Understand the NFT lending newcomer ParaSpace in five minutes

Original Title: "ParaSpace: The NFT Platform to Watch After Blur"

Author: Fishery, Core Contributor at Biteye

This month, two of the most notable events in the NFT space are Blur's generous airdrop and the former giant "Iron Rooster" OpenSea's announcement of a 0% fee initiative.

Blur has attracted the attention of the entire market with its generous airdrop in Season 1 and the ongoing "trading mining" in Season 2, while OpenSea is not to be outdone, quickly launching a 0% fee initiative to win back lost users.

Whether OpenSea's move will convince users who have already turned to Blur to come back remains to be seen, but three narratives can be confirmed:

1. Mainstream NFT trading platforms significantly lowering the friction costs of NFT transactions will increase users' willingness to trade, leading to a rise in market transaction volume. Improved liquidity will attract more external capital into NFTs, benefiting the entire NFT sector.
2. The NFT sector is still an emerging market, and it is not impossible for good teams and projects to rise to the top. Therefore, some investors are gradually shifting their focus to early projects with rapidly growing business volumes in search of the next Blur for higher returns.
3. OpenSea continues to rely on outdated equity financing mechanisms from the Web2 era, delaying token issuance and relying on its first-mover advantage. In contrast, Blur adopts a Web3 model, airdropping tokens to early users and providing subsequent mining rewards, which not only serves as the best way to attract users but also achieves a win-win for both users and the platform.

It has been proven that projects with airdrop expectations are more promising than those relying on equity financing without issuing tokens or those that have already issued tokens.

Three recent keywords can be summarized: NFT sub-sector, rapid business growth, and airdrop expectations. The NFT lending platform ParaSpace, which will be introduced in this article, perfectly fits these three points.

ParaSpace Introduction

ParaSpace is an advanced NFT lending platform that helps users utilize their NFT assets more effectively to generate greater returns.

Currently, ParaSpace has been online for only 2 months, and without any token incentives, it has attracted the second-highest TVL in its sector. Compared to other NFT lending platforms, its products are more aligned with the habits of seasoned DeFi players, with thoughtful details throughout the product.

What problem does NFT lending solve?

Today, the market value of NFTs held by crypto users has reached tens of billions, but in most cases, these NFT assets remain idle, resulting in low capital efficiency.

Without lending services, NFT users may be forced to sell their unique NFTs to gain liquidity.

Most existing lending solutions have limited support for different types of collateral, not allowing users to customize their lending collateral based on their specific risk preferences. Users accustomed to lending platforms like AAVE, which target ERC20 assets, will deeply feel the significant room for optimization in user experience on NFT lending platforms.

ParaSpace's vision is to provide a user experience similar to interacting with AAVE while offering NFT lending services.

Basic Information

ParaSpace is co-incubated by Para Labs. Previously, Para Labs launched the Parallel Finance ecosystem, which is based on Polkadot and features composable and interoperable DAPPs. According to the Parallel Finance GitHub repository,

Last week, developers merged over 2,000 lines of code, indicating the team's commitment to their past products and maintaining efficient development.

On November 14, 2022, ParaSpace launched its testnet on the Goerli Network and encouraged user participation through three independent activities: Traveler, Explorer, and Settler.

On December 11, 2022, ParaSpace announced that its mainnet had successfully launched and has been running stably for 2 months.

Currently, 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.

It also supports 8 ERC-20 assets, including APE, cAPE, ETH, DAI, WETH, stETH, USDC, and USDT, and innovatively supports 12 groups of UNISWAP V3 LP (with specified rates) composed of the above ERC20s as collateral.

Since ParaSpace's launch last December, its interaction data has been impressive.

ParaSpace's TVL maintains a healthy upward trend, defillama

ParaSpace's TVL ranks second in the NFT lending leaderboard, defillama

In terms of financing, ParaSpace has notable investors such as Sequoia, Coinbase Ventures, and PolyChain, and when considering the funding from the same team's Parallel Finance, it has ample funds and rich business resources.

Regarding security audits, ParaSpace has completed 9 audits from security firms such as Trail of Bits, Secure3, 0xQuit, Certik, and Veridise. Currently, it is undergoing two new audits led by Quantstamp and Slowmist, expected to be delivered in Q1 2023.

Additionally, Code4rena hosted a bug bounty program worth $190,000 on November 23 last year, and the ongoing bounty program is hosted by Immunefi.

In terms of project development capability, ParaSpace has been actively advancing development. Especially since the launch of Ape Staking in December last year, the innovative Peer-to-Pool mining service introduced by the ParaSpace team has demonstrated its impressive development capabilities.

According to GitHub, in the past month, the Paraspace-core code repository has had 5 active developers who added over 7,000 lines of code.

ParaSpace Unique Mechanisms

ParaSpace's innovative mechanisms are one of the key reasons for its standout TVL. This article will introduce three special mechanisms for ParaSpace's collateral lending.

Yield-Generating Assets as Collateral

ParaSpace's collateral includes various yield-generating tokens, including: Uniswap V3 LP, AAVE's aTokens, and Compound's cTokens.

By introducing yield-generating assets into the collateral category, ParaSpace transforms into a cross-border product between NFTFi and DeFi, benefiting multiple parties:

1. It helps increase the returns for depositors on the platform, allowing borrowers to pay less for loans, achieving greater capital efficiency.
2. It can increase ParaSpace's TVL.
3. It expands the application scenarios for yield-generating assets, promoting the co-prosperity of NFT and DeFi.

Uniswap V3 LP is an ERC-721 token that serves as proof of liquidity provided by users in the Uniswap V3 pool. Holders of this proof can earn transaction fees in real-time, thus it is regarded as a yield-generating token.

If users no longer wish to provide liquidity, they can immediately redeem the two tokens belonging to their share in the corresponding trading pair.

As a yield-generating token, UniV3 LP is very suitable as collateral for on-chain lending protocols like ParaSpace. In ParaSpace, users can obtain credit limits by collateralizing UniV3 LP tokens.

Once users have a credit limit, they can use this credit to borrow NFTs or other ERC20 tokens, and most importantly, while enjoying lending services, users can continue to earn LP transaction fees.

Currently, ParaSpace supports the following trading pairs:

It is easy to see that the base tokens in these trading pairs are all ERC20 single coins supported by ParaSpace, allowing for DeFi leveraged mining functions on the ParaSpace platform. The team has also launched a one-click leveraged mining feature, which not only improves the internal capital utilization of the platform but also allows single ERC20 deposit users to capture higher returns.

If one can understand the principle of using Uni as collateral mentioned above, the following aTokens and cTokens will be much easier to understand.

aTokens and cTokens are deposit certificates provided by Aave and Compound, respectively, with deposit interest automatically included and accumulated in the deposit certificates. Therefore, if used as collateral in ParaSpace, users will simultaneously earn DeFi lending interest and NFT lending interest, resulting in double returns.

The document provides an example:

User A deposits 10,000 USDC into Aave and now holds 10,000 aUSDC, earning 5% deposit interest.

The same user sees that if they deposit 10,000 aUSDC into the protocol, they can earn another 5% interest on ParaSpace, resulting in a total yield of 10.25% on their USDC. This is achieved through User B borrowing aUSDC and paying interest.

User B wants to borrow 10,000 USDC using their ERC-721 asset. However, they see that the borrowing rate for USDC is 20%, while the borrowing rate for aUSDC is 5%.

As long as the net borrowing rate for aUSDC is below 20%, it is worthwhile for the user to borrow 10,000 aUSDC and immediately redeem it for USDC.

It can be seen that ParaSpace's method of introducing external liquidity is clever, as it can increase borrower returns while also helping stabilize market interest rates.

Increasing the Valuation of Rare NFTs (Not Yet Launched)

ParaSpace's market allows NFT holders to estimate how much immediate liquidity they can obtain based on the floor value of the NFTs they provide through its Peer 2 Pool lending model.

P2P Pool lending has significant advantages, but it also recognizes that in a pool-based model, all NFTs in the pool have the same value, which means that certain rare attributes of high-valued NFTs sacrifice some capital efficiency, leading rare NFT holders to lose their willingness to participate.

Currently, the ParaSpace team is designing price multiplier bonuses for each rare attribute to provide a premium beyond the collateral floor price for specific NFTs, thereby attracting rare NFT holders to deposit and improving capital efficiency, further boosting ParaSpace's TVL growth.

Project documentation has pre-announced some details of rare features, such as: the multiplier for "Monkey Land" containing Koda reaches "6x"

Enjoy Blue-Chip NFT Benefits While Collateralizing

While ensuring user capital efficiency, ParaSpace also allows users who collateralize NFTs to receive airdrops and other benefits.

Due to the uniqueness of NFTs, ParaSpace's NFT collateral settings have two modes to prevent rare NFTs from being borrowed:

1. Used only as collateral and cannot be borrowed by others. Users who choose this setting can lend out certain assets and can redeem their deposited NFTs intact as long as they return the assets.
2. Used both as collateral and as borrowable assets, suitable for NFTs that are ordinary and close to floor price. Upon redemption, users will randomly receive a same-series NFT from the pool. This contradicts the logic of traditional collateral loans, but the benefit is that users can enjoy the profits from lending out NFTs.

In the past, if a blue-chip NFT announced an airdrop, users who collateralized that NFT would need to go through multiple interactions and sacrifice capital efficiency to redeem their collateral to claim the airdrop.

However, with ParaSpace's Flash-Claim technology, users no longer need to perform complex operations between capital efficiency and obtaining their NFT benefits; they can complete the airdrop claim for their collateral in one click. (Note: This only guarantees that the first deposit option mentioned in the previous paragraph can receive the airdrop).

ParaSpace will default to support some of the most popular airdrops, and for other airdrops, users can contact the team for additional support via Discord.

In addition to claiming airdrops, ParaSpace also supports collateralizers in verifying blue-chip NFT ownership.

Thanks to the collaboration between ParaSpace and tokenproof, users who deposit NFTs into ParaSpace can continuously enjoy the benefits of rapid NFT verification.

ParaSpace will send collateral users an nToken issued by tokenproof, which is an ERC-721 token with metadata corresponding to the NFT deposited by the user, representing the rights to the original NFT.

Summary

ParaSpace has achieved the status of the second-largest NFT lending platform without issuing tokens to incentivize users, thanks to its deep understanding of NFT lending.

From the introduction of yield-generating assets into the collateral category to the research on the valuation of rare attribute NFTs, it is evident that this team has a profound understanding of Web3 economics. I am very much looking forward to how the team will design ParaSpace's own token model.

ParaSpace has put significant effort into security, completing 9 audits and currently advancing two rounds of audits. However, despite this, NFT lending products, as an emerging sector, represent innovative safety challenges, and users still need to manage risks.

Whether ParaSpace can become the number one in the NFT lending sector like Blur did with OpenSea remains to be seen, but based solely on ParaSpace's meticulous approach to user experience, it indeed has the momentum to compete for the leading position in the sector. With the recent surge in NFT narratives, the battle for the top seat in the lending sector is about to ignite.