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Is the full-collateral leveraged NFT lending protocol ParaSpace the "BendDAO killer"?

Laughing

23-02-13 11:06

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Author: 0xLaughing, from BlockBeats

Introduction

NFT lending platforms allow users to borrow liquid assets by collateralizing their NFTs, in order to achieve the goal of unlocking the liquidity of NFT funds. However, these issues are always unavoidable when designing NFT lending:

• How to improve the efficiency of matching between lenders and borrowers?

• How to maximize the liquidity of assets such as NFTs?

• How to support lending and borrowing of multiple asset types simultaneously?

• How to safely and efficiently liquidate in the event of default?

In the NFT lending field, the Peer-to-Peer model represented by NFTfi and the Peer-to-Pool model represented by BendDAO are the most well-known, each providing their own solutions but still lacking in some areas. Recently, a NFT lending protocol called ParaSpace has emerged, with innovations in mechanisms such as "full-position leverage" and "packaged collateral". With the help of Ape Coin's staking and mining activities, it rose to become the second-ranked NFT lending protocol in TVL in just two months after its launch on the mainnet.

This NFT lending protocol, how did it become a rising star? Let's break it down.

ParaSpace Introduction

What is ParaSpace?

ParaSpace is a point-to-pool NFT lending protocol in the encryption industry, which allows users to collateralize and borrow NFTs and fungible tokens. ParaSpace enables users to further invest with underutilized funds and earn profits from it.

In short, ParaSpace allows users to bundle assets of ERC-721 or ERC-20 tokens, and then collateralize and borrow the bundled assets to improve the low capital efficiency of users' on-chain assets.

ParaSpace official Twitter started operating from August 2022.

ParaSpace is launched by the team behind the Polkadot-based DeFi protocol Parallel Finance. The Parallel Finance protocol has an ecosystem of community-centered, composable, and interoperable DAPPs, and has currently launched 7 DeFi products including liquid staking, AMM, DEX, and wallet.

On November 14th, 2022, ParaSpace officially launched its testnet on the Goerli Network, using three separate activities - Traveler, Explorer, and Settler - to incentivize users participating in the testing.

On December 11, 2022, ParaSpace announced the official launch of its mainnet, which has been running smoothly for 2 months so far. 宣布

Currently supported NFTs and ERC-20 Tokens on ParaSpace

Currently, the ParaSpace platform supports a total of 12 blue-chip NFT assets, including BAYC, MAYC, BAKC, Swer Pass, CryptoPunks, Otherdeed, Azuki, Moonbirds, CloneX, Doodles, Meebits, and Pudgy Penguins. It also supports a total of 8 ERC-20 assets, including APE, cAPE, ETH, DAI, WETH, stETH, USDC, and USDT.

Platform Usage

NFT lending protocol TVL ranking

According to data from defillama, the TVL of ParaSpace has continued to rise since the mainnet launch, currently reaching $55.01 million. It ranks second in the TVL ranking of NFT lending protocols, only behind BendDAO, but there is still a significant gap (only about a quarter of BendDAO's TVL).

Currently, the NFTs pledged in ParaSpace

Financing Information and Audit Status

ParaSpace's investors

Regarding project funding support, it is reported that Parallel Finance, produced by ParaSpace's team, has received a total of $29 million in investment, including star investment institutions such as Polychain Capital, Lightspeed Venture Partners, Slow Ventures, Alameda Research, Coinbase, and StarkWare. Similarly, ParaSpace is also backed by these well-known investors, which can be referenced on their official website's investor page.

ParaSpace audit status

Regarding contract security and auditing, according to the official announcement, a total of 7 security audit teams, including CertiK, Trail of Bits, 0xQuit, Secure3, Veridise, SlowMist, and Quantstamp, have completed or are currently conducting audits on ParaSpace. (Audit reports)

ParaSpace Innovative Mortgage Lending Model

Full Position Leverage

Traditional Isolated Margin Pool Model

Like BendDAO, the underlying lending business of ParaSpace also adopts the Peer-to-Pool model. Users can mortgage NFTs in real-time as borrowers, or provide funds as lenders to earn interest paid by borrowers.

ParaSpace's innovation is that it has created the first cross-margin credit system, instead of using the isolated margin pool design used by existing platforms, which will allow users to provide loans with a credit limit for all collateral.

The official introduction article provides an example like this:

Assuming you own 61 BAYC, you decide to mortgage 5 of them for a loan and then purchase another one. Using the existing lending agreement and its isolated margin model, you need to use the 5 BAYC to borrow ETH and then buy new BAYC on the market.

This process has at least two drawbacks:

1. User experience. You need to execute 5 different on-chain transactions and manage these 5 separate lending positions.

2. If any of your loan positions are about to be liquidated, you have no choice but to repay the loan immediately in order to avoid being auctioned off for liquidation.

ParaSpace's "Cross-Margin" NFT lending model

However, by mortgaging your NFT assets through ParaSpace, you will generate a credit limit for yourself and a health score for your entire mortgaged asset portfolio. As long as the health score of your entire mortgaged asset portfolio remains above 1, none of your NFTs will ever trigger a liquidation auction.

This also means that, in order to reduce risk, you can always choose to deposit more collateral (NFT or ERC-20 Token) to maintain a high health factor.

This credit system is similar to a valuation system, which will evaluate the value of all your collateral and automatically approve loans based on that evaluation. Whether your collateral is NFT or ERC-20 Token, or your NFT comes from different NFT series, it doesn't matter. As long as they are collateral types supported by ParaSpace, you can borrow based on their total value.

This is the full-position leverage mode that uses cross-margin.

打包抵押

Collateralized Debt Obligation (CDO)

In addition, when users borrow through ParaSpace, they can package and mortgage their asset portfolios. According to the official example, the maximum amount that users can borrow is based on the weighted collateral factor.

For example, if a user mortgages BAYC worth 80 ETH, 4 ETH, and 800 USDC worth 0.6 ETH, assuming the loan-to-value ratios of BAYC, ETH, and USDC are 30%, 82.5%, and 82.5%, respectively, the total amount that the user can borrow is:

80*30% + 4*82.5% + 0.6*82.5% = 27.795 ETH (or equivalent value in tokens)

When borrowing assets, users will receive an equivalent amount of dTokens (such as dETH, dUSDC, dAPE, etc.), which are responsible for tracking the principal and interest amounts of each block. The interest owed on the loan will accumulate into the total loan amount, which users can repay at any time.

Borrowing ApeCoin to kick off the pledging activity, ParaSpace takes the lead as a latecomer

ApeCoin Staking Goes Live, ParaSpace Launches "Peer to Pool" Staking Program

ApeCoin's "Independent Combination Staking Mining"

On December 6, 2022, Horizen Labs, responsible for creating the ApeCoin DAO staking system, officially announced that ApeStake.io has launched and opened APE deposits. Here is the official announcement.

ApeStake.io's staking and mining system divides user assets into 4 pools based on category, namely ApeCoin pool, BAYC pool, MAYC pool, and BAKC pairing pool. Users need to hold the required assets for each pool and pair them independently, which can be described as "independent combination staking and mining".

BendDAO has adopted "paired staking mining" (source: BendDAO documentation)

On that day, the largest NFT lending protocol, BendDAO, launched the "Joint Pairing Collateral" function. Unlike ApeStake.io, BendDAO has eliminated the restriction of holding assets and adopted a "pairing collateral mining" scheme. Users can participate in collateral even if they only hold a portion of the assets required by the mining pool, which means that users can also mine if they only hold ApeCoin or a certain NFT (BAYC\MAYC\BAKC).

For example, if Xiaoming only has a BAYC (or MAYC\BAKC) NFT in his hand and wants to participate in the official staking mining, he needs to supplement the corresponding ApeCoin of the mining pool he wants to participate in to achieve the highest expected yield. Now, through BendDAO, Xiaoming can participate in mining with only one NFT in addition to choosing the official "independent combination staking mining". Xiaoming can choose to stake his NFT with 0 ApeCoin, and the system will pair him with other co-stakers who stake ApeCoin. In addition, Xiaoming can set the proportion of mining revenue distribution, and the more proportion of revenue he contributes, the easier it is to pair with ApeCoin.

As a way to increase the rewards for matching NFT and ApeCoin holders, BendDAO will charge a 4% user staking yield as a matching service fee.

ParaSpace adopts the "dot pool staking mining" model

As a competitor of BendDAO, ParaSpace had not yet launched its mainnet at the time, so it chose to hold an ApeCoin liquidity pool pre-staking event, offering a 30% APY for Ape Coin deposits from December 5th to December 12th.

On December 11, 2022, ParaSpace announced the official launch of its mainnet, and also opened up the "pairwise pool staking mining" mode for Ape Coin. Similar to BendDAO, it also eliminates the restriction of holding assets. Users can mine even if they only hold ApeCoin or a single NFT (BAYC\MAYC\BAKC). However, for NFT holders, there is no need to wait for other asset holders to pair up, and they can complete the "stake NFT - borrow Ape Coin - combine staking mining" process with just one click.

ParaSpace's "One-Click Configuration"

Using the same example as before, if Xiao Ming only has one NFT, BAYC (or MAYC\BAKC), or does not have enough Ape Coin to pair with his NFT, he cannot participate in Horizen Labs' official staking and mining activities. However, he can now achieve the highest expected yield through ParaSpace:

1. On the "Ape Pairing Page" of the official website, select "Pair $APE" below the NFT you want to pair.

2. On the pairing page, you can enter two types of $APE for pairing: one is $APE from your own wallet, and the other is $APE from the lending pool within the platform;

3. Then click on "pairing" to complete the process.

This only requires one configuration to complete the three steps of "staking NFT - borrowing Ape Coin - combined staking mining", reducing transaction friction. For the case of single staking Ape Coin, the staker's earnings consist of two parts: the original staking earnings and the interest earnings as a lender.

However, ParaSpace, which launched its ApeCoin staking business almost at the same time as BendDAO, has fallen behind from the beginning despite its convenient "one-click configuration" and instant pairing with "point-to-pool" advantages.

同样也是「点对池」，业务不同，效果不同

Same as "spot pool", different business, different effects

The process of the gradual popularity of NFT lending in BendDAO's "spot pool" can be traced back:

Due to the problem of insufficient liquidity and difficult pricing of NFT, the "peer-to-peer" mode of matching lenders and borrowers through NFT lending protocols such as NFTfi is inefficient. BendDAO's "pool-to-pool" lending model for NFTs of the same series is priced at the floor price, which allows borrowers to borrow from the lending pool immediately after mortgaging their NFTs. However, the disadvantage is that rare NFTs or those with valuations higher than the floor price cannot borrow at market fair value, resulting in low capital efficiency.

You can see that the "spot pool" lending model for NFTs has improved the problem of NFT illiquidity to some extent by implementing "instant borrowing of NFTs". Therefore, BendDAO, which uses this model, is more popular among users in the NFT lending business. However, the situation is different for Ape Coin's lending.

BAYC and Ape Coin prices have been following a similar trend

For Ape Coin staking mining, we know some prerequisites:

1. The maximum APE quantity that can be paired with collateral mining is: BAYC is 10,094 $APE, MAYC is 2,042 $APE, and MAKC is 856 $APE;

2. The correlation between BAYC/MAYC/BAKC and Ape Coin prices is very high. For example, since the launch of self-collateralized mining, the price range of $Ape has fluctuated between $3.2 and $6.4, while the floor price range of BAYC has fluctuated between $70,000 and $124,000, and the price trends are basically consistent.

On this premise, BendDAO has launched "paired staking mining", which allows users to mortgage their NFTs on BendDAO for loans or trading during the staking mining period. In addition, on December 20, 2022, BendDAO announced in a statement that the mortgage ratio of BAYC and CryptoPunks has been increased from 40% to 60%, and the mortgage ratio of MAYC has been increased from 30% to 50%.

Therefore, the funds borrowed by pledging NFTs such as BAYC on BendDAO are sufficient to purchase Ape Coin required to achieve the highest expected rate of return.

Comparing BendDAO with ParaSpace, they actually have the same approach in "mortgaging NFT to borrow Ape Coin and then pairing". Ape Coin is a homogeneous token, which does not have the characteristics of insufficient NFT liquidity and difficult pricing. The matching efficiency of mainstream homogeneous token lending/trading is high. ParaSpace's "one-click configuration" function implemented by "spot pool" only simplifies the operation steps and does not have an absolute advantage.

除此以外，BendDAO can also be "peer-to-peer" self-matching, giving users greater flexibility; as the largest NFT lending protocol, it has long been the first choice for many blue-chip holders to borrow and lend, with high visibility and user stickiness.

At that time, ParaSpace and BendDAO had consistent performance in "Ape Coin lending-pairing-staking mining". From the user's perspective, if the returns are not significantly different, they will tend to choose the platform they trust and are more familiar with. BendDAO wins with the head effect. In this case, ParaSpace, which has just been launched, has no significant advantages and urgently needs to find a breakthrough point.

Compound interest brings high yield for staking, ParaSpace is rising

ParaSpace For example, take ParaSpace as an example:

Assuming there are two scenarios: (1) taking away $100,000 at once; (2) starting with 1 cent, but doubling in value every day for 30 days.

On the surface, $100,000 seems much more than double $0.01. However, in reality, that $0.01 will exponentially grow to $42,949,672.96 within 30 days. This is the power of compound interest and exponential growth.

Since the launch of the "auto-compounding" feature by ParaSpace, the APE supply on the platform has skyrocketed.

Due to the official contract of ApeCoin DAO not supporting automatic compounding, in order to significantly increase the staking rewards of ApeCoin through the power of automatic compounding, ParaSpace announced the launch of the "auto-compounding" feature on December 28th via Twitter.

• After pledging $APE to ParaSpace, $APE holders can receive an equivalent amount of $cAPE (compounding APE), which serves as a proof of user pledge and compound interest. $cAPE can be exchanged 1:1 with $APE;

• The $cAPE received by $APE stakers can circulate within ParaSpace. Holders of NFTs such as BAYC/MAYC/BAKC can choose to borrow $cAPE for pairing within the platform. The NFTs will be staked with $APE on Horizen Labs to receive the maximum official staking reward.• The $cAPE earnings come from the " $APE Only Pool" staking rewards and automatic compounding rewards in Horizen Labs, as well as a small portion of interest earned from providing funds to ParaSpace lending pools.

Compare ParaSpace's staking APY with official Horizen Labs

This forms a positive feedback loop:

• $APE stakers choose to stake on ParaSpace in order to earn higher returns;

• Holders of BAYC/MAYC/BAKC and other NFTs can instantly borrow and lend pairs, and the rewards from combined mining of $cAPE can be reinvested in the ParaSpace ApeCoin Pool for higher returns.

So it goes, whether you are a holder of $APE or NFT, they can enjoy higher APY on ParaSpace due to "automatic compounding", and high APY attracts more people to stake, making the platform more efficient in pairing.

ParaSpace's "Share Pool" feature

On February 9th, 2023, ParaSpace once again announced the launch of the "Share Pool" feature, which allows users to freely match instead of choosing a borrowing and lending pair. This feature is similar to the current model of BendDAO. Here is the announcement on Twitter.

We mentioned earlier that ParaSpace's mortgage lending function has two innovative modules, "full-position leverage" and "packaged mortgage", and has high flexibility for lending ERC-20 Tokens. Now this flexibility has been extended to Ape Coin pairing and pledging, giving users higher returns. Not to mention the advantages of "one-click configuration", "automatic repayment", "zero handling fees", and so on. Regarding the risks of borrowing and lending, ParaSpace ensures that user assets have almost no liquidation risk. (In extreme cases, there will be automatic redemption, please refer to the official documentation for details.)

Conclusion

The founder of ParaSpace, Ruan Yubo, who is only 26 years old, said in an interview with 36Kr: "We need to create more valuable products that focus on users in the financial world of Web3."

For investors in the cryptocurrency market, both homogeneous tokens and NFTs are important asset types. However, due to the nature of these assets themselves, their capital efficiency cannot be fully realized in many cases. Most NFT lending solutions have very limited support for different types of collateral, such as only supporting NFTs and requiring them to be blue-chip. The liquidity of long-tail NFT assets also needs to be released, and users need to customize their lending business based on their risk preferences and different credit ratings.

In addition to the mechanisms introduced in this article, ParaSpace has also designed a "Hybrid Dutch Auction" clearing mechanism, a "Buy Now Pay Later" system under a credit system, high loan limits for high rarity NFTs, and the ability to borrow coins for short selling, accurately meeting the needs of users in the current NFT market.

Mainstream NFT lending protocol loan issuance total

Before the launch of ParaSpace, the team was already well-versed in the DeFi field through the Parallel Finance protocol, and had many lending products in the NFT field. ParaSpace combines the characteristics of both fields and has become a rising star with the help of Ape Coin staking and mining activities. However, the leading protocols are also not to be outdone. As of the time of writing, the total amount of loans issued by mainstream NFT lending protocols has exceeded 672 million US dollars, and the TVL and blue-chip NFT collateralization on the BendDAO platform have both reached historic highs.

ParaSpace, which also operates on the Peer to Pool model, may or may not become a "BendDAO killer". However, it can be predicted that the NFT lending protocol market will soon become a highly competitive "red ocean".