What is Polkadot Crowdloan? How to Participate Ultimate 101 Guide.

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Polkadot Crowdloan Illustration

In Autumn 2021, interest in the Polkadot Network grew significantly. Why? As a result of Polkadot Parachain Auctions and associated Polkadot Crowdloan Campaigns. An increasing number of people became interested in this blockchain network to benefit from being one of the early adopters of this interesting ecosystem. By reading this article, you will acquire the necessary information to participate in Polkadot Crowdloan Campaigns and, consequently, get tokens from a project bidding in a Parachain Auction to secure a slot within the Polkadot Relay Chain. 

If you are not familiar with the Polkadot Network and such concepts as Polkadot Parachain auctions and Polkadot Relay Chain, we advise you to read our article about the Polkadot Parachain Auction. Otherwise, continue reading this article that will answer most of your questions about Polkadot Crowdloan Campaigns, as well as teach you how you can participate in one. 

What is Polkadot Crowdloan in a nutshell?

A project that wants to benefit from the interoperability and shared security of the Polkadot Relay Chain has two options to lease a slot: a) to contribute DOT tokens directly or b) to start a Polkadot Crowdloan Campaign.

In a nutshell, a Polkadot Crowdloan Campaign is a built-in feature of the Polkadot Network that allows projects to loan DOT (raise DOT) from their backing communities and bid such an amount to secure a slot on the Polkadot Relay Chain. Polkadot Parachain Crowdloan Campaigns have some specific characteristics and, while some projects found a way to fine-tune the process, the rules remain unchanged. Long story short, Polkadot Crowdloan Campaigns can be started by anyone who has a registered Parachain.

How to participate in Polkadot crowdloan?

Polkadot Crowdloans are exciting opportunities for people to support a Parachain project they believe in or are bullish on. There are various ways to participate in a campaign. You can contribute directly via the project’s website by clicking on the link in the table below. We recommend this option as you may get a referee bonus and because many projects offer the possibility to participate in a so-called Polkadot Crowdloan Liquid Campaign (we will explain what it is later in this article). You can also participate via the Polkadot.js.org website.

We recommend using Polkadot{.js} browser extension. It does not have the best UX like other wallets supporting Polkadot and you will need to follow the instructions below. However, in our opinion, it is the most reliable option.

First of all, you should download Polkadot{.js} browser extension (not supported by Safari). Then you should transfer DOT tokens from a CEX to your Polkadot address (there will be other ways to get DOT in the future, but, in any case, you will need some funds on the Polkadot Network). Make sure that you use the Polkadot Relay Chain to get the correct address (see the screenshot below).

wallet for polkadot crowdloan campaign

Then, click on the link to the website of the project you are interested in and follow the instructions (see the table with links above) to contribute your DOT Tokens. You should read the instructions carefully as they may explain to you how many DOTs you should leave in your wallet (e.g., to participate in the Acala Liduid Crowdloan Campaign you needed to hold at least 2.1 DOT in your account).

Alternatively, given that Polkadot Crowdloan campaigns are supported by the centralized exchange you are currently using, you can participate via your CEX. You should read the terms and conditions carefully and understand the commission charged by the CEX. Also, do not forget that “Not your keys – not your money.” By using the CEX you are exposed to third-party risks.

Can I participate if I am based in the US?

Many projects restrict participation of US residence in Crowdloan Campaigns, as the projects may be subject to the US security laws. You should check the rules of each particular project.

What will happen with my DOT and when will I get it back?

When you contribute your DOT tokens to a Polkadot Crowdloan Campaign, two possible scenarios can be faced. In the figure below, we have summarised how a Parachain Auction can play out and the possible effects on contributors.

Polkadot crowdloan campaign outcomes

How long will my DOT be locked? 

Once DOT tokens are contributed to a Polkadot Crowdloan Campaign, they will be locked in for up to 96 weeks or, if the campaign is not successful, they can be claimed back by contributors at the end of the campaign (read carefully the sections below explaining what you should pay attention to and the case-study section will explain to you how it works in practice). 

How will parachain projects use my DOT?

Your DOT tokens will never be used by a Parachain team to finance project development. They will be used for leasing the Parachain slot and enabling the project to operate in Polkadot Network. Furthermore, smart contract technology guarantees the redistribution of DOT tokens at the end of the lease period.

What is the minimum participation amount and what is a liquid Polkadot Crowdloan Campaign?

The minimum amount of DOT to be contributed to the Polkadot Crowdloan Campaign depends on whether you are participating in a simple or liquid one. The general rule implies that the minimum amount to be contributed has to be 5 DOT. However, for Liquid Crowdloans the sum may vary. For example, the minimum amount of DOT to be locked in Acala Liquid Crowdloan was 2.1 DOT.

So, what is a Liquid Polkadot Prowloand Campaign? To sum up, without going into too many technical details,  LC (Liquid Crowdloan) offers the possibility to contribute your DOT tokens without being completely locked in for the loan duration. For example, if you participated in Acala’s Liquid Crowdloan Campaign, you would get one lcDOT in exchange for 1 DOT contributed. You cannot stake lcDOT (we mean POS staking), but you may try to sell it on a secondary market or use it as collateral once there is a market for lcDOT tokens.

What are the rewards and risks of participation in a Polkadot Crowdloan Campaign?

A project may choose to incentivize a user to participate in a Crowdloan by offering rewards. Usually, participants are rewarded with the project’s tokens. The token reward is capped, and the amount of the reward is determined by each project. Some projects may have fixed or dynamic formulas based on the amount of DOT raised. Some projects may incentivize early contributions and start a referral program. In a nutshell, there may be many kinds of rewards, including NFT tokens, off-chain rewards (e.g., merch). Check each project separately to understand the rewards you may get.

Additionally, each project chooses its vesting period. Usually, 20-30% of rewards are available to claim when the Parachain launches the network and enables token transfers. The tokens are vested according to a vesting schedule chosen by the project.

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What are the risks then if DOT will be returned in any case? By lending and locking DOT in Crowdldoans, individual “lenders” are likely to benefit from massive asymmetrical opportunities derived from Parachain project rewards. On one hand, DOT lockers do not need to worry about the timing of the next bull run’s peak (very hard to guess) and they will mainly have to wait and see where the Parachain Crowdloan campaign will bring them. If Parachains projects are successful, they may explode in the market cap over the next few years and they will highly compensate early contributors. On the other hand, nothing is risk-free in crypto and Crowdloan’s contributors will face significant risks, namely impermanent loss, Parachain risk, and opportunity cost of capital. The table below provides details of both risk and rewards characterizing Polkadot Crowdloans.

Polkadot Crowdloan risks and rewards

What you should pay attention to

In addition to the amount of reward you can get, you should also pay attention to other factors. A Polkadot Crowdloan Campaign needs to specify 3 important factors: slots, duration and cap. 

Slot

A Parachain bid for a specific slot range up to 96 weeks. Your tokens will be locked in for this specific time period. Additionally, if the auction will not be won by the Parachain of your choice and the slot will not be obtained, the Crowdloan can be designed to specifically cover other auctions.

Cap

Crowdloan cap is the maximum amount that can be collected by the campaign. If this amount is not reached, the Parachain can still bid in the auction.

Duration

Duration is related to the number of auctions that will be bided via the Crowdloan Campaign.

Why Polkadot Parachain Crowdloans exist and what is the difference with ICOs/IEOs and other token offerings?

A benefit that Parachain Auctions and Polkadot Crowdloan Campaigns bring to the Polkadot Network community is the reduction of scams and, consequently, an increase in user confidence. In Ethereum, participants in ICOs can be seen as investors. Differently from the latter, DOT contributors in Crowdloans are simply lenders. Their DOT is locked on the blockchain for the period covering the Parachain slot (up to 96 weeks) and, in exchange, they usually receive rewards in the native token of the project. Additionally, at the end of the lease period, the contributed DOT will be redeemed and returned to the original owner. At the same time, contributed DOT cannot be used by a Parachain to fund the project. 

Unlike an ICO, a Polkadot Parachain project is mainly for a project that has already something to show. This project does not raise money to develop further but it merely raises money to get access to the Polkadot Relay Chain security and interoperability features. It means that a Parachain blockchain does not need to build its own network of nodes, validators and miners. Polkadot Crowdloans is about distributing Parachain’s native tokens to users who have contributed to the Crowdloan and get a user base. It is also about not paying the full sum to lease a slot. Finally, for users it is a way to support initiatives of a project launching on Polkadot.

ICO vs polkadot crowdloan campaigns

Polkadot Parachain Crowdloan Campaign Acala case study

The first Parachain Auction terminated on November 18 and it was won by Acala. Acala is a Defi Hub and layer 1 smart contract platform on Polkadot. As a result of its best performance on the first Parachain Auction, Alcala’s leasing of Parachain slot will start on December 17 2021 and it will end on October 20 2023. Such lease, will allow the smart contract platform to operate in the Polkadot ecosystem. 

Furthermore, depending on the contributed DOT, contributors will receive different rewards. Let’s further analyze Acala’s Crowdloan mechanism and rewards.

In order to make a clear explanation, we will use an example. Let’s suppose you have contributed 10.35 DOT in Alcala’s Crowdloan, then your rewards would be 1 DOT: 3+ACA. As Acala uses a dynamic formula to determine rewards (i.e., based on the total amount of contributions), rewards were determined at the end of the auction. The more DOT you contributed, the higher the rewards. Additionally,  you have received early contribution bonus by contributing 5 DOT early in the phase. Finally, if you referred 4 people and received a referee bonus yourself (there was an additional referral bonus of 10% which is split between the referrer and the referred).

Polkadot crowdloan Acala case study

What will happen next? Twenty percent of ACA rewards will be available to claim when Acala launches the network and enables token transfer. The remaining 80% will be vested over the 96 weeks locking period (Acala chose to lease the slot for 96 weeks. If you participated in the Acala Liquid Crowdloand, during the locking period (96 weeks), you will have indirect access to your contributed DOT through lcDOT at 1:1 ratio. lcDOT will be available once Acala goes live. You will be able to use lcDOT in the DeFi ecosystem by swapping for other tokens, such as DOT (if you wish to get your DOT back), or use it as collateral to mint aUSD. At the end of the 96 weeks period, you will be able to redeem DOT by using lcDOT.

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