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FDT Explorer: Polkadot’s Parachain Auctions

Raphaël Tressieres
Raphaël Tressieres 6 July 2021

Polkadot first came to the attention of the wider world when it leapt into the top five most valuable digital assets in the world in April this year.

Built around the concept of heterogeneous sharding in three layers, and founded by a team including ex-Ethereum CTO Gavin Woods, Polkadot was suddenly one of the most interesting projects out there as well as one of the most valuable tokens.

Now, it’s bringing its longtime vision to fruition by preparing to begin its first live parachain auctions. In this post, we’ll go over what parachains are, why and how they’re being auctioned, and how to participate. First, though, let’s cover the basics.

What is Polkadot?

In technical terms, Polkadot is a three-layer blockchain. There’s a user-facing layer consisting of applications and user interfaces — Layer 2. Under that, there’s a blockchain built in Polkadot’s own Substrate framework — Layer 1. Polkadot is open source, so anyone can contribute. But the blockchain we’re talking about here isn’t made by Polkadot. It’s made by any one of a number of different companies that have built their own blockchains and ecosystems inside Polkadot. Underneath it is the ‘Layer 0’ Relay Chain, the core of Polkadot, which bundles transactions from all the Layer 1 chains into blocks.

This has several major advantages: it makes Polkadot an “ecosystem of ecosystems”, whose chains can talk easily with each other. Tokens can be passed around easily between projects and full composability makes DeFi applications much more appealing. There’s a complete technical guide to Polkadot here.

In business terms, Polkadot is less like a single business premises and more like a shopping mall or an industrial zone. Its plan isn’t to allow businesses to build applications. Instead each business will build its own custom blockchain with its own rules, internal economy, and ability to sell space to Dapps or other third-party customers. The tool that makes this possible is the parachain.

What is a parachain?

Polkadot parachains are custom blockchains that underlie groups of applications. Projects can build their own Layer 1 blockchain using Substrate, customized to best support their preferred applications or industry.

Parachains “plug into” the main Polkadot relay chain, but the computational resources required to service them are limited. Currently it’s thought that there will only ever be a relatively small number of parachains on the Polkadot network at any one time; 100 is the expected maximum. Each parachain will occupy a slot that will be sold at auction.

What are parachain auctions?

Polkadot will sell off parachain slots at auction, letting projects bid on slots and times. Each slot is available for multiples of six months up to a maximum of two years, after which it must be resold. However, there’s nothing to stop a project bidding on another parachain slot so there’s no reason to expect downtime for successful projects. The slot times are there to ensure the Polkadot chain isn’t slowed down by “zombie projects” that still own their parachain slot and absorb computational resources but are otherwise inactive.

How do parachain auctions work?

Parachain auctions will be held by a process referred to as “candle auction”. In a traditional online auction the end point of the auctio is known by all participants ahead of time. This encourages sniping: waiting until the very last minute to enter a winning bid. It prevents the auction from discovering the true price of the goods being sold, and it also makes them unfair. Candle auctions were used in the seventeenth century: a length of candle was lit and when it went out, the auction was over. The precise end point was uncertain so sniping was discouraged. Polkadot intends to use a random number generator to achieve the same end. After the bidding period of the auction has closed, a point in time prior to the end of the bidding period will randomly be assigned as the close of the auction — meaning it’s possible to enter the highest bid and still lose the auction.

When will Polkadot hold its parachain auctions?

We don’t know yet exactly when Polkadot will hold these auctions. We do know that the process has already been trialled extensively on Polkadot’s testnet, Rococo, and parachain auctions on the Polkadot canary network Kusama have already begun.

The schedule for the Kusama parachain auctions looks like this:

  • 2021/06/15, 12:00 GMT: First Kusama Parachain Slot auction commences. Bids may be placed.
  • 2021/06/17, 09:00 GMT: First Kusama Parachain Slot auction ending period begins. Only bids made prior to this point will certainly be considered in the final result. Bids made following this point have a linearly reducing chance of being considered.
  • 2021/06/22, 09:00 GMT: First Kusama Parachain Slot auction bidding ends. No bids may be made on this auction following this point.
  • 2021/06/22, 11:00 GMT: First Kusama Parachain Slot auction winner selected. The auction winner is determined as the highest bidder at some randomly selected point over the past five days.
  • 2021/06/22, 12:00 GMT: Second Kusama Parachain Slot auction commences.

The winner of the first auction, which closed on June 22, was Karura, the Kusama sister network for DeFi Polkadot project Acala. The final bidding price was 500,000 of Kusama’s native KSM token, equivalent to about $100 million.

Dan Reecer Tweet

Dan Reecer, VP of Growth at Polkadot-based DeFi network Acala, tweeted on June 8th that Polkadot’s parent Web3Foundation had emailed him to confirm that Polkadot parachain auctions would begin soon:

Dan Reecer Tweet

Who are the players?

A full list of the projects working on Polkadot can be found here. This is a list of the projects that are known to be preparing to take part in parachain auctions.

Acala

Acala is a Polkadot DeFi hub, with AMM, DEX, a USD-pegged stablecoin backed by cross-chain assets, its own native ACA token, and a trustless staking derivative. Smart contracts and Dapps developed and operating on Ethereum can be ported seamlessly across, giving Acala access to the stablecoin, token, and NFT economy of Ethereum as well as its own developing ecosystem. Its sister network won the first Kusara parachain auction with a crowdloan and it’s likely that Acala will claim a spot on Polkadot early on, particularly since VP of Growth Dan Reecer is also a Polkadot founder.

Moonbeam

Moonbeam is a smart contract platform designed to run on Polkadot and offer cross-platform interoperability through what it calls a “Layer 1.5” implementation that mirrors Ethereum’s “Web3 RPC, accounts, keys, subscriptions, logs, and more”. Developers can port across their Solidity projects from Ethereum, as well as MetaMask, Remix, Hardhat, and Truffle and built-in integration for Dot and ERC-20. Users can sign into Moonbeam with their Ethereum keys and usernames.

Kilt

Kilt is a protocol for identification without passwords, that removes the risk of accumulating a tranche of personally-identifiable information in unsecure locations off the blockchain. Using independent verifiers and attesters on the Kilt blockchain, Kilt creates an immutable log of verified claims (this person has a Master’s degree, this person is qualified to drive) which can be consulted by third parties without them having to store any such information themselves.

Loom

Loom is a multichain interoperability platform optimized for high-performance scaling, and aiming to deliver a user experience comparable to traditional web applications on blockchain. Loom plans to build Polkadot into its own ecosystem and to participate in Polkadot, including plans for a parachain auction bid.

How to participate in a parachain auction as an investor

To participate in a parachain auction as an investor, you can approach individual projects and invest with them, either through their existing networks or through traditional stock purchases or loans.

The alternative is to participate in a Crowdloan, a crowdfunding tool designed to offer the advantages of an ICO without the drawbacks.

In a crowdloan, investors offer the project their DOT or KSM, and the project uses the funds to bid on a parachain slot. But the project doesn’t custody the funds; Polkadot does. Project leadership has no access to the funds and they’re locked up until the parachain slot is surrendered at the end of the lease period. When that happens, everyone who participated in funding the Crowdloan gets their DOT or KSM back.

To participate in a Crowdloan, you need a Polkadot account with a positive balance. Find the project you’d like to contribute to under the Crowdloan tab in the Polkadot dashboard, select Contribute and choose an amount. The process is as simple as that.

If this sounds interesting, you can do a dry run on the Rococo testnet. Find Rococo under Apps Wallet (Hosted) > Test Relays and Parachains, open a Rococo account under Accounts > Add Account and add a balance by going to https://app.element.io/#/room/#rococo-faucet:matrix.org and entering !drip and your account address. This will give your account 20 free ROC tokens to test things with. Then you can open Rococo’s Crowdloans tab and go through the process of contributing.

How to participate in a parachain auction as a project

Participating in a Polkadot parachain auction as a project is a major undertaking, one that most of the current crop of would-be Polkadot heavyweights have been preparing for for months. If you’re a larger organization approaching Polkadot with conventional corporate treasury or investor funding, you may simply need to convert your treasury funds into DOT and enter the bidding on a parachain slot when one becomes available.

If you want to participate with Crowdloan funding, you’ll need the Substrate pallet pallet/simple-crowdloan.

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

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