Polkadot Crowdloans: What are they and how do they work?
Polkadot is a three-layer blockchain protocol, with autonomous chains that can support Dapps, smart contracts and financial applications, joined by an underlying relay chain. It’s designed to deal with some of the problems currently plaguing general-use blockchains, like scalability, speed and transaction fees; for users, this should translate to helping solve business-level problems like DeFi’s ongoing liquidity issues.
Polkadot chains are called parachains, and they’re to be made available at auction — auctions haven’t started yet, as of writing, but are expected to start soon. Since getting a parachain will likely run into tens of millions of dollars, there’s a system in place for generating capital from investors on the Polkadot platform: Crowdloans.
In this post, we’ll talk about how Crowdloans work and what’s happening with Polkadot’s parachain slot auction, as well as highlighting some particularly interesting projects on Polkadot.
First, though, let’s briefly cover how parachains work and how you can get one.
Parachains, slots and auctions
Polkadot parachains are interoperable blockchains that can be used to run applications and contracts. Each one is like its own Ethereum, though without the problems that come with Ethereum’s current PoW consensus algorithm. Running under them is the Polkadot ‘layer 0’ metaprotocol that makes these chains interoperable and creates an ecosystem of ecosystems.
However, this metaprotocol doesn’t have unlimited processing capacity. For a parachain to have guaranteed block inclusion at every new Polkadot block, it must occupy a parachain slot. There is a limited number of parachain slots; eventually Polkadot proposes to have up to 100, and may have more if and when the Polkadot ecosystem is able to support them.
For now, chain slots are limited in both numbers and time. When you buy a parachain slot, you’re actually leasing it for six-month periods (the Polkadot wiki lists this as three months, but this appears to be an update error), and the maximum time you can buy out of the gate is two years. Lease slots are fungible and can be bought ahead of time, so successful projects will have to manage this process by bidding on contiguous slots, but won’t necessarily face downtime.
New chain slots will become available as older leases expire and lease periods mean there won’t be any ‘zombie parachains’ where the slot is owned by a defunct or inactive entity.
There are two places to acquire a parachain slot: directly at auction, or from someone who won the auction selling on their slot. Right now we don’t know which of these will become the dominant means of acquiring parachains, because the first parachain slot auction hasn’t yet been completed.
Parachain slot auctions are allocated through permissioned candle auctions. A candle auction derives its name from sixteenth-century ship auctions which were timed using ‘an inch of candle’ rather than a clock; the precise end time was unpredictable, which made ‘sniping’ (bidding at the last minute) ineffective. (Polkadot will use a random beacon rather than a candle.) After the first parachain slot auction, there will be one roughly every two weeks.
Crowdloans on Polkadot
Crowdloans are decentralized credit for Polkadot parachain slot auction campaigns. Think of an ICO, but stick around — this is not the same. In an ICO you hand over a token of proven value — say, BTC. In return, you get a project token which you hope will appreciate in value to exceed the value of your BTC. Sometimes this did happen; ICOs have a reputation for untrustworthiness that’s not entirely deserved. But it left investors in a vulnerable position, and many were exploited.
How do Crowdloans work?
Crowdloans set out to achieve similar goals, but in a more direct and ethical way. Projects can ask their communities to loan them DOT tokens (Polkadot’s native token) to pay for the parachain slot for the project. This is a campaign.
If it’s successful, the tokens loaned by the community are bonded (locked up) for the duration of the project’s occupancy of the parachain slot. Toward the end of the project’s occupancy, it enters a ‘retirement phase’ when the tokens become available for withdrawal.
If it’s unsuccessful and doesn’t result in leasing a parachain slot, the retirement phase begins when the campaign ends and lenders can recover their tokens then.
For investors, this means their tokens aren’t under the direct control of the project they’re investing in; tokens are managed by the Polkadot rules instead, and the project’s leadership can’t stop their investors from recovering their tokens when the campaign or lease period ends. (They also can’t move the tokens, making exit scams impossible.)
So much for how investors get out of it; what do they get out of the process? When a project’s own token is airdropped, a proportion can be earmarked for investors. Here’s Acala’s VP of Growth Dan Reecer:
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.
How to participate in a Crowdloan
To participate in Crowdloans, you’ll need a Polkadot account with a positive balance.
Then, find the project you’d like to contribute to under the Crowdloan tab in your Polkadot dashboard, click ‘contribute’ and select an amount.
If you’d like to do a walkthrough in advance, you can use the Rococo testnet to practice. Here are the steps:
- Got to Polkadot > Apps Wallet (Hosted) > Test Relays and Parachains>Rococo
- Open an account by selecting Accounts>Add Account, write down your mnemonic seed phrase and click Create.
- Add balance by going to https://app.element.io/#/room/#rococo-faucet:matrix.org and enter !drip and your account address. This will give your account 20 free ROC tokens so you can use the testnet.
- Go to Crowdloans, select an open project and contribute. These projects are doing the same thing as you, dry-running their parachain slot campaigns and testing their code, but from the other side.
Crowdloan campaigns to watch
There are several projects already set to launch their Polkadot Crowdloan campaigns, including:
Moonbeam
Moonbeam is a smart contract platform for Polkadot, designed to be as interoperable as possible, including outside the Polkadot ecosystem. One stand-out feature is that developers can easily port across Solidity projects from Ethereum, as well as MetaMask, Remix, Hardhat, and Truffle and built-in integration for Dot and ERC-20.
This isn’t achieved by a complex API, but by using what Moonbeam calls a ‘layer 1.5’ implementation that mirrors Ethereum’s ‘Web3 RPC, accounts, keys, subscriptions, logs, and more.’ This means Moonbeam’s interoperability with Ethereum goes a lot deeper than being able to port tokens or contracts across; users can also log in using their existing Ethereum account and keys.
Moonbeam can therefore be used as a mutual onramp between Ethereum and Polkadot, increasing the likelihood of mass adoption for Polkadot and accelerating participating projects on Ethereum. The Kusama version of Moonbeam, Moonriver, is already running its Crowdloan campaign to purchase a parachain slot on Polkadot’s canary network and provide a permanent space for testing code prior to shipping to the Moonbeam chain.
Kilt
Kilt is a protocol for replacing the problematic use of passwords and personally-identifiable information on the internet. Since the services and companies we regularly interact with store increasingly large amounts of our personally-identifiable information, their databases are targets for attack. But Kilt has a solution.
The protocol uses four actors: claimers, attesters, verifiers, and the Kilt blockchain. Claimers make a claim about themselves — identity, activities, memberships. Attesters check whether the claim is true and put it on the Kilt blockchain if it is. Verifiers might seek to know whether a claimer’s claim is true, so they can consult the attester or the Kilt blockchain directly. Kilt has already won a parachain auction on Polkadot testnet Rococo, and tweeted on June 4 that it would ‘either crowdfund or self-fund our Kusama parachain slot in these first few auctions’ before turning its attention to the Polkadot mainnet.
Acala
Acala is a Polkadot-based DeFi hub, featuring 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 from Ethereum can be seamlessly deployed on Acala, meaning stablecoins and tokens, including NFTs, can simply be moved over onto Acala — and thence to the rest of the Polkadot metanetwork.
Acala is backed by an impressive array of names from both digital assets and traditional finance, including CoinFund, Web3Capital and Goodmoore Capital, and has already begun building out a range of financial products, including an innovative Decentralized Sovereign Wealth Fund.
Loom
Loom Network has form in technical innovation; it was the first entity to run a sidechain to Ethereum, as well as one of the first to launch a gateway allowing transfer of tokens between sidechains and Ethereum.
Now, to avoid the bottleneck affecting many DeFi platforms on Ethereum, Loom Network is looking at alternatives, including Polkadot. Loom Network has always been committed to interoperability and has seamless integration with Ethereum, Tron, and Binance Chain; adding Polkadot to that list would deliver a new, growing ecosystem to Loom’s communities of DeFi investors and Dapp developers.
Loom Network is considering doing a Crowdloan for a parachain auction bid as part of its plans to expand connections to its mainnet Basechain.
Stake Technologies
Stake is building a group of business-oriented services aimed at ‘re-democratizing the web and society,’ including its flagship project, Plasm. Plasm, currently being trialled on the Kusama network, is built to be a Polkadot parachain. It’s a scalable smart contract platform that’s fully Ethereum-compatible, supporting EVM, ECDSA, and Solidity and allowing Ethereum-based smart contract and Dapp implementation through Metamask and Remix.
The Plasm project pitches its Polkadot Crowdloan on the homepage, to supplement the $10 million already raised from investors including Fenbushi Capital.
Equilibrium
Equilibrium is a cross-chain money market with one foot in the Polkadot ecosystem and the other in EOSIO. It contains a built-in DEX and a solve for the liquidity problem that can slow DeFi projects, thanks to multiplatform access for institutional investors and a bailout function to prevent default risks.
Equilibrium has also raised money from investors, totalling $8.5 million by May 4, and is also planning a Crowdloan to raise ‘750,00 DOT [about $4.5 million], which will progress as the auctions arrive on the Polkadot network around July/August.”
When will Polkadot parachain auctions begin?
The parachain auction process has already been trialled on Rococo, and is being rolled out on the Kusama canary network at the time of writing, with the first auction beginning June 15th. The process for the first auction will go 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.
Polkadot has yet to announce concrete dates for initial parachain auctions, though mid-to-late summer is likely. As a general rule, the timetable will look like this:
Dan Reecer, Acala’s VP of Growth, tweeted on June 8th to confirm that Polkadot parachain auctions would begin shortly after the Kusama auctions which began on June 15:
Once at least *one* auction has successfully taken place on Kusama, parachains are running smoothly, and a full external audit has been completed, parachain rollout can begin on Polkadot.
Conclusion
Polkadot’s ‘blockchain of blockchains’ approach looks capable of delivering the combination of interoperability, security and speed that advanced digital asset business use cases like DeFi demand. There’s already proof of concept in a working test net and canary network. And the parachain auction process has already been trialled on Rococo. When it’s validated on Kusama and the real thing rolls out on Polkadot, we’ll get a clearer idea of interest and prices, as well as the experience of every project that takes part — whether or not they wind up leasing a parachain slot.
But while getting a parachain is one way to get into the Polkadot ecosystem, it’s not the only one. We can expect to see many projects exploiting the advanced bridging offered by many Polkadot projects, to port across their assets with less commitment, especially in the early stages. Hybrid business models with one foot in Ethereum and another in Polkadot will probably arise too. But for those ambitious and well-funded projects that do obtain parachain slots this could be even more significant than the development of the Ethereum Virtual Machine.
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