Dot Deep-Dive Part 2: Why Contribute to a Crowdloan?

Web3 aims to be decentralized. This is a word heard frequently inside the crypto community so often that what it actually means, sometimes gets lost. What is considered definitional for blockchain and many of the projects that are being created in web3, is also a very powerful concept.

A decentralized platform allows for anyone to have a voice and the opportunity to make an impact on a project, a community, or a decentralized autonomous organization (DAO).

A great example happened recently. On November 18, 2021, Sotheby's put up one of the original US Constitutions for auction. There are only 13 remaining in the world, and this is the first time in 33 years that one has been put up for auction.

It was expected to be sold at around $15M to $20M. A high price the vast majority of people cannot afford. Until now.

A DAO called ConstitutionDAO announced that they were raising money to bid, and hopefully win, the auction. Although the contributors would not own the constitution, they would receive governance tokens proportional to their contribution. The group would vote on everything that happened to that copy of the US Constitution. They would vote on where it would be located, how it would be displayed, if it should be displayed, and much more.

The group raised over $40M with 17,437 donors in a week.

Unfortunately, the group lost the auction. This project brought to light areas of improvement that are needed if an attempt such as this were to be taken again. For example, they updated the amount of money raised in real-time, allowing other bidders to capitalize on this knowledge.

However, it also showed the potential power of DAOs. A group of people coming together in a decentralized environment governed by the community and not a select group of people.

This is the power of decentralization and blockchain. It gave thousands of people the opportunity to contribute and govern something that they believed in and were excited about. This example is not limited to ConstitutionDAO, thousands of projects on blockchains that have created strong communities who believe in what the project is doing and want to help it grow.

This is one of the reasons why the Polkadot parachain auctions are so exciting. People have the ability to participate in crowdloans and contribute to the project that they believe in. It’s like being able to support an early-stage startup, but rather than providing capital, you contribute DOT tokens from your digital wallet. In return, supporters receive project tokens.

What is a crowdloan and what are the benefits?

A crowdloan is when a project raises DOT tokens from your community that will be used as a bid in the auction for a Polkadot parachain. If you don’t know what Polkadot, parachains, or auctions are, take a look at this article.

Although not all projects need a crowdloan, as some already have the liquidity to place a winning bid on a parachain, most projects need to fundraise from their community. If the project wins the auction, all of the tokens are locked up for the length of the parachain lease, at which point they will be returned to the original owners.

In return for their contribution, projects reward stakers with their project tokens. The project tokens provide value in some fashion on their respective networks, it could be to pay for fees on a DeFi trading platform, or transaction fees on a payments network or many other possible utilities that tokens are capable of providing. With crowdloans, anyone can contribute and receive these tokens

Crowdloans are a great way for people to support a project that they believe in. It is also a great way to earn project tokens.

Why should I contribute to a project?

Two simple reasons: impact and rewards

Impact

Web3 is still in its infancy and is growing rapidly every day. It is eliminating the need for a middleman such as a bank. Instead, it enables direct peer-to-peer transactions and interactions. Web3 is a natural progression of the digital era.

Web1 was the beginning of the internet in the 1990s. It was created to make information easily accessible, but without browser and user-friendly web platforms, it was very difficult to navigate. Web2 began with the emergence of platforms such as Google, Facebook, and Amazon. It allowed users to access data, make transactions, and engage with others with ease. However, these interactions could only be done through a third party.

Web3 removes the need for a third party by using blockchain technology. Right now, the space is very new and changing every day, but some of the small projects today will become the backbone of web3 in the future.

By contributing to crowdloans you are staking a claim on the future of Web3. You are actively participating in what you want it to look like tomorrow.

Rewards

Every crowdloan has an incentive to encourage people to contribute by offering their native token as a reward. Tokens are unique to a specific project and can have many functions on their respective platform. A token can provide access to specific services, give you voting rights in the project’s decision making, and much more.

As an example, Parallel Finance is offering its PARA token as a reward to contributors to their crowdloan, as well those who use their Auction Loan platform to contribute to any project. The PARA token is the native platform token for Parallel’s Polkadot parachain and has a lot of utility:

• Owners have voting rights in the company and are able to propose various governance actions
• It is required to execute the functionalities and security of their protocol
• Holding the token increases the chances of someone being nominated as a validator

If you’re interested in learning more about the PARA token, click here for Parallel’s whitepaper. The PARA token will be in circulation once Parallel’s newly won Polkadot parachain is fully live in Q1 2022.

Each project offers native tokens such as these to those who contribute to the project’s crowdloan. As a project becomes more successful, the value of their native token can fluctuate.

At the end of the lease period, all DOT is sent back to the original owners’ wallets. You keep the rewards AND you get your initial contribution back. That’s pretty exciting!

How do I maximize my rewards?

The best platform to use for maximum rewards is Parallel’s Auction Loan platform. Not only is it easy to use, it also offers more rewards than you would receive if you used the PolkadotJS system or contribute directly through a project’s website.

Parallel partners with other companies in the Polkadot community to provide contributors additional rewards for their DOT tokens. For example, Astar Network won the 3rd parachain slot and offered 10 ASTR rewards for every 1 DOT contributed directly through Astar.

Additionally, due to their partnership with Parallel, they offered extra rewards on Parallel’s Auction Loan platform. Not only did contributors receive the base rewards but they also all split a 200K ASTR bonus. Many of the projects have a similar partnership with Parallel and will offer extra incentives like Astar.

Another advantage to using Parallel is that you will continue to have liquidity even when your DOT tokens are locked for the duration of the lease. When you supply DOT, you will receive a derivative token, cDOT as the liquid asset in return. These can be used on Parallel’s future DeFi solutions. You’ll be able to do things such as:

• Deposit your cDOT in Money Market to earn interest
• Lend out your cDOT in the form of DOT or other token in Money Market
• Trade your cDOT in Parallel’s Automatic Market Makers

The cDOT token allows users to continue to gain value from their contributed DOT tokens. As Parallel Finance continues to grow,the utility of the cDOT will continue to increase.

What happens next?

That’s when a project can start to bring its vision to life by building on the parachain. Over the tenure of their lease, they will create their solutions on the parachain and grow their project.

After their lease, all of the funds from the auctions are released and given back to the contributors, and the project will need to participate in the auction once again.

Great, where do I start?

The best place to start is on Auction Loan. It’s easy to use, easy to understand, and offers maximum rewards.

Crowdloans are a win-win for the project as well as the contributors. Not only do contributors get their contribution back, but they also receive native tokens as a reward which could prove to be valuable in the future.

What’s also extremely exciting is that by contributing to crowdloans, people can help create the future of web3. If you see an interesting project on Auction Loan, do some research. Figure out what impact that project plans to make and ask yourself, is that something I would like to see in the future? If yes, hit that “contribute” button and watch the team you believed in turn an idea into reality.