A Comprehensive Understanding of the NFT Lending Protocol ParaSpace: Will It Be the Killer of BendDAO?
Riding the wave of the ApeCoin staking event, ParaSpace is a rising star.Author: 0xLaughing, Rhythm BlockBeats
Introduction
NFT lending platforms allow users to borrow liquid assets by collateralizing their NFTs, aiming to release the liquidity of funds tied up in NFTs. However, when designing NFT lending, these questions always arise:
• How to improve the matching efficiency between borrowers and lenders?
• How to maximize the liquidity release of NFT and other assets?
• How to support lending across multiple asset types simultaneously?
• How to safely and efficiently liquidate in case of default?
In the NFT lending space, 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 with shortcomings. Recently, a new NFT lending protocol named ParaSpace has emerged, featuring innovations such as "full collateral leverage" and "bundled collateral." Thanks to the staking mining activities of Ape Coin, it took only two months from its mainnet launch to become the second-ranked NFT lending protocol by TVL.
How did this NFT lending protocol become a rising star? Let’s break it down.
1. Introduction to ParaSpace
What is ParaSpace?
ParaSpace is a point-to-pool NFT lending protocol that allows users to collateralize and lend NFTs and fungible tokens. ParaSpace enables users to utilize underused funds for further investments and earn returns.
In simple terms, ParaSpace allows users to bundle their ERC-721 tokens or ERC-20 token assets and then collateralize and lend the bundled assets to improve the capital efficiency of users' on-chain assets.
ParaSpace's official Twitter has been operational since August 2022
ParaSpace was launched by the Parallel Finance team, a DeFi protocol based on Polkadot. The Parallel Finance protocol has a community-centric ecosystem of composable and interoperable DAPPs, having launched seven DeFi products including liquid staking, AMM, DEX, and wallets.
On November 14, 2022, ParaSpace officially opened its testnet on the Goerli Network, using three independent 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 two months.
Currently supported NFTs and ERC-20 Tokens on ParaSpace
As of now, 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, along with 8 ERC-20 assets including APE, cAPE, ETH, DAI, WETH, stETH, USDC, and USDT.
Platform Usage
TVL ranking of NFT lending protocols
According to defillama data, since the launch of ParaSpace's mainnet, its TVL has been steadily increasing, currently at $55.01 million, ranking second among NFT lending protocols, only behind BendDAO, but still with a significant gap (only about a quarter of BendDAO's TVL).
Currently collateralized NFTs in ParaSpace
The vast majority of NFTs collateralized on the platform are from Yuga Labs, with a total of 186 BAYC, 382 MAYC, 101 Otherdeed, and 33 BAKC collateralized as of the publication date, while the number of other blue-chip NFT series collateralized is less than 10.
Financing Information and Audit Status
Investors of ParaSpace
In terms of project funding, it is reported that Parallel Finance, produced by the same team as ParaSpace, has received a total of $29 million in investments, including notable investment firms such as Polychain Capital, Lightspeed Venture Partners, Slow Ventures, Alameda Research, Coinbase, and StarkWare, making for a luxurious lineup. Similarly, ParaSpace is backed by these well-known investors, as referenced on the official investor page.
Audit status of ParaSpace
Regarding contract security and audits, 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 conducting audits on ParaSpace. (Audit reports)
2. Innovative Collateral Lending Model of ParaSpace
Full Collateral Leverage
Traditional isolated margin pool model
Like BendDAO, ParaSpace's underlying lending business also adopts a Peer-to-Pool model, where users can collateralize NFTs to borrow in real-time as borrowers, or provide funds as lenders to earn interest paid by borrowers.
The innovation of ParaSpace is the creation of the first cross-margin credit system, rather than using the isolated margin pool design adopted by existing platforms, which allows users to provide loans against all collateral with a single credit limit.
An official introductory article provides the following example:
Suppose you own 61 BAYC, and you decide to collateralize 5 to borrow, then buy another one. Using existing lending protocols and their isolated margin models, you would need to borrow ETH separately against these 5 BAYC and then purchase the new BAYC on the market.
This process has at least two drawbacks:
User experience. You have to execute 5 different on-chain transactions and manage these 5 separate borrowing positions.
If any of your borrowing positions are about to be liquidated, you have no choice but to repay the loan immediately to avoid auction liquidation.
ParaSpace's "Cross-Margin" NFT lending model
However, by collateralizing your NFT assets through ParaSpace, you will generate a credit limit and a health factor for your entire collateralized asset portfolio. As long as the health factor of your entire collateralized asset portfolio remains above 1, none of your NFTs will ever trigger liquidation auctions.
This also means that to reduce risk, you can always choose to deposit more collateral (NFTs or ERC-20 Tokens) to maintain a high health factor.
This credit system is similar to a valuation system that assesses the value of all your collateral and automatically approves loans based on that assessment. It does not matter whether your collateral is NFTs or ERC-20 Tokens, or whether your NFTs come from different NFT series. As long as they are collateral types supported by ParaSpace, you can borrow against their total value.
This is the full collateral leverage model with cross-margin.
Bundled Collateral
Additionally, when borrowing through ParaSpace, users can bundle their asset portfolios as collateral. According to the official example, the maximum amount a user can borrow is based on the weighted collateral factor.
For example, if a user collateralizes a BAYC worth 80 ETH, 4 ETH, and 800 USDC worth 0.6 ETH, assuming the borrowing ratios for BAYC, ETH, and USDC are 30%, 82.5%, and 82.5% respectively, the total amount the user can borrow would be:
80*30% + 4*82.5% + 0.6*82.5% = 27.795 ETH (or other equivalent 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 for each block. The interest owed on the loan will accumulate into the total borrowing amount, which users can repay at any time.
3. The Rise of ParaSpace Fueled by ApeCoin Staking Activities
ApeCoin Staking Launches, ParaSpace Introduces "Peer to Pool" Staking Solution
ApeCoin's "Independent Pool Staking Mining"
On December 6, 2022, Horizen Labs, responsible for creating the ApeCoin DAO staking system, officially announced that ApeStake.io has officially launched and opened for APE deposits.
The staking mining system of ApeStake.io categorizes user assets into four pools: ApeCoin pool, BAYC pool, MAYC pool, and BAKC pairing pool. Users need to hold the required assets for each pool to pair them, which can be described as "independent pool staking mining."
BendDAO adopted "paired staking mining" (Image source: BendDAO documentation)
On the same day, the largest NFT lending protocol, BendDAO, launched the "joint paired staking" feature. Unlike ApeStake.io, BendDAO removed the asset holding restrictions and adopted a "paired staking mining" scheme, allowing users to participate in staking even if they only hold part of the required assets for the mining pool, meaning that users can mine even if they only hold ApeCoin or a single NFT (BAYC\MAYC\BAKC).
For example, if Xiao Ming only has one BAYC (or MAYC\BAKC) NFT, and wants to participate in the official staking mining, he would need to supplement the ApeCoin corresponding to the mining pool he wants to participate in to achieve the highest expected yield. Now, through BendDAO, besides choosing the official "independent pool staking mining," there are other ways for Xiao Ming to participate in mining with just one NFT: he can choose to stake his NFT with 0 ApeCoin, and the system will pair him with other users' staked ApeCoin, making them co-stakers. Additionally, Xiao Ming can set the ratio of mining reward distribution; the more he contributes, the easier it will be to pair with ApeCoin.
As a reward for improving the matching of NFT and ApeCoin holders, BendDAO charges a 4% service fee on users' staking rewards.
ParaSpace adopted "point-to-pool staking mining" model
As a competitor to BendDAO, ParaSpace had not yet launched its mainnet at that time, but chose to open a liquidity pool pre-deposit activity for ApeCoin, allowing pre-deposits for Ape Coin with a 30% APY from December 5 to December 12.
On December 11, 2022, ParaSpace announced the official launch of its mainnet, and also opened the "point-to-pool staking mining" model for Ape Coin. Similar to BendDAO, it also removed the asset holding restrictions, allowing users to 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; they can complete the three steps of "stake NFT - borrow Ape Coin - combined staking mining" with one click.
ParaSpace's "One-Click Configuration"
Using the same example, if Xiao Ming only has one BAYC (or MAYC\BAKC) NFT, or does not have enough Ape Coin to pair with his NFT, the official staking mining activity from Horizen Labs cannot meet his conditions. Now, Xiao Ming can achieve the highest expected yield through ParaSpace:
On the official website's "Ape Pairing Page," select "Pair $APE" below the NFT he wants to pair;
On the pairing page, he can input two sources of $APE for pairing: one from his own wallet and the other from the lending pool on the platform;
Then click to pair.
This way, with just one configuration, he completes the three steps of "stake NFT - borrow Ape Coin - combined staking mining," reducing transaction friction. For the case of staking only Ape Coin, the staker's yield consists of two parts: the original staking yield + the interest yield as a lender.
However, although ParaSpace launched its ApeCoin staking business almost simultaneously with BendDAO, with the convenience of "one-click configuration" and the advantage of "point-to-pool" instant pairing, it started at a disadvantage.
Same "Point-to-Pool," Different Business, Different Effects
Looking back at the process of BendDAO's "point-to-pool" NFT lending gradually gaining popularity:
Due to the issues of insufficient NFT liquidity and pricing difficulties, the efficiency of matching borrowers and lenders through peer-to-peer models like NFTfi is low. BendDAO's "point-to-pool" lending model prices NFTs of the same series at a floor price, allowing borrowers to instantly borrow from the lending pool after collateralizing their NFTs. The downside is that rare NFTs or those valued above the floor price cannot be borrowed at market fair value, leading to low capital efficiency.
It can be seen that the "point-to-pool" lending model for NFTs improves the issue of insufficient NFT liquidity to some extent by enabling "instant borrowing of NFTs," making BendDAO more popular among users in NFT lending. However, the situation is different for Ape Coin lending.
BAYC and Ape Coin price trends are basically consistent
For Ape Coin staking mining, we know some prerequisites:
The maximum amount of APE that can be paired for staking mining: BAYC is 10,094 $APE, MAYC is 2,042 $APE, and BAKC is 856 $APE;
The price trends of BAYC/MAYC/BAKC are highly correlated with Ape Coin, for example, since the launch of staking mining, the price of $Ape has fluctuated between $3.2 and $6.4, while the floor price of BAYC has fluctuated between $70,000 and $124,000, showing a consistent price trend.
Under these conditions, BendDAO's "paired staking mining" allows users to collateralize their NFTs on BendDAO for borrowing or trading during the staking mining period. Additionally, on December 20, 2022, BendDAO announced in a statement that it would increase the collateral ratios for BAYC and CryptoPunks from 40% to 60%, and for MAYC from 30% to 50%.
Thus, the funds borrowed by collateralizing BAYC and other NFTs on BendDAO are sufficient to purchase the required Ape Coin to achieve the highest expected yield.
Comparing BendDAO and ParaSpace, they essentially reach the same goal in "collateralizing NFTs to borrow Ape Coin and then pairing." Ape Coin is a fungible token, which does not have the characteristics of insufficient NFT liquidity and pricing difficulties, and the matching efficiency for lending/trading of mainstream fungible tokens is generally high. The "one-click configuration" feature achieved by ParaSpace through the "point-to-pool" model merely simplifies the operational steps and does not have an absolute advantage.
Moreover, BendDAO also allows for "point-to-point" self-pairing, providing users with greater flexibility; as the largest NFT lending protocol, it has long been the first choice for many blue-chip holders, with high recognition and user stickiness.
At that time, ParaSpace and BendDAO had similar effects in "Ape Coin lending-pairing-staking mining." From the user's perspective, if the yields are not significantly different, they are likely to choose the platform they trust and are more familiar with, and BendDAO wins with its leading effect. In this case, the newly launched ParaSpace had no significant advantages and urgently needed to find a breakthrough point.
Compound Interest Brings High Staking Yields, ParaSpace Rises
ParaSpace provides the following example:
"Assume there are two scenarios: (1) taking away $100,000 at once; (2) starting with one cent, but doubling in value every day for 30 days.
On the surface, $100,000 sounds much more than one cent doubling, but in reality, that one cent will grow exponentially to $42,949,672.96 in 30 days, showcasing the power of compound interest and exponential growth."
Since ParaSpace launched the "auto-compounding" feature, the supply of APE on the platform has surged
Since the official ApeCoin DAO contract does not support auto-compounding, to significantly increase ApeCoin staking rewards through the power of auto-compounding, ParaSpace announced on December 28 that it launched the "auto-compounding" feature:
• $APE holders will receive proportional $cAPE (compounding APE) after staking $APE on ParaSpace, which serves as proof of user staking and compounding, and can be exchanged 1:1 with $APE;
• $APE stakers can circulate the $cAPE received within ParaSpace, and holders of NFTs such as BAYC/MAYC/BAKC can choose to borrow $cAPE for pairing on the platform, instantly staking NFTs with $APE on Horizen Labs to obtain the maximum official staking rewards;
• The earnings from $cAPE come from staking rewards in the "APE Only Pool" on Horizen Labs and auto-compounding rewards, along with a small portion earned from interest generated by providing funds to the lending pool on ParaSpace.
Comparison of ParaSpace and official Horizen Labs staking APY
This creates a positive cycle:
• $APE stakers choose to stake on ParaSpace to reap higher rewards;
• Holders of NFTs such as BAYC/MAYC/BAKC can instantly borrow and pair, and the combined mining rewards of $cAPE can be reinvested into the ParaSpace ApeCoin Pool, generating higher returns.
In this way, both $APE and NFT holders can enjoy higher APY on ParaSpace due to "auto-compounding."
ParaSpace's "Share Pool" feature
On February 9, 2023, ParaSpace announced the launch of the "Share Pool" feature, allowing users to match freely without selecting borrowing pairing, similar to BendDAO's current model.
As mentioned earlier, ParaSpace's collateral lending features include two innovative modules: "full collateral leverage" and "bundled collateral," offering high flexibility for borrowing ERC-20 Tokens. Now this flexibility extends to pairing staking for Ape Coin, providing users with higher returns. Not to mention the advantages of "one-click configuration," "automatic repayment," and "zero fees." ParaSpace ensures that users' assets have almost no liquidation risk (in extreme cases, there will be automatic redemption; refer to the official documentation).
4. Conclusion
The 26-year-old founder of ParaSpace, Ruan Yubo, stated in an interview with 36Kr: "We aim to create more valuable products that return to users in the financial world of Web3."
For investors in the crypto market, both fungible tokens and NFTs are important asset types. However, due to the characteristics of these assets, their capital efficiency is often not fully realized. Most NFT lending solutions have very limited support for different types of collateral, for example, only supporting NFTs and requiring them to be blue-chip, while the liquidity of long-tail NFT assets also needs to be released urgently. Users also need to customize their lending services based on their risk preferences and different credit levels.
In addition to the mechanisms introduced in this article, ParaSpace has also designed a "hybrid Dutch auction" liquidation mechanism, "buy now pay later" under the credit system, high-amount lending for high-rarity NFTs, and borrowing tokens for shorting, accurately addressing the current user needs in the NFT market.
Total loan issuance of mainstream NFT lending protocols
Before the launch of ParaSpace, the team had already mastered the gameplay in the DeFi field through the Parallel Finance protocol, and with many lending products in the NFT space, ParaSpace combines the characteristics of both fields and leverages the Ape Coin staking mining activities to become a rising star. However, leading protocols are also not to be outdone; as of the publication date, the total loan issuance of mainstream NFT lending protocols has surpassed $672 million, with both BendDAO's lending TVL and blue-chip NFT collateralization numbers reaching all-time highs.
Whether ParaSpace, also a Peer to Pool model, will become the "BendDAO killer" remains to be seen, but it can be predicted that the NFT lending protocol track is about to enter a fierce competition.
References
[1] https://para.space/
[2] https://docs.para.space/para-space/
[3] https://medium.com/parallel-x/paraspace-ape-staking-program-faq-23c81b2075ef
[4] https://dune.com/paraspaceduneowner/paraspace
[5] https://mp.weixin.qq.com/s/skmWsHe1812tCxDq3N_dmw
