Polkadot Parachain Auction. The Ultimate 101 Q&A Guide

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Polkadot Parachain Auction Illustration

We have received quite a lot of questions about Polkadot Parachain Auctions these days. To answer these questions, we have written this guide that will help you understand how you can participate in a Polkadot Parachain Auction and why you should do it. We created this guide for newbies as well as for more experienced users. You will find some basic information and information for those who want to learn a little bit more. Check the table of contents to find answers to the questions that are specifically interesting for you.

You should read our article about Polkadot Crowdloan campaigns if you are just interested in participating in Polkadot Parachain Auction Crowdloan campaigns.

What is Polkadot?

Let’s start with some basics before we deep dive into the topic of the Polkadot Parachain Auction. So, what is Polkadot? Simply speaking, Polkadot is a blockchain network that allows multiple, project-specific, and customizable blockchains to be built on it. Such blockchains are called Parachains, and we will explain them in more detail later in this guide.

Hence, Polkadot is a network of blockchains that consist of Polkadot Relay Chain and Parachains. Polkadot Relay Chain can be regarded as a multichain blockchain for Parachains. This is different from Ethereum, which is called Layer 1 (L1) blockchain, while Polkadot Relay Chain can be called Layer 0 (L0) blockchain. In practice, it means that decentralized applications (DApps) are built not on top of the Polkadot blockchain itself but on top of its Parachains. 

As with many other public blockchains, Polkadot is not owned or managed by any specific individual. Instead, decisions are taken via its native token called DOT. DOT can be used for staking, bonding, participation in Polkadot Parachain Auctions, Polkadot Parachain crowdloans campaigns and, most importantly, governance purposes.

What are Parachains and how do they operate? 

Before you can understand the Polkadot Parachain auction, you should have a clear understanding of Parachains. 

What is a Parachain? In a nutshell, it is a customizable and project-specific blockchain with its own token connected to the Polkadot Relay Chain. Why do they launch on Polkadot? Because they can benefit from security and interoperability features that Polkadot Relay Chain can provide. Parachains do not need to be blockchains, and they may have different technical architectures (e.g., see Hashgraph technology); however, in most cases, they are blockchains. Parachains can interact with each other within the Relay Chain of Polkadot. They can also interact with external blockchains via so-called blockchain bridges.

Polkadot Relay Chain and its interaction with Parachains 

Let’s speak about the Polkadot Relay Chain. It is the most critical player for Polkadot’s network security, consensus, cross-chain interoperability, and scalability of the Polkadot ecosystem. Because it allows Parachains to conduct parallelized transactions, Parachains are called Para-Chains. The Polkadot Relay Chain makes sure that the security of the Polkadot network is shared across Parachains and that they can communicate with each other through XCM format.

Polkadot Parachain Auction Slots
Source: https://research-test.readthedocs.io/en/latest/polkadot/

What does shared security (also known as pooled security) mean?

One of the reasons why Parachains participate in the Polkadot Parachain Auction is to get access to so-called pooled security. But what does it mean to have shared security within the Polkadot system? It means that all Parachains will benefit from the economic security provided by the Relay Chain validators by being connected to the Relay Chain. L1 blockchains like Bitcoin, Ethereum, Litecoin, Solana, and many others are responsible for their security, while Polkadot Parachains share the security of the Polkadot network. Parachains should not be confused with so-called Layer 2 (L2) blockchains (e.g., Arbitrum) and sidechains (e.g., Polygon) as the security mechanism used by them is different. L2 and sidechains do not share security between all L2 and sidechains that use a specific L1 blockchain.

What is the XCM format, and how does it benefit Parachains?

XCM format allows cross-chain communication. It is a format that states how communication and messages should be performed between Parachains. It expresses what should be done by the receiver of the message. It is a language that Parachains use to communicate with each other. Blockchain is a database, and you can imagine use cases for databases that can communicate with each other. For example, this technology allows moving tokens from one chain to another chain (exchange value) and altering states.

How can a blockchain connect to Polkadot Relay Chain and become a Parachain? (the answer is Polkadot Parachain Auction)

To be part of the Relay Chain, Parachains need to lease a Parachain Slot. The Polkadot network is set in a way that a project cannot just come and lease a slot or pay as you go and start a so-called “Parathread”. To lease a slot via a future, Parachains have to participate in Polkadot Parachain auction through a procedure called Crowdloan or through the direct contribution of DOT by the candidate to lease a slot.

What is Polkadot Parachain Auction?

Shared security and processing of transactions don’t come for free. One of the ways to access them is to lease a slot on the Relay Chain. Projects compete to place the highest bid to get the slot. The first Polkadot Parachain Auction winner, via the process known as Crowdloan Campaign, raised 32.5 million DOT (around 1.3 billion USD at that time) to lease the slot for two years.

How do Polkadot Parachain Slot Auctions work?

As you have already understood, the Parachain Auction is a method used by Parachains to secure their space in the Polkadot ecosystem. By securing a slot, a Parachain will join and operate in the Polkadot ecosystem for a period of up to 96 weeks. A Parachain slot is a scarce resource. Given an increase in the number of Parachains, every few months new Parachains slots will be added. The Polkadot ultimate goal is to have 100 slots.

How does it work? Basically, Polkadot Parachain Auctions are automated candle auctions (with some adjustments relevant to blockchain technology). It means that there is an opening period and an ending period. At any moment the winner can be chosen but we will only find it out at the end. The closing moment is retroactively determined during the ending period. This means that late bids have a lower probability of winning since the retroactively determined close moment may have occurred- before the submission of the bid.

What problems are Parachain Auctions trying to solve?  

Through Polkadot Parachain Auctions, teams are exposed to a game theory experience where they are required to have significant skin in the game to launch a Parachain on the network and gain from the security of the Relay chain and the interoperability of the network. It is not easy to get access to the Polkadot Relay Chain, and, currently, Parachains prefer to use crowdloan mechanism to collect funds to participate in Polkadot Parchain Auctions.

How can a Parachain participate in Slot Auctions?

To participate in the PolkadotParachain Auction and compete for a slot, prospective Parachains can bid in two ways:

  • Parachains can bid their own DOT, through a single account
  • Parachains can use crowdloans to crowdsource DOT and bid it in the auctions 

Users cannot participate in the Polkadot Parachain Auction directly. Users can only participate indirectly via crowd loans by contributing and locking DOT.

Polkadot Parachain Auction date

The schedule for Polkadot Parachain auctions is determined by Polkadot’s on-chain governance via simple majority voting. The schedule for the first 11 auctions was determined in October 2021. 

Polkadot Parachain Auction Date 2021-2022
*The dates above are approximate, based on fixed block numbers

 

Why do projects choose to participate in the Polkadot Parachain Auction?

Polkadot Parachain Auctions do not offer a free and open environment as we have seen with ERC20 tokens, where the only thing needed was a white paper to deploy a smart contract on the Ethereum Blockchain. Neither it is as easy as deploying an L2 solution or sidechain (*it is not that easy, but projects do not need permission to do this). For a blockchain to become part of the Polkadot ecosystem, it will have to be integrated within the Relay Chain and lease a slot to become a Parachain (that can become quite complicated for some projects) or choose the “pay as you go” method and become a Parathread. 

If there are alternatives to participation in the Polkadot Parachain Slot Auctions, why do projects still want to spend efforts on collecting a quite big some of DOT to get the slot? To answer this question let’s look at the Ethereum network. The Ethereum blockchain has done a fantastic job in enabling individuals to freely deploy DApps, DAOs, ERC20, and ERC755 tokens; however, the network is currently suffering from high congestion and high gas fees. The problem of high congestion and high gas fees is being solved by various Ethereum L2 chains and sidechains (at least 11 at the time this article was written). However, even L2 chains and sidechains are not cheap compared to other blockchains supporting smart contract technology like Solana.

On the other hand, Polkadot is an L1 blockchain. It is the infrastructure supporting 100 potential “private roads” that, in Polkadot terms, translate into Parachains. Parachains are Layer 1 themselves and are defined as customizable and project-specific blockchains. Such a feature allows for flexibility in the Polkadot ecosystem where every Parachain can create its own set of rules. For example, one Parachain can focus on decentralization while another Parachain can give more importance to speed and efficiency (e.g., Moonbeam is a developer-oriented blockchain that strives to provide compatibility with the existing Ethereum developer toolchain and network). Furthermore, Parachains benefit from shared or plug-and-play security of the network and, consequently, they don’t have to recruit their own set of network validators. 

Polkadot Parchains Ecosystem
Source https://waszczyk.com/introduction-to-polkadot-ecosystem-and-hackusama

The second factor that strongly affects the popularity of Polkadot Parachain Auctions is explained by the interoperability of the Polkadot network. As you can see from the picture above, the intersection linking pink lines represents value and data interacting between different Parachains. The concept of interoperability has been very discussed in the last 4 years in crypto. At present, it is coming to life through the Polkadot network. Currently, L2 chains and sidechains of Ethereum do not benefit from such interoperability features. They can be seen more like competitors and, currently, do not benefit much from each other. Meanwhile, we can expect more synergies between Parachains than between Ethereum-based L2 chains and sidechains.

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