock exchange plans to use this liquidity for both trading and speculation. But we will only look at the liquidity position through ecosystem projects, so Binance USD (BUSD) and shells on other exchanges will not be available today.