[ This introduction is reproduced from my prior article entitled "Common Goods Parachains in POLKADOT & The Free-Rider Problem" found at https://www.publish0x.com/kev-nag/common-good-parachains-in-polkadot-and-the-free-rider-proble-xnqpenl and https://read.cash/@kevnag/common-goods-parachains-in-polkadot-and-the-free-rider-problem-0a9cea93].
By way of introduction, the core of the POLKADOT system lies within its Relay Chain which is responsible for the interoperability of the network and the shared network security all while securing the parachains and parathreads within the protocol. This is accomplished by utilizing the hub and spoke model. The parachains exist as independent blockchains in the system which mint their own tokens and are customized to provide a specific individual use. Parathreads are even smaller than parachains which are models of blockchains operating on a pay as you go model. The beauty of this ecosystem lies with the bridges that allow the parachains and parathreads to connect with other blockchain networks such as Bitcoin and/or Ethereum. "Polkadot enables cross-blockchain transfers of any type of data or asset, not just tokens. Connecting to Polkadot gives you the ability to interoperate with a wide variety of blockchains in the Polkadot network." (https://polkadot.network)
Whereas the design space of blockchain systems is infinite, the Relay Chain within the POLKADOT system can only support a finite and limited number of parachains. Accordingly, to select which parachains can access the computing capacity of the Relay Chain, an on-chain auction is utilized where parachains bid and compete for the space through their willingness to lock up or bond DOT tokens for the duration of the lease.
DISCUSSION:
In a Proof of Stake network tokens are staked or locked up for a specific minimum time providing the stakeholder a return and the network security. In the case of POLKADOT, this period is 28 days (or 7 days for KUSAMA). Additionally, in POLKADOT, another scenario where DOT assets will be locked and bonded for up to two years is found within the Parachain Lease Offering (PLO) which is similar to staking.
We all know that the Cryptocurrency markets are highly volatile in nature. As such, asset owners who have staked tokens or have bonded tokens for a PLO subject themselves to potential significant real losses due to the unpredictability of value decreases in the underlying asset and no vehicle available to unbond the assets immediately to protect the value. However, there is now a protocol available to mitigate this potential loss and negate the opportunity loss from bonding assets instead of other investments.
BIFROST is a cross-chain network based in POLKADOT which aims to provide liquidity to bonded assets. The solution lies in 'staking derivatives' where by using the BIFROST system, asset owners can exchange staked or bonded tokens to the tokens 'reflection' (Token to vToken, DOT to vDOT). By issuing the reflection token, the staked (bonded) assets may continue to earn staking rewards or purposes leaving the staking derivatives (reflection tokens) available to be utilized in DeFi to leverage the staking/bonding thereby providing mitigation of loss or additional gains.
To attempt to clarify this process, an example of a possible POLKADOT scenario is in order. Let's assume that it is time to auction POLKADOT parachains. To fund the auction, parachain bidders crowdsource DOT tokens to get a parachain slot and the supporters are airdropped native tokens of the parachain bidder. The bidder is successful and obtains the parachain slot. Now, by using the BIFROST protocol, not only do the crowdloan supporters receive the value of the airdropped native tokens, but they may also exchange the bonded DOT tokens for vDOT and use the vDOT for other DeFi investments (thereby providing protection from loss from asset value decrease as well as the potential for additional gain).
CONCLUSION:
The utilization of the BIFROST protocol within the POLKADOT system is a useful tool for investors to maximize their returns in volatile markets. It is beneficial to the system by providing a vehicle to mitigate loss or provide additional gains all while benefiting the POLKADOT ecosystem as a whole.
I am merely an ordinary small investor who likes to share what I've learned and found interesting. Please take a few minutes and check out my other published articles. I am not in any way a financial advisor and as such, do your own research before investing. If you enjoyed this article please like it, comment and/or tip. Feedback is always welcome here.