Parachain auctions with polkadot and kusama – the next big thing?

The prices of Polkadot (DOT) and Kusama (KSM) have risen sharply in recent weeks and now Parachain auctions and crowdloans could revolutionize the entire crypto space – but what exactly is that?

Polkadot and Kusama are platforms on which blockchain networks can be built that can communicate with each other. These networks are called parachains. A parachain can be a simple form of blockchain that hangs on the security of a relay chain rather than providing its own.

Parachains therefore rely on a relay chain, which ensures the security of the network and also provides a guarantee for secure data exchange. Apart from that, parachains are completely independent of the relay chain. You can therefore specialize in different things such as non-fungible tokens (NFT) or decentralized finance (DeFi).

Basically, Kusama and Polkadot work the same, but certain parameters are set faster in the Kusama network than on Polkadot. For this reason, Kusama is particularly suitable for unrestricted designing, experimenting and testing applications. However, the code implemented on Kusama carries a certain level of risk due to the lower hurdles. Kusama is therefore often called the Testnet of Polkadot by many designated.

What are parachain auctions and crowdloans?

If you want to set up a parachain on polkadot or kusama as a project, you have to take part in a so-called parachain auction. There are currently no parachain auctions, but the next weeks the first auctions take place on Kusama. Then in the future every two weeks Parachain auctions are held on Polkadot and Kusama.

In the auctions, various teams with DOT or KSM offer space for a parachain. In total, there should be 100 parachain places on Polkadot and a little more than 100 parachain places on Kusama give. In addition, it is not possible to participate in the auctions with other cryptocurrencies. It is therefore likely that the start of the Parachain auctions will significantly increase the demand for DOT and KSM.

Projects have two options for participating in the Parachain auctions. You can use your own DOT or KSM to bid or you can use so-called crowdloans.

Crowdloans enable teams to collect DOT or KSM tokens from the community in order to bid with them at Parachain auctions.

The tokens provided are retained by the projects that issue crowdloans for a certain period of time.

Advantages of crowdloans

In return, the supporters receive tokens of the project that a Parachain wants to set up. As soon as the auction is over, for example after a year, the DOT or KSM are paid back to the individual supporters.

The graphic above illustrates the process of a parachain auction that uses crowdloans, using the example of the Kusama project Karura.

In addition, it is important to know that the various teams that use crowdloans are never able to sell DOT or KSM. Crowdloans encourage teams to give their protocols their own token value. Unlike with Initial Coin Offerings (ICOs), you cannot simply run away with the coins you have collected. Dan Reecer, VP of Growth of the Polkadot Acala Project, is therefore convincedthat crowdloans will have a huge impact in the crypto space.