Explaining the Litentry Parachain Auction (II) — Reward Schema, Cost And Advantage
In our previous article, we discussed why Litentry is joining the Polkadot parachain auction. As crowdloan is currently the most efficient way for participating in the parachain auction, in this article, I will explain how we will utilize crowdloan to secure a Parachain slot in the auction, which will include the background, the research, and the reward plan of the Litentry crowdloan.
In order to ensure the long-term success of the Litentry project, and to design a reasonable crowdloan strategy, we need to consider the following aspects:
Crowdloan reward — a double-edged sword
Generally, a network pays the inflation to the network maintainers who ensure the security of the network. However, parachain and its related crowdloan provide an innovative way for blockchains to get security from a high-value network and could also distribute the project’s token to supporters from the Polkadot community.
As we are building a multi-chain identity, we believe in the multi-chain future. This crowdloan is a strategic step for the Litentry Network, as our parachain will be connected to the Polkadot relay chain to gain shared security and interoperability. Our aggregated identity protocol will gain a great advantage in becoming the standard and the fundamental core in Web3. Designing a crowdloan plan is not easy for Litentry since LIT is already traded on the market: On one side we need to give more LIT token rewards to attract voters in the Polkadot ecosystem, on the other side we need to make sure we do not hurt the interest of LIT holder, not to dilute the price of LIT, and also to have enough LIT for project growth in the long-run.
The estimated cost of Polkadot crowdloan
According to the token economics designed by the Web3 Foundation, there are estimated 25%-30% DOT will be locked in the parachain. The current total supply of DOT is 1.126 Billion and consider there will eventually be 100 parachains on Polkadot, so the average locked DOT per parachain is around 3 million.
But if we refer to the Kusama 1st and 2nd batch parachain auctions from Parachains.info, the cost varies from 132k KSM to 501k KSM, totally raising 2.365 Million KSM, average cost 215k KSM, which is about 1.85% of the total KSM supply. And 1.85% of the total supply of Polkadot is 20.8 Million DOTs.
Still and all, 3 Million and 20.8 Million sound a bit far-fetched so we can’t completely rely on these numbers. As in, 3 Million is not realistic because the 1st and 2nd batch of the Parachain auction will definitely get hyped and overpriced, because at the moment the slots have a very limited supply. As in, 20.8 Million is overestimated because the aforementioned Kusama auction was the first-ever parachain auction in the industry, while now there is enough parachain supply on Kusama especially after the continuous parachain auction is enabled. Also worth noting is that the token holder metrics on Kusama and Polkadot are different. With 13 times larger market cap (Kusama 3.2 Billion, Polkadot 42.3 Billion ATTOW), Polkadot’s token holders are more distributed. We also expect there are more institutes that prefer to hold their DOT, because it is almost risk-free to stake compared to locking DOT into Parachains.
Probably a useful reference is the increase of unstaked DOT when the news of the parachain auction was released on 13th Oct. We monitored the staking rate has dropped from 61.7% to 56.9%, with about 4.8% (54 Million DOT) token unstaked. As most of the parachain investors are long-term DOT holders, we can anticipate these 54 Million DOTs will account for the biggest part of DOT contribution in the first round of the parachain auction. And considering the first 1 or 2 parachain will attract the most DOT contribution, we decided to use the amount of around 8 Million DOTs as our hard cap.
The sustainability value of LIT
A crowdloan can not secure a parachain slot forever, but for 2 years.
As we know, the value of the project depends on what the project brings to the whole ecosystem, to the industry, and to society. To be a parachain is our goal, but we will need to control the cost and pursue long-term sustainability.
Reward Schema & The Numbers
Litentry is expected to participate in the Polkadot auction from the first slot and continue to bid until we secure a slot. This crowdloan is an effective mechanism for us to gather support and gain an impeccable advantage in the auctions. In designing the reward schema, bonus APY, fairness, opportunity cost, time, and many other aspects are carefully considered to provide our supporters an intriguing, rewarding, and meanwhile sustainable crowdloan system.
Compared to projects that haven’t issued native tokens, Litentry will be using 20% of the total supply of LIT with extra bonus to reward supporters who help us gain a superior position in the auctions, which means more consideration must go to our existing communities, LIT holders, and the long-term impact this crowdloan potential have on our project growth.
- Slot leasing period (Parachain duration): 96 weeks
- Crowdloan hard Cap: 8,000,000 DOT
- Total LIT rewards pool: 20,000,000 LIT (20% of total supply)
- Crowdloan campaign deadline: 17 December 2021
- Minimum contribution: 5 DOT
- For each 5 DOT locked, a participant will be rewarded with a minimum of 12.5 LIT. Yet, we anticipate the reward would be higher, which comes down to the amount of support that Litentry receives.
- Vesting period: LIT rewards and LIT bonuses are distributed linearly in each block. The distribution will start once the Litentry parachain runs on the Polkadot relay chain and will continue until the parachain slot expires.
- Up to 10% extra early bird bonus.
- Up to 10% extra bonus related to identity-related tasks (include 2% if you register in the waitlist).
- Compensate if failed the auction with the ratio of DOT:LIT = 1:0.12
Why Attend Litentry Crowdloan?
To raise DOT in a crowdloan, there are primarily two options available:
1. Buy DOT tokens from the public trading market or Borrow DOT tokens from institutions;
2. Rent coins from DOT/KSM holders.
For the first option, no major LIT tokens dilution will happen as the teams get most of the LIT rewards. The downside is the team has to either pay fiat money in the trading market or pay the interest for the loan, which will significantly reduce the fund available for project development. Alternatively, the second option dilutes LIT supply to a certain extent, while leaving the fund for project development untouched. We see that the case of diluted LIT won’t cost more than the fiat paid in the first option because LIT rewards are distributed linearly. Therefore, option 2 does not do harm to the community, rather it is an inflation model similar to the one we have for our own network securers.
That’s why we want to keep everything transparent and public and run this crowdloan in a fully community-focused way.
Profit is always related to risk control. The biggest advantage of the Litentry Crowdloan plan is that the contributors would have fewer risks in supporting Litentry. LIT tokens are already traded on the world’s largest exchanges and can be traded instantly once the contributors have the LIT token. A big difference between Polkadot and Kusama parachain is, the leasing period of Polkadot parachain is 2 years, as the reward token is mostly distributed in a linear method, contributors should consider the long term value of a project rather than the short hype of the expectation to be a parachain.
Market proved value
Litentry is different from all the other parachain teams as LIT is already traded on crypto exchanges since 4th. Feb. 2021.
Compared to projects that don’t have a token, the APY of Litentry crowdloan rewards is quite obvious to our contributors. Need to be noticed here, even without the mainnet launched, the market cap of LIT ranks #6 in the whole Polkadot ecosystem according to Messari’s statistics. The price indicates the vision is proved by the market and the team’s operational efforts are proved by the community. After the mainnet launches, and the identity-related functions gradually onboard on the Litentry parachain (which I will explain in the next article), the risk that contributors bear would be significantly reduced.
Less unvested tokens
According to the token allocation plan of LIT, the time when the Polkadot parachain auction starts on the 11th.Nov.2021, there is only 2.08% strategic sale and 1.62% of seed sale token is still vested (until 4th. Feb 2022). More than 80% of investors’ tokens are already unvested in the market. If you compare other projects on DotMarketCap, you will find that almost all the other projects have the plan to release a big part of investors’ tokens in the next 2 years.
Less unvested tokens not only mean less speculation when parachain is onboarded on Polkadot but also mean smaller dumping pressure during the next 2 years. In other words, more controllable profit and less risk.
Linear reward distribution
We want to encourage every contributor to focus on the long-term value of LIT. That’s why the token will be distributed in a linear fashion with the vesting pallet on the Litentry Parachain, so there is not much speculation at the beginning for all the parachain contributors.
One exception is that we will also cooperate with centralized exchanges to distribute the reward, which makes it hard to do linear distribution, but we will try to make the distribution fair to our DOT supporters on decentralized platforms like the Polkadot.js app.
Compensation when failed
Any team in the crowdloan can’t be 100% sure to win the slot, so we also take the failure case into consideration and try to compensate for the opportunity cost of DOT contributors. Specifically:
- If Litentry doesn’t win a slot in batch 1 auctions, Litentry will compensate our supporters for their DOT contributions.
- The compensate ratio is DOT:LIT = 1:0.12
- The expected compensation APY is 13%
- If a slot is successfully acquired, there will be no compensation anymore.
- The compensation will be distributed on Polkadot until Litentry wins a parachain slot.
The compensation plan won’t dilute the LIT token much as we also aligned the compensation APY according to the total reward plan.
The compensation will be aligned for all the decentralized platforms as well as Polkadot.js. But we will not make the compensation If a user votes on a centralized exchange, because the centralized exchange generally has its specific reward plan.
Up to 20% Extra Bonus
In addition to the 20% total supply of the LIT reward pool, we also provide up to 20% extra bonus rewards. Theoretically, total LIT rewards could account for up to 24% of the total LIT supply. But it requires the investors to fulfill certain requirements or complete certain tasks.
Though we have collaborated on the Parachain Auction with multiple platforms, some of the platforms also provide extra bonuses like Parallel Finance. But there are partnerships that are still in the discussion that we cannot disclose. We are trying to make the bonus aligned with the same requirements and distribution plan.
Early bird bonus up to 10%
As Polkadot auction is using a candle auction behavior, it is critical for a project to get early contributors. Also, the contributors who lock their DOT earlier pay more opportunity costs. Thus we provide the extra bonus for our early supporters.
The crowdloan feature will be enabled by this motion on the 4th. Nov. I guess most of the project will register parachains on the 5th. Nov. Therefore, before the parachain auction starts on 11th Nov, all the Litentry parachain voters on Polkadot.js will get a 10% extra bonus; In the first parachain slot auction, which means from 11th Nov to 18th Nov, all the Litentry parachain supporters will get a 5% extra bonus.
The above early-bird bonuses are based on early contributions through the Polkadot.js app. The exact date, period, and amount of early-bird bonuses will be subject to the terms of our partner platforms. The early bird bonus may not apply to all other partnering exchanges and decentralized platforms as they may have different crowdloan contribution starting times and special reward plans. So there will be different early bird bonuses in different partnering contribution destinations, but we will make sure all the early bird bonus on different platforms is up to 10%.
Bonuses in different partnering platforms can be effective only for the DOT contributed to the platform, but can’t be staked. That means, if you contribute your DOT on Parallel, you can’t get the extra bonus from Bifrost for example.
The bonus token will be distributed along with the base reward. For example, if a user contributes to Litentry Crowdloan on the Polkadot.js app, the reward will be linearly distributed also on the Polkadot.js app. If a user contributes to Litentry Crowdloan in other decentralized platforms, the bonus reward will be distributed along with the regular reward by the partnering contribution platform.
Identity-related tasks bonus up to 10%
Crowdloan and auction are important, if not rare, opportunities for a project to gain usage and real use cases among their target user group in the Polkadot ecosystem. As we are focused on the on-chain identity. We provide our users with an extra bonus pool as a reward for completing identity-related tasks. The reward will be as much as 2% of the LIT total supply, which is a 10% additional auction reward.
The tasks will not be published at once, but rather be gradually announced. they will include the on-chain tasks like registering identity and off-chain tasks like registering the Litentry crowdloan waitlist. Once a task is completed, the contributor will be able to claim it on the Litentry Parachain with the linear distributed reward since the launch of Parachain.
We generate the identity-related tasks as we want users to realize that the identity is important and actually profitable. In the future, these tasks will be consolidated into Litentry dApp, and empower the aggregated identity.
Being said, we aim to join the Polkadot ecosystem as soon as possible, yet not at any price and cost. Considering the long-term growth of the Litentry project, we must allocate resources wisely to sustain and elevate the project, and we consider it too risky and reckless to overpay for a slot in the first batch of auctions. We believe that uplifting and bestowing value on the LIT token is the ultimate way to reward our community members and supporters. Thus maintaining a stable and experienced development team and having a solid product plan is very important. I will explain the key use case and the upcoming important modules in the next article.