Parachain auctions, or crowdloans, attracted particular interest among cryptocurrency users because they offered an opportunity not only to contribute to the development of the crypto industry, but also to receive potential additional income. Today, this topic should be considered in light of updates to the Polkadot ecosystem: classic slot auctions and crowdloans now belong to the previous model, while access to network resources has gradually shifted to the Agile Coretime mechanism.
In this article, we will look at what parachain auctions are, how they were structured and how they worked, how investors previously participated in them, what risks parachain projects had, and what changed after Polkadot and Kusama moved to a new model for distributing blockchain resources.
Key Takeaways
- Parachains are layer-1 blockchains that run in parallel with the Relay Chain and use the shared security, infrastructure and interoperability of the Polkadot or Kusama ecosystem.
- Parachain auctions and crowdloans previously allowed projects to obtain a network slot, while users could temporarily lock DOT or KSM to support a selected project and receive that project’s tokens in return.
- Classic parachain auctions and crowdloans are now outdated: after the introduction of Agile Coretime, access to Polkadot’s computational resources started to be based on purchasing coretime rather than long-term slot leasing through auctions.
- Earning from crowdloans was not guaranteed: an investor could receive tokens from a successful project, but also faced DOT/KSM lock-up periods, market volatility, token price decline risk and the possibility of unsuccessful project development.
- To analyze old and new parachain projects, it is important to consider liquidity, real user activity, tokenomics, lock-up periods, team reputation and the current model for accessing Polkadot infrastructure.
Parachain auctions and crowdloans: what are they?
The essence of parachains
Let us start with theory and simple analogies. Thus, Bitcoin and Ethereum are layer-1 networks. In other words, they ensure that transactions are processed according to a defined protocol. In the Bitcoin or Ethereum networks, it is not possible to simply change the base logic of the blockchain for a separate project: smart contracts, protocol upgrades or layer-2 solutions are usually used for this.
In such an ecosystem, layer-1 networks — parachains — are “built on top of” layer-0 networks. They can be different: with their own functionality, tokenomics, governance rules and economy, while the layer-0 network serves as their foundation, is responsible for the security of the entire system and provides interoperability.
In other words, the Polkadot and Kusama networks are cores around which flexible and adaptive blockchains — parachains — can be built. If parachain developers need a new feature, they can add it at the level of their own blockchain without interfering with the base layer-0 network.
Why were auctions needed?
In Polkadot’s initial model, the number of slots for connecting parachains was limited, while the number of projects seeking access to the network’s shared security and infrastructure was much larger. Therefore, slot auctions, or crowdloans, were used, and their winners received the opportunity to launch their parachains around the Polkadot or Kusama core.
Why projects needed this is already clear: it was an opportunity to gain access to secure and compatible blockchain infrastructure without creating a separate security network from scratch. But why did the platform itself, the provider of the layer-0 network, need this?
- The service provider increased engagement within its ecosystem, since participation in a crowdloan was connected to the network’s native coins — DOT or KSM.
- The provider received an economic model for distributing limited resources between parachains.
- Demand for the network’s native coin could grow, since it was actively used by projects, investors and auction participants.
Main parachain ecosystems
Today, there are many blockchains and infrastructure solutions that offer different models of compatibility, scaling and access to computational resources. However, the two key ecosystems associated with the history of parachain auctions and crowdloans remain Polkadot and Kusama. Let us look at them in more detail.
Polkadot
Polkadot is one of the best-known projects in the field of layer-0 networks. In addition to the Relay Chain, the project’s architecture includes parachains, interoperability mechanisms and tools for transferring data and assets between different networks. The project team set an ambitious goal — to unite its ecosystem with other blockchains, including Ethereum, into something resembling a global multichain.
Historically, Polkadot and Kusama auctions generally worked as follows:
- Polkadot or Kusama announced an auction;
- candidates took part in the auction. Both large infrastructure teams and young projects could compete for slots;
- slot candidates and ordinary users contributed any amount of the network’s native coin, DOT or KSM, to a special network mechanism, backing a specific candidate.
Because of this, a large company could independently buy DOT coins from the market and obtain a slot using its own resources, while a startup could attract third-party investors — ordinary users willing to support the project through a crowdloan.
Ordinary users had the opportunity to buy DOT and back one or another slot candidate. If the candidate project won the crowdloan, that user’s DOT coins were locked for the slot lease period — in the old model, the maximum term could reach 96 weeks. In return, the user received project tokens at a pre-announced ratio. If the project lost the auction, the DOT coins were returned to the owner.
Kusama
Kusama is Polkadot’s canary network, its branch for experimenting with new blockchain features, risky projects and early technical solutions. In essence, it is an experimental but fully functional network, and its difference from ordinary testnets is that it exists independently and will continue to operate until its community votes otherwise.
It was assumed that any function or subnet, before entering Polkadot, should be thoroughly “tested” in Kusama. As a result, notable projects launched on the canary blockchain, and the KSM token showed strong market dynamics at certain stages.
The rules for parachain auctions on Kusama were generally similar to those on Polkadot. After the success of the first projects, competition for a slot in the Kusama network also became high. One of the key differences was the lock-up period: in the old model, KSM was locked for up to 48 weeks, rather than up to 96 weeks as in Polkadot.
What changed: Agile Coretime instead of parachain auctions
The classic parachain auction model was an important part of the early development of Polkadot and Kusama, but over time it became less flexible. Long-term slot leasing created a high entry barrier for projects, required a significant amount of DOT or KSM and was poorly suited to applications that did not need constant access to an entire slot for two years.
Agile Coretime makes the infrastructure more flexible: a project can purchase resources for a shorter period or use on-demand coretime if it does not need a permanent blockchain slot. Therefore, modern parachain projects and applications in the Polkadot ecosystem should now be evaluated not only through the lens of old crowdloans, but also by how they use coretime, liquidity, user activity and cross-chain capabilities.
How people used to earn from parachain auctions
Crowdloans, like any other crowdfunding process in the cryptocurrency sector, gave ordinary users and enthusiasts an opportunity to earn. Compared with launchpads and platforms for launching crypto startups, for example, parachain auctions had a different risk profile: the user did not send DOT or KSM directly to the project, but still assumed the risks of locked funds, a decline in the native coin’s price and a decrease in the value of the project’s tokens.
So, the obvious historical profit scheme for crowdloans was this: buy DOT or KSM before the auctions. Then, after the start of fundraising was announced, send the coins to support the project you were backing and wait for the result.
What happened next? If the project won a slot, your DOT or KSM were locked for 96 or 48 weeks respectively, and the winner’s tokens arrived in your wallet. As practice with early Kusama auctions showed, tokens of some candidates did indeed grow, since such projects were perceived as potential market leaders and important ecosystem participants. In this case, the user effectively received tokens of the winning project, while the locked DOT or KSM still remained their property and were returned after the lease term ended.
At the same time, if the project you “voted” for did not win, the user received their DOT or KSM coins back.
There was a strategy for investing in parachain auctions: stake your DOT on a strong candidate that was already known in the crypto community. For example, at one time the Acala Network project showed signs of being one of the ecosystem leaders. After the slot was won, some participants could immediately sell the received tokens at the market price if liquidity was available for them.
Risks of parachain auctions and crowdloans
Before participating in crowdloans, it was important to consider not only potential returns, but also risks. Even if funds were not transferred directly to a startup, the user still locked capital for a long period and depended on the market situation, project quality and token distribution terms.
The main risks included:
- long DOT or KSM lock-up: the user could not freely sell the coins until the slot lease period ended;
- market volatility: over 48 or 96 weeks, the price of DOT, KSM and project tokens could change significantly;
- low liquidity of project tokens: received rewards could not always be sold quickly at a favorable price;
- technical and product risks: a project could delay launch, change tokenomics or fail to attract enough users;
- regulatory risks: rules for working with cryptocurrency, exchanges and tokens may change in different jurisdictions;
- model obsolescence: after the transition to Agile Coretime, new projects no longer use classic crowdloans as the main way to connect to Polkadot.
In conclusion, crowdloans were not just a new term in the crypto industry, but an important stage in the development of Polkadot and Kusama. They avoided some of the shortcomings of fundraising methods such as IDO, ICO and IEO, because the network mechanism itself, rather than only the startup team or an intermediary, acted as a kind of “guarantor” for locked funds. However, in the modern Polkadot ecosystem, the focus has shifted from slot auctions to Agile Coretime, so old crowdloans should be viewed as a historical instrument and a useful example of how the parachain funding model developed.
FAQ
What are parachain auctions in simple terms?
Parachain auctions were a previous Polkadot and Kusama mechanism through which projects competed for the right to connect their blockchain to the Relay Chain. The winner received a slot, while users could support a project through a crowdloan by temporarily locking DOT or KSM.
What is a crowdloan in Polkadot?
A crowdloan is a way to collectively support a parachain project. Users locked DOT or KSM to support a slot candidate, and if the project won, they received its tokens as a reward. After the lease period ended, the locked coins were returned to participants.
Do Polkadot and Kusama parachain auctions still work?
Classic parachain auctions and crowdloans in their previous form are no longer an active mechanism. They have been replaced by the Agile Coretime model, in which projects gain access to network computational resources by purchasing coretime rather than through long-term slot leasing at auction.
How is a crowdloan different from an ICO, IDO or IEO?
In an ICO, IDO or IEO, a user usually buys project tokens or participates in an offering through a platform. In a crowdloan, DOT or KSM were not transferred directly to the startup but locked in a network mechanism. For supporting the project, the user could receive tokens, while their DOT or KSM were returned after the lease ended or if the project lost.
Was it possible to earn from crowdloans?
Yes, some participants earned income from tokens of projects that won a slot, especially if those tokens grew after launch and had liquidity. But income was not guaranteed: reward prices could fall, while DOT or KSM remained locked for a long period.
What is Agile Coretime and why did it replace auctions?
Agile Coretime is a new model for accessing Polkadot’s computational resources. It replaced classic slot auctions because it allows projects to buy the required runtime on a network core more flexibly, lowers the entry barrier and better suits applications with different levels of load.
