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Parachain Slot Auctions Explained

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Published on:
June 10, 2021

Parachains are essentially fully functional blockchains that run alongside the main Polkadot relay chain, but developers can customize their characteristics.

Parachain Slot Auctions Explained

Table of Contents

Bitcoin's launch a decade ago spurred the creation of thousands of new cryptocurrencies over the years that followed. However, despite there being an estimated 4000 blockchain-based tokens available for trade, interoperability is still relatively primitive, meaning most blockchains can't interact with each other.


Ethereum's approach to this problem is to create a unified platform for developers to create DApps, allowing them to create application-specific tokens that adhere to its ERC-20 token standard (ERC-20). While this has led to a thriving ecosystem of decentralized applications, including most platforms in the now incredibly popular DeFi space, it has its inherent issues.


For one, it forces DApps to adhere to a single standard, not just for its tokens, but also Ethereum's broader decentralized infrastructure. Currently, Ethereum has composability on its side, meaning it has the ecosystem to enable more development and growth on its own platform. Still, with projects chasing interoperability more than ever before, its reign over decentralized applications might not last much longer.


For the last few years, the ETH token has maintained its position as the second-most valued cryptocurrency by market capitalization. While other digital assets shift in and out of the ranks beneath it, none of them have posed much competition to the original smart contract platform.


However, Ethereum has faced multiple issues since its launch, including high gas fees, transaction throughput and network congestion. The network is simply too popular for its infrastructure. During development discussions for Ethereum 2.0, Gavin Wood, co-founder and former CTO of Ethereum, saw that its inherent limitations would not only stop more people from using the network, but also prevent better DApps from entering the space.


Within months, Wood came up with a whitepaper and a vision for the future of distributed applications. His concept for a heterogeneous multi-chain framework — the Polkadot protocol — quickly generated a lot of hype, and the network's native DOT token shot into the top ten ranks soon after its public launch.


Polkadot is a decentralized network connected to several parallel blockchains on "parachains," which are Layer-1 blockchain equivalents designed specifically to run a certain DApp or group of DApps. These parachains are interoperable with each other, but not just anyone can create one. In fact, projects need to win a "slot auction" to access these parallel, interoperable blockchains, paid for by locking DOT tokens in a smart contract.


Parachains are essentially fully functional blockchains that run alongside the main Polkadot relay chain, but developers can customize their characteristics to best suit their DApps. These slots are incredibly valuable, especially for newer projects trying to create platforms for the long run. Winning a parachain auction can be expensive, but not how you'd expect. The DOT tokens locked up to gain control of a parachain are returned to the team once the lease expires, making the true cost only the lost opportunity to stake those tokens.


Parachains also offer DApps a host of other features, including plug-and-play security, interoperability, governance, and forkless upgrades — something Ethereum has never done before. It also has lower fees and is far more scalable than any Layer-1 blockchain solution.

A Little Help From Your Friends

Crowdfunding has been an integral part of the blockchain industry's growth, and as a technology that promotes decentralization, it only seems natural that blockchain's benefactors would come from all over the world. However, while the ICO model has evolved to a point where there aren't as many scams on the market, it could still be a lot better.


Though winning a parachain auction on Polkadot could involve staking millions in DOT tokens, teams can also raise funds through a "crowdloan." This model could pave the way for an era of decentralized crowdfunding, creating innovative, valuable applications with blockchain technology in a fully distributed manner.


Slot auctions aren't the only way teams can get their hands on a parachain. They are also acquirable from a secondary market by purchasing or renting it from another group that won the slot. Parachains are sold in an unpermissioned candle auction — a method used to auction ships in the 16th century where the winner was the highest bidder when the flame went out — which terminate after a random amount of time determined by the system.


Auctions for both Polkadot and its testing "canary" network Kusama will function similarly, and teams bid using two pieces of information — their bid amount and slot duration. Slot duration is determined in six-month segments, with two years being the maximum allowed duration. Smaller teams tend to bid for smaller slot durations, while larger projects with more long-term goals will bid for the maximum duration.


Crowdloan contributions also remain open as long as the parachain auction, enabling people to contribute more capital during an auction to provide additional support. Winning teams move on to launching their mainnet parachain while losing teams can choose to participate in any of the auctions taking place every few weeks.


The team expects parachain slot auctions to become a lot more popular, becoming regular occurrences that happen all the time once the network scales to more than a hundred parachains. When someone contributes to an auction, the DOT tokens are locked in a contract in exchange for that team's DApp token.


For example, the Acala network, one of the first parachain projects deployed on Polkadot, crowdloan participants received the network's native ACA token in exchange for locking up DOT tokens. Parachains sometimes airdrop these tokens with only a percentage of them being unlocked. The remaining tokens are unlocked over time, and the locked DOT isn't moved or used by anyone on the team, eliminating the risk of scam projects running away with funds.


Acala is a high-performance platform for decentralized finance, and was founded by members of two teams from the Polkadot ecosystem — Laminar and Polkawallet. Acala brings all kinds of DeFi-related services to the Polkadot network, including a decentralized exchange (DEX), staking, and aUSD, an algorithmic stablecoin. Teams running a parachain can also decide how much to reward its participants, and whether or not they get rewards for funding the parachain at all.


Parachain owners ideally upload all of their chain data before asking for funding from the market, allowing participants to verify its data before making their decision. The chain's data can only be uploaded once during the campaign, and includes the state in which the parachain will be deployed. However, parachains can also implement changes to the network's state through runtime upgrades determined through the platform's governance protocols.


At the end of the parachain's slot duration, the DOT tokens are returned to the original contributors, losing out only on the staking returns they could have received over that period. That being said, as long as the gains from the parachain token (Acala's ACA, Karura's KAR) are more than the potential lost staking returns, there's no downside to helping a team get their project up and running.


To renew their slots, teams have a few options at their disposal. The most obvious one is to host another crowdloan to source funds to re-lease the parachain, and teams can also shift to a 'parathread' model, which uses a pay-as-you-go model. However, larger teams with more sophisticated functionality can create their own wealth funds to build funds specifically to fund parachain auctions, making the network self-sustaining.

Developing Development

Polkadot is on its way to shifting how teams fund their blockchain-based projects and lowers the barrier for entry from hundreds of thousands of dollars a year in blockchain infrastructure to a simple crowdfunding structure. The first milestone will be reaching 100 live parachains on both Polkadot and its testing network Kusama, but it won't be easy.


However, we may even see enterprise or government parachains on the network in the future, potentially bringing some of the world's most influential people to the Polkadot council. Currently, it's cheaper and easier to win and set up a parachain on the Kusama testing network, but teams can also launch on the Polkadot network immediately after they acquire a parachain for it.


Teams can launch on either network and in any order depending on their requirements. For example, Acala launched on the Polkadot network first before starting its crowdloan efforts to deploy Karura (a DeFi product similar to Acala) on the Kusama network. Polkadot also guarantees free parachains for "common good" projects.


These are system-level parachains that serve a specific purpose, such as bridging to another network or making parachain processing more efficient. Polkadot can even integrate with bridges like Interlay, ChainX and RenBTC to bring tokens like Bitcoin into its ecosystem.


Further, Polkadot also makes it easier for developers to write blockchain applications. Unlike Ethereum, which only runs applications written in Solidity, Polkadot can parse any WebAssembly-compatible programming language, even popular ones like Rust and Javascript. This could encourage more developers to develop software for the platform by removing the need to learn a new programming language.


The Acala DeFi hub recently launched its Acala EVM, which allows the network to run DApps built for Ethereum. This opens Polkadot up to hundreds of applications that were previously only available on Ethereum, allowing developers to make use of both platforms' user bases. The EVM even has an on-chain scheduler for DApps that require subscriptions or recurring payments and could help improve liquidity and composability for both Acala and Polkadot.


The Acala EVM also walks around some of Ethereum's legacy issues while maintaining all the benefits of running on Substrate — the platform built by Parity which runs Polkadot and its parachains. For instance, Acala offers a completely adjustable economy that's upgradable, interoperable, and has on-chain governance systems, and Ethereum-specific code can get lost in translation unless certain code adjustments are made to ensure compatibility.


Blockchains require stakeholders to have aligned interests, and the complexity of maintaining these incentives scales as the network becomes more functional and requires more security. This makes them more optimal for solving specific problems against platforms made for broader use-cases, and Polkadot's parachain crowdloan system enables projects to take advantage of that.


In the last ten years, blockchain has represented the potential behind a decentralized future, but unless distributed systems can become more efficient in resource management, innovation and progress are bound to be slow. Not only does developing for blockchain require experience with finance, computer science, and cryptography, it also needs expertise on topics like distributed networks, payment protocols, market psychology, and economics.


Interoperability between decentralized networks is paramount to the growth of the blockchain industry, enabling developers to create better applications and use development resources more efficiently. As projects like Acala continue to launch on Polkadot, the industry is slowly shifting from standardized universal platforms to customizable use-case-specific chains, which could make blockchain a much more formidable competitor against the traditional financial services industry.


The DOT token currently has a market capitalization of over $30 billion, and some critics question whether the Polkadot platform and its parachains are actually worth that much. However, the problem with trying to analyze the fundamentals of a blockchain-based product is that markets don't value platforms the same way they value companies to solve real-world problems.


Polkadot functions on a fundamentally different model from anything we've seen before, making blockchain development and its applications better and more inclusive to developers and users alike. The goal with Polkadot and parachains like Acala isn't to recreate the Ethereum ecosystem on a different blockchain — it's to create an easier way for these networks to share resources, create cross-chain innovations, and better interact with distributed applications.


Whether this new model of blockchain crowdfunding will stick around is yet to be determined, but only time will tell whether Polkadot's parachain auction system will truly benefit the industry. However, as an interoperable smart contract platform that promotes DApp development, its existence might just complement Ethereum's to build a much more prominent, thriving ecosystem of interacting decentralized applications.


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Author(s)

Anupam Varshney

I'm the founder of Octaloop.com

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