Parallel Finance: Next Generation DeFi Lending Protocol

6 min readSep 23, 2021


The future of Polkadot is “incredibly bright”, the developers of Parallel Finance say — and they plan to make it even brighter with lending solutions tailored for Polkadot, with all the security it can offer.
With leveraged staking and auction lending as core offerings, Parallel’s new lending design could disrupt the somewhat stagnant DeFi narrative with higher yields and better opportunities.

In addition to building lending utilities, Parallel will also build and brand the user experience interfaces required for DeFi.

“Collaborative portfolio management will be a critical tool for doing business at Polkadot, and we plan to be the first to effectively address this issue,” the project team says. “This is one of the many areas where Parallel is building on the spirit of interoperability already embedded in the Polkadot’s design and making it stronger as a result.”

Parallel aims to be the right lending solution for DOT and KSM holders. Through Parallel, users will be able to place their DOT and KSM in exchange for tokenized derivative bets called xDOT and xKSM. These tokens represent the redemption of the underlying DOT and KSM in the Parallel bet pool.

“As you can see in the picture below, a user can borrow xDOT and xKSM from Parallel to receive a borrower’s commission in addition to the interest rate, which we call the ‘leverage rate’. The user can then create even more leverage by using xDOT and xKSM as collateral for borrowing. These tokens already initially generate income due to the profitability of bets, which reduces interest and increases demand, “the developers say.

The chart below shows the workflow for building leverage and it can be seen that a borrower can significantly increase their leverage by providing a loan from KSM, by borrowing xKSM and lending to xKSM. As long as the user lends and borrows, Parallel will algorithmically optimize the user staking profitability by assigning validator nodes with the strongest reputations and the fewest DOTs and KSMs delivered. Parallel’s algorithmic staking solution outperforms existing custodian staking solutions such as Kraken in both security and overall profitability.

Auction loans
By keeping its own parachain, Parallel will be able to offer auction credits, which is huge for DeFi on Polkadot and Kusama. Users will be able to deposit loan collateral at fixed or floating interest rates, and parachain applicants will be able to borrow from this collateral to participate in parachain auctions. This means that in addition to the incentives offered by loan projects, users will also receive a flat rate on their auction loans. This type of lending mechanism will be attractive for users who want to increase the value of the DOT and KSM provided to them, as well as for projects that need direct access to users who have capital to obtain a loan.

Ideal predictions suggest that 30% of the total DOT and KSM will be locked into parachains, cutting the circulating supply in half and creating opportunities for a symbiotic lending and borrowing market, essentially thanks to the designs of Kusama and Polkadot. Organizations to which Parallel provides DOT or KSM may or may not succeed in their parachain auctions. This means that parachain auctions will generate continuous cash flow on Parallel that is not limited to the total capacity of the parachains counted individually, and organizations that do win will be able to leverage the value of the parachain without the heavy burden of funding it themselves or through crowdfunding. This, in turn, will make the parachain market much more accessible. It also maximizes the potential use of parachains in general, which is an inherent boon to the Polkadot ecosystem.

Interest rate swaps
In its current state, DeFi is built to cater to short-term bull runs, but for a more competitive and long-term advantage, DeFi’s excitement will need to be complemented by the pragmatism of traditional finance. Interest rate swaps are one of the pragmatic tools needed for DeFi to break through the glass ceiling. With this functionality, institutional borrowers will be able to increase or decrease their exposure to interest rate risk based on their perception of the market and their willingness to take on further risks. Fixed rate loans serve as an anchor for the volatility of floating rates. If a user currently has a fixed interest rate loan and suspects a bear market is coming, then he may switch to a floating interest rate in the hope of paying lower interest rates. If, on the contrary, users expect growth across the board, they may decide to stay in a fixed rate position to get a lower rate.

Decentralized credit scoring
In its initial study of credit scoring, the Parallel financial blockchain will become “DefiPulse of credit”.

DeFi has a kind of internal reputation system. Sentiment can be tracked qualitatively through social media mentions and quantitatively through factors such as market cap, TVL, and dominance.

However, for DeFi to compete with traditional finance, it must be able to transparently assess the quality of borrowers and their debts. The credit reporting system will function as a check against fraudulent institutional borrowers, as well as provide lenders with a second line of defense to negotiate the repayment of their loans.

If a large DeFi organization reported a default on a loan, the negative impact of that report would affect the perception of the project token, and as a result, projects will seek to improve their creditworthiness.

The ability of the blockchain to act in a transparent manner is indeed a valuable asset, and in the future it may actually help prevent crises such as the 2008 market crash caused by an opaque credit rating.

A Reliable Advantage: Why Parallel Starts with the Polkadot Ecosystem
At the strategic level, Polkadot has less infrastructure, which means more opportunities to start.

“Polkadot is like the Wild West and the potential for return is much higher. In particular, the parachain market has the highest recoverable value of any untapped DeFi market, and Parallel has a chance to be the first. We expect our auction loans to be very attractive and free for founders who want to launch their own parachain but are unwilling to allocate most of their resources in advance. Parallel may also be the first company to offer complex bids for the highly undervalued market for DOT and KSM holders, ”the project team says.

Another argument in favor of getting started on Polkadot is the fact that Polkadot is the only blockchain that has created a spirit of collective innovation. When Polkadot reaches critical mass, blockchain wars will become ineffective because any blockchain can be connected to Polkadot. This makes using Polkadot an even more important means of protecting against fragmented capital.

“We also intend to make our platform available on Ethereum in the future,” the developers say. “However, we are currently focusing on the Polkadot ecosystem. The launch of Parallel will primarily take place in the Polkadot ecosystem, where staking is already widely available, giving us the time and time to market to bring our platform to Ethereum, where the need for leverage will soon become much greater as a result of the move to Ethereum 2.0.




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