Parachain and Crowdloans: The why, the what and the how.

Parachain and Crowdloans: The why, the what and the how.

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So many projects have been launched, each with its blockchains. It’s more like there are projects with their blockchains scattered around and no way for these projects to interact with each other.

Individual projects have different purposes and specific solutions they provide like DeFi, gaming, smart contracts, credentials, or ID verifications. For them to interact with the different connected parachains.

Why do projects need to connect as parachains?

This method helps to reduce the congestion on the Ethereum network and achieve faster and cheaper transaction confirmation.

Parachains do not need to worry about spending resources on security and validations because that has already been taken care of by the relay chain — The Polkadot network. The relay chain also connects the parachains to the Ethereum and Bitcoin networks via a bridge.

This is how it helps to reduce congestion on the Ethereum network. The Polkadot Network makes setting up parachains easy and fast.

What is required of projects to connect as a parachain?

To connect as a parachain to a relay chain, projects have to lease parachain slots. This is done by locking up an amount of the relay chain's tokens for the period of the lease.

In the case of Polkadot, projects lease a parachain slot by locking up an amount of DOT for 2 years, while for Kusama, an amount of KSM is locked up for a period of 48weeks.

The Polkadot network structure is built to handle 100 parachains, but this doesn’t mean there can only be 100 individual parachains, sometimes more than one project connects to a parachain slot as a parathread.

Because this method helps lots of projects achieve security, interoperability, and scalability in such an affordable way, there are most times up to hundreds of projects bidding for a particular parachain slot.

Therefore, it’s only natural that the slot will only go to the highest bidder at a particular, specified time.

When a project wins the parachain slot, its bids are locked up in a special account in the relay network and used for para chain bonding. The project will not have access to the coins till the end of the lease period.

At the end of the lease period, the projects funds are returned to them.

This means it doesn’t cost anything extra to secure a parchain slot, just the inability to use a certain amount of funds ( The one used to win the bid) for some time.

What is Crowdloaning?

For new projects or projects that may not have enough funds or DOT ummbid high enough for a parachain slot, crowd loaning is an option for them.

Crowdloaning is an process where projects seek funding from their community members to secure a parachain slot.

Here community members that have the relay chain native token can loan it to the project to help win the parachain auction.

What happens to the contributed funds when a project wins the auction?

If a project wins the auction, the funds are held with the relay network for the period of the lease time.

When the lease is over, the relay chain returns the funds to the project which in turn returns the funds to the contributors.

Depending on the project , the contributors may be rewarded with incentives, usually in the form of the native coin of the projects, opportunity to participate in block generation or some governance .

Contributors can be assured that their funds are secured in the relay network.

What happens to projects that did not win the parachain slot auction?

If a project fails to win the slot, the funds are immediately returned to the project which in turn, returns the contributions to the community.

All hope is not lost for projects that didn’t win the auction. There are some alternatives for such projects.

• Converting Substrate-based chain into a parathread: While this does not give the project the full benefits of a parachain, it still offers security from the Polkadot network and interoperability. It could be a more affordable option for new projects or projects that haven’t gained enough popularity and may lack funds to win parachain auctions because they can use a pay-as-you-go method.

• They could bid for parachain slots on Kusama: Any projects that wants to use this method as an alternative will have to have it properly planned out. They have to be on the look out for available slots on Kusama. Kusama requirements are relatively lesser and more affordable than Polkadot.

• Launch on an existing parachain through smart contracts on Solidity or Ink: This is more expensive in terms of development cost but projects that find this method useful can hop on it.

• They could run their Substrate-based chain on their own: They could connect to the Polkadot network through a bridge for interoperability with other blockchains. In this case, the projects will be responsible for providing their security for validations on the bridge.

How is the bidding for the parachain slot lease done?

Bidding for the lease of these parachain slots is done using the web 3.0 version of the “candle auction” method to avoid sniping — a situation whereby bidders deliberately delay placing their bids till the bid time is almost over, then bid a little bit above the last bid to win the auction.

The candle auction method dates back to the 17th and 18th centuries. It is an auction method whereby bidders keep bidding until a candle that has been lighted dies out.

The idea here was that, for fairness, no one knows when exactly the candle will die out so the highest bidder at the point when the candle dies out wins.

This method had its loopholes though, sometimes bidders waited till the candle had gone down before they started bidding. Some mischievous bidders went as far as coughing to put off the candlelight.

However, in the web 3.0 version, a method called Verifiable Random Function (VRF) is used.

Here a random time is picked by some programmed codes at the end of the auction and the highest bidder at this chosen time wins the parachain slot.

No one knows the time, so there is no room for sniping.