People unfamiliar with Polkadot's jargon are often baffled by its terminology, which is very different from that of other layer 1 blockchains such as Ethereum and Binance Smart Chain. Therefore, this thread is born to help you better understand the overall Polkadot architecture and functionality as well as its core and unique distinction.
Blockchains' current state
At the time of this writing, there are a number of different blockchains in existence. In order to be the best Ethereum alternative chain, a few of these projects started out as a competitor to Ethereum. You might prefer Solana because of its low transaction fee, Binance Smart Chain because of its more mature ecosystem, and Celo because it is the best chain for mobile phones.
These above blockchains can be consider as layer 1 blockchains.
However, scalability, security, decentralisation, and operation are all issues that each of these layer 1 blockchains still has to deal with. Development will put more and more operational pressure on each blockchain. As a result, using those blockchains can make users irritated. The best examples are the creeping fees and network congestion happening on Ethereum.
Therefore, as the crypto market expands with many new chains appearing, Polkadot was built with the purpose of becoming the next step in the crypto market, connecting single pieces into a unified whole.
Polkadot, in contrast, was born to be a layer 0 blockchain, which means it's a central chain that connects multiple layer 1 blockchains together.
Learn more: What is Polkadot (DOT)?
Layer 0 chains will be referred to as the Relay Chain, while Layer 1 chains will be referred to as the Parachain. The term "parachain" reffers to transactions on these blockchains being processed in parallel instead of sequentially
It is possible to design and optimise parachains for a variety of use cases thanks to the Substrate framework (explained below). Let's say that one parachain is optimised for gaming, while another parachain is optimised for storing files. As a result of this characteristic, 100 chains have 100 unique use cases. Therefore, those parachains can offer better service and leave out many unnecessary codes.
Type of Bridges on Polkadot
Bridges are also the critical component of a blockchain. In Polkadot, there will be four types of bridges, including:
- Bridge between Polkadot & other blockchains (ex. Polkadot to Ethereum through ChainSafe or Centrifuge).
- Bridge between Kusama Relay Chain & Polkadot Relay Chain (expected to be deployed in 2022).
- Bridge between Parachain & Parachain (expected to be deployed in early 2022).
- Bridge between Rococo Testnet and Wococo Testnet.
A few popular misunderstandings about Polkadot
Some misconceptions about Polkadot include the claim that Polkadot does not yet have a smart contract. However, the Relay Chain itself is not a smart contract platform, instead, it is only the main core of the Polkadot Ecosystem which is responsible for security, interoperability and governance.
Therefore, the Relay Chain will need infrastructure parachains which offer smart contract services. The example is:
- Moonbeam Network (Parachain): Provides an Ethereum-compatible smart contract on Polkadot. Developers can port their existing application on Ethereum into Polkadot with minimal code changes.
- Astar Network (Parachain): Astar is an infrastructure parachain and a smart contract hub supporting DeFi, NFT, DAO, etc.
What is Kusama?
In short, Kusama is nearly the same as Polkadot; they are both Relay Chains and share the same codebase. The notable differentiation is that Kusama is a Polkadot's experimental version. You can think of Kusama as best suited for a start-up, while Polkadot is better for large enterprises.
The detailed comparison between Kusama and Polkadot can be found here: What is Kusama (KSM)?
Typically, projects will choose to deploy their products on both Relay Chains by simultaneously running two parachains. Moonriver Network and Moonbeam Network, for instance, were developed by the same team. However:
- Moonriver is a parachain on Kusama.
- Moonbeam is a parachain on Polkadot.
The illustrated picture below will clearly show the relationship between Kusama & Polkadot, Parachain & Parachain.
There are still some projects that aim to run only on a single Relay Chain, such as Efinity only running on Polkadot and KILT only on Kusama.
Other notable examples include dTrade and Firefly. It is a Dapp for trading derivatives. While dTrade is on Moonriver Network (Kusama Relay Chain), Firefly, on the other hand, is on Moonbeam (Polkadot Relay Chain).
You might wonder why Polkadot doesn't use the Testnet network instead of Kusama, which is also an experimental version of Polkadot. The answer is right here!
It's likely that you've heard of the Ethereum testnets Kovan and Ropsten, but keep in mind that these testnets have no monetary value, which means they can only be used for testing technical aspects.
However, Polkadot’s team wants a network that can mirror both real economic conditions and the governance process because real voting cannot be tested in a valueless testnet network.
Therefore, Kusama is an intermediate version between testnet and mainnet. The flow of Dapp launching is illustrated here:
What is Substrate?
Substrate can simply be understood as a framework that makes it easier to build a custom blockchain. Developers can select whichever modules from a list of pre-built building blocks (known as pallets) in Substrate to set up their customized blockchain, such as Acala for DeFi, and Phala for Privacy.
The EVM module is one of Substrate’s modules. By adding an EVM module, Polkadot can be a second destination for talented developers who are more familiar with Solidity smart contracts, attracting them to come and build products on this ecosystem.
In more simple words, think of Adobe Photoshop, which has thousands of toolkits and functions to edit a picture. Some will use specific tools to edit a bright-color picture, while others can use another group of tools in Adobe to design B&W portraits.
Initial Coin Offering (ICO) vs Parachain Lease Offering (PLO)
All of us know that an ICO is an event in which a project seeks to raise funds to create a new coin, app or service in the crypto market. When it comes to the stock market, it's akin to an Initial Public Offering (IPO).
PLO in Polkadot is not much different. The Parachain Lease Offering is when a project seeks to raise funds from various sources in order to participate in the parachain auction event on Polkadot. If the project wins the auction, they will become a parachain and lease that parachain slot for 1 year (if on Kusama) or 2 years (if on Polkadot). If not, the project must wait until the next auction event or choose to give up.
Sometimes, you will see the term "crowdloan" in articles or on KOLs' tweets to mention an event when a project raises funds to enter the parachain auction slot. But don’t get confused; the term "crowdloan" can be referred to as a Parachain Lease Offering.
How do projects participate in Parachain Lease Offering (PLO)?
It's not an easy road to be a parachain. Effort and money will be required in four stages of the project, which include:
Step 1: Crowdloan
To be eligible for the parachain auction, the project must first raise funds in KSM or DOT through a crowdloan. The fund can be self-funded (if they are rich) or come from the community, or can be from both.
Most of the cases will combine both, as projects receive million dollar investments from ventures so they can both self-fund and receive support from the community.
The community can support a project in the form of staking their KSM or DOT during a crowdloan.
For example, Acala conducts the crowdloan to join the parachain auction on Polkadot. You, as a supporter, can stake your DOT on Acala. If Acala wins the auction, your DOT contribution will be locked for two years (equivalent to the parachain lease period).
In exchange, the project will show their gratitude to their supporters by rewarding its native token with a proportional value corresponding to the amount of your contributed DOT.
Your contributed DOT will be returned to you if Acala loses the auction.
Luckily, on November 11th, 2021, Acala was the first parachain to win the auction for a parachain slot on Polkadot. So, in this case, your DOT tokens are locked in for two years.
Do you dread the DOT lock time? Be at ease. Many projects are already aware of this issue. Therefore, projects will help unlock these illiquid DOTs by offering another form of DOT coin to supporters.
If you stake DOT to Acala, for example, you will receive LDOT at a 1:1 ratio with the staked DOT. This LDOT can be used in all corners of the Polkadot Ecosystem.
Step 2: Parachain Auction
Is the word "Auction" likely to cause you to believe that the parachain with the most money raised will be the winner?
Not at all!
Normal auctions face the issue when a bidder offers the peak price at the last minute. This mechanism is not fair to other bidders. Therefore, Parachain Slot Auction will follow the candle auction mechanism.
A candle auction, or auction by the candle, is when the auction is signalled by the expiration of a candle flame, which was intended to ensure that no one could know exactly when the auction would end and make a last-second bid.
As for this mechanism auction, not every project with the most funding value will win.
Step 3: The Winner
After winning the auction, all community-contributed DOT (or KSM) will be locked for the duration of the parachain lease period, which is equal to the length of the locked time.
The project will calculate the number of supporters and send the rewards back to them in the form of their native tokens. For example, Acala will send ACA tokens to their supporters, and these ACA tokens will be partially released over a period of time.
Concurrently this time, the parachain winner must make technical preparations in order to link up with the Relay Chain.
Step 4: Official Launch
The official launch is the final step in the process.
The parachain will go live on Kusama on Polkadot at this time. It's possible that some projects will only need a slot for a short period, while others may want to lease for the longest possible time.
Parachain Lease Offering: Tips for you to get involved
Basically, supporters will both get back KSM/DOT and the project's native token when the lease slot expires. Once you decide to join a PLO, there are a few considerations to keep in mind. For the purposes of this example, I'll divide the supporters into two categories:
- Already DOT/KSM holders: If you are a fan of Polkadot and have already held DOT/KSM coins before, congratulations! You are the one who takes the tiniest risk (if any). In this case, the greatest threat to you is when the project rug-pulls, or when you stake your coins in the scam projects. As a result, exercise caution when entrusting your assets to any project.
- Buying new DOT/KSM coins to join the PLO: A careful risk-to-reward analysis is necessary in this situation. Whether or not risk is greater than reward, and how should risk and reward be defined, is the question at hand.
Some information needs to be determined when planning to join the PLO:
- The number of tokens you'll get in return for each KSM/DOT that you contribute to the project. Is the number of native tokens per DOT fixed or determined by the total token supply for PLO divided among all participants?
- Does the native token of the parachain have a lockup period or are there any special requirements?
- Does your third party platform, on which you choose to stake your DOT, give you another form of DOT (like cDOT, bDOT, etc.) for you to unlock the illiquidity?
- What's your strategy for your tokens during the KSM/DOT lockup period (usually 1 – 4 years)? Will you use derivatives of DOT/KSM in exchange or accept the lockup of 2 years?
- Other related Incentives (for example, participating in PLO EQ on Polkadot can even get Genshiro's GENS Airdrop on Kusama).
A good example of this is that you're planning to purchase KSM/DOT for $1,000 USDT in order to join the project's PLO.
Step 1: Calculate how many KSM/DOTs are contained within this 1,000 USDT this time around.
Step 2: Calculate how many tokens will be returned to participants for each KSM/DOT contribution.
Step 3: Then assess the value of this token when listed on an exchange.
The overview of this process is to calculate the opportunity cost of spending 1,000 USDT. How long will it take to get a return on investment?
In Moonbeam's case, if you bought 100 DOT on November 11th, 2021 (the first day of the Polkadot Parachain Auction) to join the Moonbeam Crowdloan, you had to spend 470$ at that time.
On January 11th, 2022, GLMR was officially listed on Binance Exchange, which means that after two months, you will earn 37% of the GLMR rewards at the price of 14$ (current price) and 134% at the GLMR price of 50$ (ATH price).
For the purposes of calculating ROI when joining PLO on Polkadot, you can use Moonbeam as a first-hand example. Similar projects like Parallel Finance, Acala, etc. can be compared.
Be aware that not every project will yield a high return on investment (ROI). Moonbeam's crowdloan had the most contributors and the highest amount of DOT received by any parachain in the first auction batch on Polkadot, so Moonbeam will have the first-mover advantage in conjunction with the other four parachains: Acala, Parallel, Astar, and Clover Finance.
That is the reason why we see an impressive ROI on Moonbeam.
In order to gain the network effect, parachains want to be the first to launch. The top five parachains in the Polkadot Ecosystem will be the most recognisable because they will raise the most money and have the most supporters.
Where to join Parachain Lease Offering?
You can choose to participate in the project's crowdloan campaigns natively on Polkadot and/or via third party intermediaries. For Polkadot-native crowdloans, you can participate on Polkadot-JS. If you’re less experienced in using blockchain technology, you may find it easier to participate in a non-native campaign via third-party platforms.
Polkadot-JS Apps is the native way to participate in parachain crowdloans. This is the most official and trustworthy way to join the PLO on Polkadot.
Here is the instrument from the Polkadot Official Site if you are Polkadot-native crowdloan: https://www.youtube.com/watch?v=AA9mPANmzmU
1. Centralized Exchanges
Market cap for Polkadot now stands at more than $28 billion, making it the 9th most valuable market in the world. The Polkadot Parachain Auction is one of the most important events in Polkadot's history, and many exchanges (including both DEXs and CEXs) are keeping an eye on it.
For the time being, the only reputation exchange that doesn't support Polkadot Parachain Auction is Coinbase. However, I believe Coinbase will soon support Polkadot's Parachain Auction, which will also help this exchange approach new users from this ecosystem.
Here are the detailed instructions to participate in the Slot Auction on Binance and FAQs: How to participate in Slot Auction on Binance
It's also a good idea to see if these exchanges will offer you the DOT derivative tokens during the lockup period. For your convenience, here is the data I've gathered for each exchange:
- Binance: Unlock illiquidity and receive back bDOT.
- Huobi: Lock DOT.
- Okex: Unlock illiquidity and receive back OKDOT .
- Gate: Lock DOT.
- Kucoin: Lock DOT.
- MXC: Lock DOT.
When it comes to choosing CEXs, it is entirely up to you. I believe you know the answer already!
It is possible to participate in the Parachain auction through the use of other parachains that offer an auction service. There are currently four parachains supporting Polkadot's Parachain Lease Offering.
They will give you DOT coins in the form of derivatives so that you don't have to wait two years to get your contributed DOTs back, including:
- Parallel Finance: Received back cDOT.
- Equilibrium: xDOT.
- Bifrost: vsDOT.
- StaFi: rDOT.
For example, Parallel Finance, the fourth parachain who won in the first batch of the auction, supports an Auction Loan platform for the global community to support projects bidding for a parachain slot through a crowdloan.
By joining PLO on Parallel, supporters can earn both: Parallel Tokens + a bonus of Base rewards.
In contrast, you will not receive the same reward bonus if you contribute through the PolkadotJS portal.
In the detail case, the following benefits are yours if you stake your DOTs in the Centrifuge crowdloan on the Parallel Platform:
- 3.75 CFG (native token of Centrifuge) per DOT + additional 4 PARA per DOT.
- The equivalent cDOT to stay liquid in the locked period so that you can use these cDOTs in the whole Polkadot Ecosystem.
Polkadot has gradually matured over time, as evidenced by the increasing number of projects that have appeared on this ecosystem, which you can see here.
Moonbeam Network (one of Polkadot's parachains) connected and went live on the Polkadot Relay Chain three days ago. It is the first fully operational parachain on Polkadot. Due to this, they will bring many new integrations, activity, and users to light up Polkadot's ecosystem.
I'm guessing that after reading this article, you still have questions. These following are some of the most frequently asked questions about Polkadot.
What is the total number of Parachain slots?
Theoretically, Polkadot will have around 100 parachain slots, and one slot is auctioned every two weeks. It would take 3.8 years to fill each slot once.
What is a "common good" Parachain?
A "common good" parachain is one that receives a parachain slot for free via a governance vote (rather than being auctioned like other parachain slots). It is given to free slots in recognition of their contribution to the Polkadot or Kusama ecosystems.
Generally, the lease on a common good parachain would not expire; it would be terminated only through governance.
In Kusama, Statemine is a common good parachain, whereas Statemint is in Polkadot.
What exactly is a parathread?
Parathread is a subnet of Parachain. It uses a pay-as-you-go model ⇒ More savings for blockchains that don't need a constant connection to the network.
The project, for example, would like to be a part of Polkadot, but being a parachain means that joining the auction would be difficult and costly. Being a Parathread is a cost-effective option for this project.
Conclusion: Parathread is like a subscription to your favourite online newspaper. If you still want to read that newspaper, you'll have to pay a subscription fee, but you can cancel it whenever you want.
What happens at the end of the parachain Slot lease?
The parachain’s lease period will be 1 year on Kusama and 2 years on Polkadot.
There will be a re-auction for Parachain slots at the end of the lease. In the worst case, if they fail to renew their parachain slot, the best optimised option for the project this time is to be a parathread.
What is Web3 Foundation and Parity Technologies?
A large part of the Polkadot Ecosystem's success can be attributed to two organisations: Web3 Foundation and Parity Technology. They were both founded by Gavin Wood, the former Ethereum co-founder.
Web3 Foundation is the non-profit organization that aims to fund research and development teams building products around Web3 & Polkadot, while Parity Technologies, on the other hand, is a for-profit software company commissioned by the Web3 Foundation to develop Polkadot.
More than 300 projects in 50 countries have been supported by the Web3 Foundation as of this writing. Listed below are a few noteworthy projects that have been awarded Web3 Grants.
- Kusama is an experimental version of Polkadot, which is between the testnet and mainnet
- If the project wants to become a parachain on Polkadot/Kusama, they must go through 4 steps, which are Crowdloan, Parachain Auction, Winning, and Official Launch.
- Users who want to join the Parachain Lease Offering have two options: the first is to contribute directly to Polkadot.js, and the second is through a third-party platform like CEXs or other parachains that support the PLO process.
- Moonbeam is the first operational parachain that went live on Polkadot. It's now ready to light up the Polkadot Ecosystem with the inflow of users, money, and Dapps.
This is the end of this article. I hope you find it useful and educational. Let us know what you'd like to see added or improved in the article by commenting below. We'll do our best to get it done as quickly as possible.
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