An incredible opportunity for the Polkadot and Kusama communities.
Polkadot’s long-awaited Parachains are finally here and the DOT community has been waiting patiently. Even though it has been live for a while on Kusama which is the canary network of Polkadot, this is a big step in the right direction for Polkadot. If you’re not familiar with Polkadot, it is a blockchain of blockchains that aims make the blockchain space more interoperable by enabling cross-blockchain transfers for data or assets. Polkadot provides a secure environment for cross-chain composability by allowing blockchains to pool their security. This leads to the security being aggregated together and then distributed to all.
Polkadot is scalable through the use of shards. The network has a main chain that is called the Relay chain, which is the heart of the Polkadot ecosystem and provides its security and consensus mechanism. In addition, the shards on the network are labeled parachains that can execute parallel transactions on their own. Basically, it’s a sharded network that enables blockchain networks to operate together. However, why are the parachains such a hot topic?
Crowdloans has opened up a new opportunity for DOT holders
Prior to the release of the parachains, the people that have had a strong conviction in the Polkadot project have had limited options regarding the usage of their tokens. It has either been used for speculating on the market or staking for a solid yield of 13%. Now, they have the opportunity to lend out their DOT tokens in the parachain auctions. The parachain auctions are held on the Polkadot network or Kusama in order to conclude which blockchains will have the ability to connect to one of the parachain slots. These parachain slots function as a lease on a limited time frame. They achieve this through crowdloans, which is when the project is crowdsourcing for DOT tokens and has to reach a certain threshold to win the parachain auction.
This means that every individual that is holding DOT can lock up their tokens in these crowdloans and receive rewards from the teams of the projects with their native token. Obviously, this comes with a price which is the required lock-up period of 98 weeks for Polkadot and 48 weeks for Kusama if the elected project receives a parachain slot. If the project does not get selected for the parachain slot the user has their DOT tokens returned. So long-term DOT and KSM holders that have sufficient tokens are incentivized to contribute to the crowdloans. The reason is that there is clear asymmetric risk in this move. The main opportunity cost of these crowdloans is that you miss out on the staking reward of 13% APY for staking DOT or 15.9% for KSM. So you would hope that the tokens that you receive from the project competing for a parachain slot will reward you enough with their tokens to exceed this at minimum.
The low barrier to entry in combination with this is a welcome change. Crypto is all about the community and not having investor creditor thresholds. The opportunity is there for everyone with the only minimum requirement of 0.1 KSM or 5 DOT. Considering that the gas fees are low on the Polkadot network, it is a feasible requirement for anybody wanting to be an early contributor to these projects.
Fostering a culture of community token distribution
Crowdloans are contributing to a community token distribution, which is not always the case when tokens are getting dsitributed. It is set up in a way where the tokens that are contributed by the team for the parachain project can’t be touched by the team. They are locked in the Relay chain during the whole duration of the parachain slot. This is superior to the typical ICO model where teams can do whatever they want with the funds and could rug pull you at any moment. The crowdloan model forces the team to be responsible for creating value considering you get your DOT or KSM tokens back after the principal period. This is amplified because the team can’t touch the DOT or KSM tokens during the 98 or 48 weeks as well. There is nowhere to run.
The biggest challenge is actually picking a project that you think will be a winner in the long term. There are countless interesting projects with great roadmaps that make it a tough feat. Nonetheless, it is driving the momentum in an excited community that is seeing price rising in the native tokens as well. The parachain auctions start today the 11th of November as I am releasing this and it might be something that is worth paying attention to. As a wise man called Publius Terence once said: “Fortune favors the brave.”