In this post, I’ll dive into crowdloans, how they’re different (and much better) than ICOs, how to participate, how parachain auctions work, and much more. First a quick intro…
Hey! This is Dan Reecer. I am currently VP of Growth for Acala and Karura, and previously launched Polkadot and Kusama at Web3 Foundation. Acala is building the all-in-one DeFi hub of Polkadot, and Karura is serving the same purpose for the Kusama community.
Karura’s parachain auction will take place first and is, in my opinion, the most useful and anticipated launch on Kusama in 2021. From day 1, Karura will provide the Kusama community a Uniswap-like AMM DEX, liquid staking for KSM, and the Karura Dollar (kUSD) that we expect will be the de facto stablecoin of the Kusama ecosystem.
It’s also important to first understand what Polkadot and Kusama are enabling with this new approach to a multi-chain network. Polkadot is a 3-layered platform, unlike legacy networks like Ethereum who are just one isolated chain with apps. Here is a simple diagram to explain:
Background info on crowdloans and parachain auctions
Polkadot enables a multi-chain ecosystem of several connected parachains (each parachain is what we call a “layer 1” blockchain equivalent to today’s Ethereum). However, not any blockchain can join Polkadot. Teams must win a “parachain slot auction” in order to win a slot to connect to Polkadot.
Think of a parachain slot like a spot in a small parking lot next to the World Cup stadium. These spots will be in high demand and not easy to get because of the value they bring to each car owner. The same goes for Polkadot, especially this early as the first slots open up.
Obtaining a parachain slot (one of the small spots inside the gray inner ring — the Relay Chain) is the only way a team can truly become a “Polkadot parachain”. Winning a slot offers everything that comes with the desired Polkadot nirvana: plug-and-play security, inter-communication with other chains, governance, forkless upgrades (constantly being able to upgrade the core blockchain without a fork — in comparison, Ethereum hasn’t upgraded once since launching), scalability, low fees, etc.
To win a parachain slot, a team or individual must participate in and win a parachain slot auction OR acquire the slot on a secondary market from some person/group who won the slot with the intent to re-sell or rent it (🤯 — going to be fun to see what happens).
Parachain Slot Auctions
The parachain slot auction will look like this — the day of the first auction will be announced, teams/people will prep but we won’t truly know who is participating until the day it starts. It’s going to be like some awesome/nerdy sporting event that we can all watch live.
Participants can bid in the auction in two ways: using the funds they raised in a crowdloan (more on this later) or they can use an ordinary Polkadot account if they’re a whale of some sort.
The parachain auction is an unpermissioned candle auction — candle auctions were originally used in 16th century for the sale of ships. In these auctions, a candle was lit and when the flame went out, the auction would suddenly terminate and the highest bid at that point won.
Polkadot and Kusama’s auctions will function similarly. We will have a KNOWN open time and KNOWN close time. Once the auction opens, teams can bid using their entire crowdloan contribution or bid with a single account. This will continue into a bidding contest.
Teams will be bidding with two pieces of information: 1) their bid amount and 2) their slot duration. The slot duration can be up to 2 years. Technically this is four 6-month slots. The minimum is 6 months. A long-term, key parachain like @AcalaNetwork will bid for 2 years.
One very important thing to know is that crowdloan contributions don’t end until the end of the parachain auction. So, if someone contributes to a parachain and sees they need additional support, they can contribute to the crowdloan again even during the auction.
So how does the auction end? After the pre-defined “close” time, the Polkadot system will generate a random “end time”. This end time (red line below) will determine the ‘block’ or moment in time when the winner will be selected.
The team who wins the auction will then quickly move to its mainnet launch of their parachain. For any team who does not win, they can choose to participate in one of the next auctions (these are expected to happen every couple weeks).
In the very year future, Polkadot and Kusama parachain auctions are going to be a regular occurrence happening almost at all times as we scale up to 100+ parachains on both Polkadot and Kusama.
What are Crowdloans?
It was necessary to start with parachain slot auctions, because this is the whole reason crowdloans exist. As mentioned above, a crowdloan allows a team to crowdsource DOT (for Polkadot slots) or KSM (for Kusama slots) to use to bootstrap its parachain auction.
We all know how ICOs worked: people would contribute some token, say BTC, that they will never see again. In return, they would get a token that they hope appreciates in value. There is no way to know for sure if the team will deliver, and this model has led to many scams. Luckily the industry has matured quite a lot since this craze in 2017.
This year we’ll see the beginning of a new, ethical model called a “Crowdloan”. Let’s stick to Polkadot as the example (but all of this applies to Kusama too). When crowdloans begin on Kusama and Polkadot, several parachain teams will crowdsource KSM and DOT from their community.
For example, if I am participating, I could contribute, say, 100 DOT to Parachain A. That DOT is then locked (sometimes called “bonded”) for the duration of the parachain’s slot (2 years in Acala’s case). For this support, I would receive an amount of ACA relative to my DOT support.
When parachains airdrop their native token, it’s likely that a % of this will be transferrable and unlocked, and a portion will be locked in your wallet with a vesting schedule (unlocking over a period of time). In Karura’s case (Acala’s DeFi network on Kusama), 30% is unlocked and 70% will be vesting.
It’s key to understand that all DOT or KSM contributed by a parachain’s supporters will be locked in the Relay Chain for the entire duration of the parachain slot, not touched by anyone on the team. This aligns interests for the team to deliver on their vision and eliminates risk of teams running away with funds like we saw with ICOs.
At the end of the parachain slot, 2 years in Acala’s case, all original contributions are returned to contributors. In my example, I would receive my 100 DOT back after the 2 years. The main tradeoff I’d be making is to sacrifice the ~12% staking returns over that period.
So what happens at the end of the slot when the parachain needs to renew their slot? There are a few options:
- the team could host another crowdloan
- the team may decide it doesn’t need a parachain slot anymore or move to a parathread (pay as you go model)
- A team with sophisticated parachain functionality like Acala’s decentralized sovereign wealth fund (dSWF) could build up its own on-chain wealth fund, or treasury, to become self-sustaining and self-fund future slot auctions without the need to hold another crowdsourcing event.
That’s a wrap. In summary, parachain slot auctions are the way a blockchain gets a slot on Polkadot’s network. Teams competiting on these auctions can either crowdsource DOT (for Polkadot slots) or KSM (for Kusama slots) to bootstrap their auction bid, or a team/person could compete in the auction with a regular DOT or KSM account if they’re a whale or don’t want to do a crowdloan.
If you’re excited about what’s coming with parachains, check out the Acala DeFi Apps (below) which are live on testnet and ready to launch. You can use the Getting Started guide to get your testnet tokens, then try it out at apps.acala.network.
If you have more questions, please add your questions in the comments of this tweet thread and I’ll respond to you.
Hope you learned something new. Thanks for reading.
Crowdloan and parachain auction Q&A from This tweet:
- M D: @empidavies and @VoiceMyAmbition
- How Many slots are available in each individual auction? 1 Or Multiple?
- This gets a little confusing. Technical teams can bid for up to 4 slots (each 6 months) for a total of 2 years. So a team could choose to only bid for 6 months, or they could max it out and bid for the full 2 years.
- Al: @friendzoneAl
- Can I do anything else with the tokens that are loaned in the crowd loan? E.g. could I stake them AND contribute them to the crowd loan at the same time?
- No. The tokens you stake/bond in support of a parachain team will not be able to be used for anything else. This is the trade-off contributors accept when participating.
- ElTukko: @eltukko21
- The $KAR & $ACA rewards by leasing $KSM / $DOT will be distributed in a single drop once the auction is awarded or will be distributed daily/monthly similar than a staking reward?
- Yes, the rewards will be distributed in one transaction. However, tokens may be subject to a vesting period. For KaruraNetwork for example, 30% will be unlocked while 70% will be subject to vesting.
- travi: @travis_turner
- Will auctions for both networks be conducted the same?
- At the beginning, Kusama parachain auctions will begin first. Once Kusama parachain auctions start and things are running smoothly, then Polkadot auctions will begin. However, it’s definitely feasible to think auctions on Polkadot and Kusama could run in parallel in the future.
- Polkadotters: @Polkadotters1
- How often will be opened the new slot for Kusama? Does it make sense for a project to reward users who lock $DOT in this stage for Kusama parachain auction (or just $KSM)?
- We are actually waiting to find out how often new slots will open (and auctions happening). I’d expect them to run pretty frequently, potentially like 2 per month. 2nd question: No one can lock DOT for Kusama-based parachain auctions. Only KSM.
- SchemeDream: @SchemeDream and @AceCrypto2324
- How many competitors are there going to be per bracket? How many parachains are being offered this year? Who is your favorite vs who is the underdog?
- We won’t know until the parachain auction actually begin. There could be a secret whale who comes in to buy a slot on her/his own. We also don’t know how many slots will be open in 2021 but the goal and plan is to reach 100+ live parachains on Kusama and Polkadot.
- TradingTalks: @tradingtalks48
- Will the parachain auctions be visible to all participants or unknown? so essentially you have to bid as high as possible without knowing who has bid the highest?
- The parachain auctions will be on-chain and completely transparent. You’ll know exactly how much each project or participant has contributed at any point in the auction. I’m waiting to see who will build the website/app to watch this event live…we need a live scoreboard!
- A Handsome Man: @twinsforum
- well who are the top contenders for the parachains?
- There are several great teams who plan to participate, but we won’t know until the day of the event who truly participates.
- lateadopter: @lateadopter8
- Will we see any institutional parachains in the future?
- I would be shocked if we didn’t see an enterprise or government parachain of some sort in the future. Only time will tell, but the possibilities are endless. Someday the Polkadot Council could include people like heads of government, CEOs of Fortune 500 companies, etc. who have a strong interest in the direction of the network.
- kqryptic: @dlrowehtfoweiv
- Do parachains have to prove themself for 2 years on ksm before becoming a dot parachain, or are both auctions done at the same time?
- No, parachains can launch on Kusama then launch another network on Polkadot immediately after, and run both at the same time. It can be seen like a bank opening a branch in Germany and another branch in China — both countries have demand for services (same as Polkadot and Kusama).
- Naruto: @Naruto22670619
- is there going to be an integration with metamask so that we can store our ksm and dot on metamask?. Also, will Kusama or Dot will be used as a collateral for Acala?
- I hope someone builds something meant for end-users and optimized for user experience. Right now the only option for browser extension is Polkadot.js. 2nd question: Yes, KSM and DOT will be integrated into Acala and Karura’s DeFi apps.
- The Thi3rd: @KSBISTSR
- Based on ppl been lazy, Will web3/Parity be releasing YouTube vids explaining the rules of engagement around parachains (how candle auctions work, parachain slot thresholds etc) ?
- II’m expecting many leaders to step up amongst parachains to start taking on some of this educational work for the community (including us at Acala).
- Paper Trails: @GT3_BTC
- How many spots are available on each? Is the $DOT/ $KSM locked up in the voting process?
- There will be up to 100 or more slots open on both Polkadot and Kusama. Yes, if a parachain crowdsources DOT using the ‘crowdloan module’, then that DOT will be locked trustlessly in the Polkadot Relay Chain for the duration of the parachain slot (up to 2 years on Polkadot).
- boyswan: @boyswannn
- Do you think a cap will be applied to the KUR/ACA crowdloan, such as the maximum needed for n-years lease? If so, will it be first-come-first-served?
- This is totally up to each parachain team. Since the crowdloan’s purpose is to help bootstrap the parachain auction, it is likely that teams wouldn’t have a maximum.
- WE COULD BE KINGS: @cya_at_the_top
- What is the cadence for auctions and how many for each? If you are staking the dot already on an exchange will you still be able to vote for parachain auctions or will you have to remove that stake and restake.
- I’m wondering the same thing! We don’t yet know the cadence of auctions, but it’s likely to be around every 2 weeks. 2nd question: It depends on if your exchange is offering support for parachain auctions. If they do not, then you’d need to move your DOT/KSM to somewhere that does support participating.
- KSM will break up?
- I assume you’re talking about Kusama doing a redenomination like Polkadot did. This is highly unlikely given how engrained Kusama is in wallets, exchanges, and other infrastructure. If it did get proposed, it would have to pass a governance vote but I think it would be very messy to try to do this at this stage.
- Joel Jakob: @JoelJakob3
- Will ALL projects first go through Kusama or will some bypass and launch directly on Polkadot? Also, are any projects going to be guaranteed a parachain based on their benefit to the entire ecosystem? If so, which projects? Thank you.
- Certainly all projects won’t take the same path. Some will go thru Kusama first, then Polkadot. Some will go to Kusama and stay there forever. Some will go only to Polkadot. It depends on the team and what their needs are.
- 2nd question is great: Yes, some projects or bridges could be guaranteed a free parachain slot if they serve a specific purpose. This is called a “common good”. These system-level parachains could be a bridge to another network or a functional chain like a governance parachain that removes work from the Relay Chain., making the relay chain more efficient for parachain processing.
- Investkwon: @investkwon
- Will there be a max cap to each address taking into account bot distribution into other many unique wallets? One way is by doing kyc for each. How do you intend to hinder/block bots from participating in the auctions?
- This depends on the specific team and how they choose to approach the crowdloan process.
- DerMonte: @DMonte0
- Can we integrate Bitcoin?
- Bitcoin cannot be integrated into the crowdloan process (yet), but Bitcoin is very much being integrated into the Polkadot ecosystem through bridges like Interlay, ChainX, and RenBTC.