Dot Deep-Dive Part 1: Polkadot, Parachain, and Auctions
Over the past few years, many new blockchains have been created with unique qualities. One of the most exciting blockchains that has emerged is Polkadot. What makes it different is its goal is to be interoperable and eventually interlock with every other blockchain like Ethereum. This will allow all blockchains to communicate and exchange data with each other.
This is incredible because right now, each blockchain is very siloed. As of today, Ethereum projects can only communicate with projects that are built on Ethereum, the Solana blockchain can only communicate with projects that are built on Solana, and so on.
To paint a picture, imagine that blockchains are islands, completely isolated from each other and unable to communicate. Each has their own currency, infrastructure, and marketplaces, but lack of communication makes them unable to work with the other islands around them.
Polkadot wants to build bridges between each of these islands to allow for interoperability and open communication.
Polkadot is also exciting and different because of its use of relay chains and parachains.
Polkadot is made up of one relay chain and many parachains.
The relay chain is the main chain on Polkadot. It provides governance and staking transactions, as well as security. It also provides interoperability between the parachains.
The parachains are individual blockchains that are connected to the relay chain. This allows them to communicate with each other. Each parachain can be customized and tailored to a company’s specific needs.
Why would someone want to use Polkadot?
Polkadot has a lot to offer:
- Scalability: Some of the most popular blockchains are slow. Ethereum can handle 15–20 transactions per second (TPS). A credit card like Visa can handle ~65,000k TPS. Polkadot can connect 166,666+ TPS and this number is projected to only increase.
- Security: It can defend itself against hacks, bugs, and other security issues
- Interoperability: The parachains can communicate with both the relay chain and other projects built on the parachain
One of the biggest benefits of Polkadot is that projects don’t need to build their own blockchain from scratch. Building a blockchain from scratch is hard. It requires time, money, and if done poorly, will be subjected to hacks and slow transaction times.
With Polkadot, developers leverage the benefits the Polkadot relay chain provides them, which is security, scalability, and interoperability, and can customize the relay chain to fit their unique needs.
If you were to visualize Polkadot, think of a start-up incubator. There would be the managers who created the space, provide the necessary tools you need such as security to keep your work safe, fast wifi, and the basic appliances. The managers and incubator would be the Polkadot relay chain.
The start-ups who are part of the incubator are each given their own space in the building and can customize it as needed. If they need a giant server, floor-to-ceiling monitors, or even a pool, they can add it to their space. They can focus on their work rather than the place they are working in as they know the basics such as security is taken care of.
In return, the parachains offer utility and scalability. For example, upon winning a parachain Parallel Finance will build Polkadot’s first money market. It allows users to lend, stake, and borrow DOT tokens within the Polkadot ecosystem. Depositors can lend and stake simultaneously and can earn a double yield on their staked coins, and borrowers can collateralize to borrow.
This is just one example of a project creating more utility on the Polkadot blockchain. Additionally, with each additional parachain added, the faster transactions can be processed. The relationship between the relay chain and parachain is mutually beneficial.
How do you get a parachain?
Most blockchains allow for any developer to build whatever they want, but Polkadot is different.
It uses a candle auction system to auction off a limited number of parachains. This means that the bidders submit a bid and the highest bid at the end of the auction wins the slot. However, the length of the auction is decided beforehand and not disclosed to the public.
This means that no one except Polkadot knows when the auction will close. There is an open bidding period of approximately 1 week, and within that time period, the auction will end.
The reason they don’t announce when they are ending the auction is to prevent “auction sniping.” This is when a high bidder waits until the last few seconds of an auction and places a large bid on an item, allowing them to win the auction without allowing other bidders a chance to outprice them.
By using a candle auction system, Polkadot helps ensure fair bidding.
What happens if you win?
Winners are able to lease a parachain slot for a maximum of 96 weeks. When a company bids on a slot, they choose the amount of time they want to lease the parachain using 12 week increments.
Since companies state beforehand how long they want to lease the parachain, multiple companies could technically win the same parachain if they place a successful bid on lease periods that do not overlap.
Why is this system used?
Unlike some blockchains, Polkadot is not free to build on. Polkadot wants to ensure that the projects building on the parachains are invested and willing to contribute the time and money a successful project needs.
On public blockchains such as Ethereum, new projects are created every single day. It is difficult for people to identify projects that are serious and worthy of contribution, and the ones that are just out to get a quick buck.
By creating auctions, Polkadot has ensured that these projects have skin in the game before launching on the network. In order to raise the money required, months of fundraising and development are needed. As of right now, there are only 100 parachains so the competition is fierce.
The team must be dedicated, otherwise, they will not win a parachain.
How do you place a bid in the auction?
There are two options:
- A single account bid that doesn’t require a community
- Crowdloan: Raise DOT, the Polkadot token, from your community that will be used as a bid in the auction
If you contribute to a project that won a parachain slot, the tokens you provided will be locked up for the length of the lease. In return, contributors usually receive the company’s native token.
After the lease has ended, all of the DOT tokens that were contributed will be returned to the original owners wallet.
Where can one contribute to a crowdloan?
People can contribute through the PolkadotJS platform, however, the best option is Parallel Finance’s new Auction Loan platform. It offers many benefits to both the Polkadot ecosystem and the community.
More rewards: If you look at Parallel’s Auction Loan, you might notice that you receive more tokens than you would on the PolkadotJS platform. This is because Parallel partners with other companies in the Polkadot community to provide contributors additional rewards for their DOT tokens.
In addition to the base rewards, Parallel and the partner whose project you contributed to will give an added percent bonus based on the amount you contributed.
Liquidity: Usually a contributor’s DOT tokens are locked during the lease period if the project they contributed to wins the parachain. The lease can last up to 96 weeks. However, if you use Parallel’s platform, when you supply DOT, you receive a derivative token (cDOT) in return.
These can be used during the lease period on Parallel’s money market and Automatic Market Makers platforms.
The cDOT are also used to claim the DOT assets after the project’s lease period ends.
Ease of use: Out of all the ways to contribute to a parachain auction, Parallel offers the most user friendly platform. Users can contribute DOT tokens with just 3 clicks. When users type in the amount they want to contribute, the rewards they will receive are also very clearly stated on the page. It is easy to use and easy to understand.
They also offer a dashboard that ranks the auction leaders and their process. It clearly lays out the rewards and bonuses one would receive if they contributed to a project’s auction.
Accessibility & diversification: Some of the projects participating in these auctions have access to enough liquidity to win a parachain auction. They don’t need a crowdloan. However, there are a lot of small projects in the Polkadot ecosystem that don’t have the liquidity for a single amount bid.
Parallel’s platform allows the masses to contribute to projects they believe in. This results in more ways for projects to source funding, through Parallel’s users as well as its own community. This allows for:
- Projects with smaller budgets have an opportunity to win a parachain auction
- The community has more influence in the outcomes of the auctions
- There will be a more diverse Polkadot ecosystem.
How do you use Parallel?
The Parallel Auction Loan platform was built to be simple. Here is how you contribute:
- Go to crowdloan.parallel.fi
- Make sure you’ve clicked on Dot Slots. You’ll see a list of the auctions
- Click on the project you want to contribute to and type in the amount you want to give. You will be able to see the rewards you will receive
- Sign the contract and you’re done!
The video below provides a step-by-step guide.
https://www.youtube.com/watch?v=B1wQxUrLsoA&ab_channel=ParallelFinance
When are the auctions?
The first round of auctions began on November 11, 2021 and will end on December 16, 2021. A total of 5 parachains will be auctioned off and as of right now, you can contribute to a crowdloan.
Each week, one parachain will be auctioned off. After every parachain has been auctioned off, the bids that were not successful will be returned.
The second round of auctions will begin on December 23, 2021 to March 10, 2022.
Why should I contribute?
Rewards aside, Polkadot and web3 is a growing ecosystem. There are new companies entering the space with big ambitions and inspiring visions. Contributing to a crowdloan is a great way to support a project and a team that you believe in. Even if it’s just a small amount you’ll be able to leave your mark on web3 and the Polkadot ecosystem.
