Blockchain has entered the 3.0 era with the extremely rapid development of decentralized applications (DApps), for example, the average block size of Ether has doubled since 2020, and the total value locked (TVL) in Defi applications has grown by as much as 25 times.
The variety of applications places extremely high requirements on data access and processing, such as prices and volume of transaction pairs in exchanges and prices of artwork auctions in NFT projects, etc. Due to the limitations of blockchain performance and storage methods, it is difficult for project parties to obtain relevant information and display it to users. However, users are eager to be informed, not only accurately, but also timely.
In contrast, the insistence of the NEST ecosystem on decentralization is notable. Parasset is a new synthetic asset protocol based on the NEST core product, which is an oracle price quotation solution with full on-chain access on the ETH ecosystem. parasset realizes value recreation, enabling existing native assets to generate quoted pairs in parallel, forming financialized self-enhancing properties.
This is done by minting P-assets on Parasset by pledging NEST Token, such as minting ERC20 assets like pETH and pUSD. P assets users can participate in NEST Protocol price quotes and can also be used for other purposes, such as liquidity, participation in other DeFi Protocol farming proceeds, leverage, etc. Stabilization rates generated by Cast P assets attract external LPs to fund the Parasset insurance pool.
With the upgraded version of NEST Protocol, NEST miners hold asset quotes while also taking the risk of asset volatility. So Parasset tries to create a closed-loop of application from internal demand. Parasset borrows asset quotes and pays only interest charges to reduce the loss from diverse asset volatility. The asset with 0 volatility relative to ETH is the stable coin of ETH, except that we generally set the anchor asset to fiat currency.
Due to decentralization and high liquidity, two processes, collateralization and liquidation, are involved: downtime risk and liquidation risk. Downtime risk refers to the time duration from the start of collateralization to the trigger of liquidation. Liquidation risk refers to the ability to properly liquidate the asset at no less than the collateral rate. Price movements are broadly valid in the long term (and may fluctuate in the short term, causing unsuccessful liquidation), and triggering a downtime is when the price reaches the liquidation line.
However, Parasset is using a fully decentralized NEST oracle. It is guaranteed to be decentralized and free from the risk of offensive price feeding. Borrower, liquidator and insurer have a clearer scope of risk and equity. Fast coin minting and high asset efficiency make parallel assets stable in price relative to the underlying assets. Together with the insurance pool design, the risk mechanism is more complete.
Risk mechanisms play a vital role in financial development, and Parasset’s insurance fund was created to protect liquidity providers in order to eliminate and manage liquidation risk as much as possible. With the introduction of the insurance fund, liquidity providers enjoy security by paying a guarantee fee. The return on the underlying asset’s stabilization fee also constitutes a liability to the system. The gap risk due to market incompleteness cannot be hedged. The stabilization fee is partly determined by the collateral rate (downtime risk) and partly by the total collateral ratio, such as the ratio of total ETH collateral to total liquidity, and also with reference to volatility, taking into account liquidity and liquidation scale considerations. In this way, the insurance fund can obtain an extremely high interest rate for natural balance depending on the size. Insurance funds cannot hedge and take the risk of an incomplete market, which is possible to lose money.
Blockchain is a gaming system where any action that occurs on the chain has an immediate impact on the next participant. Insurance funds help to create self-reinforcement, and if borrowers take on each other’s liquidation risk without adequate compensation for the proceeds, the whole process must be full of wreckage. The introduction of an insurance fund generates a ledger for everyone, a stable currency that can be used uniformly for settlement.
Liquidation line K, Collateral rate C, and a constant k
It is better to have a dynamic between K and C as volatility changes, but dynamics in product design can affect user experience: users cannot remember the liquidation line and volatility changes can be significant.
- The fixed ratio between K and C, with K temporarily set at 1.2 times C
- The stabilization fee is partly determined by the collateral rate and partly by the total collateral ratio (that is, the ratio of total ETH collateral to total liquidity, taking into account liquidity and liquidation scale)
- The proceeds from the stabilization fee are transferred to the insurance pool to increase the resilience of the pool in case of liquidation.
- Stabilization fee = total debt at moment t-1 * dynamic stabilization fee rate at moment t-1 * difference in block height at moment t and moment t-1
- Dynamic stabilization fee rate at moment t = Initial stabilization fee rate * f
The Insurance Fund LP Earns 3 Types of Returns
- Transaction fee of 0.2%
- Stabilization fee
- Liquidation residual value
The presence of an insurance fund allows the parallel and underlying assets to always maintain a 1:1 equivalence. The larger the insurance fund is compared to the size of the parallel assets, the lower the risk of “margin call liquidation” and the more credible value anchoring of the parallel assets to the underlying assets, but the overall yield of the insurance fund is also lower.
Three Layers of Risk Control:
- Insurance fund pool
- System bears
Since Parasset launched, miners’ demand is well met, and the value (real demand) is delivered to NEST and CoFiX at the same time. In addition, after 3.6, the dividend is changed to repurchase model, the value can be retained in the system, and the circulation of tokens is reduced through repurchase. This landing not only realizes the real demand of NEST, but also builds up the future vision of Parasset — it is not only a parallel asset in NEST ecosystem but wants to be the ultimate solution for collateralized tokens, unified stable coin, lending and synthetic assets.