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On Polkadot, liquid staking disturbs parachain auctions


Crowd loan events in Polkadot allow community members to support specific bids of projects in parachain auctions. Users contributing these DOTs get project token rewards. The DOTs are returned in 2 years which is a common lease term. This option has been used to raise sufficient capital in these tokens. The notional value of such tokens can be very high in dollars. The only downside to it is that the DOTs are locked for 2 years. It restricts the liquidity throughout this term.

How It Works with the Stock Options?

Standard financial markets have IPO lockup contracts that prohibit insiders of the company, such as employees, their family members and their friends from selling the shares. This lockup prevents company owners from selling shares quickly in the market. These restrictions can be overcome by developing arrangements with other people where the gains are locked. Another option is to offer some money early for the day when the holdings are sold. Corporate lawyers have prohibited such arrangements to avoid unnecessary market pressure.

Different in the Blockchain Field

These restrictions are not for the blockchain field. Rights can be claimed on the locked blockchain assets by issuing derivative tokens with the rights to underlying main assets. The derivative tokens get minted at 1-1 ratio to get locked tokens. The derivative tokens are issued by the liquidity staking providers if the initial assets are sent by the users to the custodian address. These tokens can also be sent directly to the depositors.

This concept is going to open up new markets for decentralized finance projects. It will bring liquidity for collateral and non-flexible assets.

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