Polkadot Parachain Auctions: How to Get Involved
|— Polkadot is a Third-Generation blockchain designed to host multiple separate blockchains within the same network, allowing them to be interoperable.|
— A parachain is a parallel blockchain off Polkadot’s central relay chain. It can host other blockchain projects, allowing them to program their own rules and specifications while enjoying the security provided by the main relay chain.
— To occupy a parachain slot, projects need to win an auction by bidding the highest amount of DOT.
— Crowdloans see this DOT sourced from the wider community, enabling them to contribute their own DOT to the project’s auction, in exchange for rewards.
— And here, we explain how to do that with your Nano.
Here we give you the breakdown of how to take part in Parachain Auctions on Polkadot, using your Ledger device.
Polkadot is the third generation blockchain aiming to bring scalability and interoperability to existing (and future) blockchain projects. But beyond this, it also brings an unprecedented concept to the industry – the parachain auction.
Polkadot’s parachains give upcoming crypto projects the chance to use Polkadot’s multiple-blockchain infrastructure (not to mention its network security) to launch their platforms – while parachain auctions enable you, the user, to support that project’s bid.
In this article, we’ll take a deep dive into the concept of parachain auctions – and explain how you can get involved yourself.
What exactly is Polkadot?
Polkadot is one of Web3’s hottest topics, especially when it comes to interoperability and multi-chain technology.
The vision behind Polkadot is pretty simple – to combat the danger of “chain maximalism”. In other words, to provide an alternative to the idea that one blockchain alone can dominate the space. Polkadot achieves this by offering a network that allows multiple platforms to communicate, transact and thrive together. As Gavin Wood (Polkadot creator) puts it:
“Polkadot, in some respects, is the biggest bet in this ecosystem against chain maximalism. I would try to convince people that it’s really not such a good plan to be so focused on backing one winner above all others.”
A multi-chain network like Polkadot aims to address the “all eggs in one basket” approach to blockchain, and this has a number of benefits for the space.
The benefits of Polkadot Parachains
Using one of Polkadot’s parachains opens up some pretty incredible doors for projects and users alike, but for now let’s take a look at the key themes.
Unless you’re new to blockchain, you’ll likely already know that scalability is a defining question for the industry, as well as for the fate of individual networks.
Most blockchain networks suffer from congestion and traffic, since they can only handle a limited number of transactions per second. This impacts their ability to handle widescale adoption, and therefore their overall utility for regular people, both now and in future.
A multichain network (like Polkadot) exists to mitigate this. Its architecture allows multiple distinct blockchain networks to work in parallel, using its main chain (relay chain) as the underlying security infrastructure. It’s like moving into a furnished house that comes with state-of-the-art security and the possibility to expand and add bits as you see fit.
And by using multiple parachains to host different projects, the transaction load is spread to allow fast, secure transactions to take place across various chains. Think of a main road with different roads running parallel to it, but still connected to it. More lanes mean more cars can fit on the road at the same time without getting stuck behind one another, reducing congestion and allowing streamlined flow.
Polkadot’s flexible parachain design means projects can opt to be a public or private network and choose their own native cryptocurrency token and method of governance, while benefiting from the security and flexibility of the Polkadot network.
Each blockchain project can create its own design and use the lane to execute the project while remaining connected to the main blockchain (known as the relay chain).
And last but not least, let’s address Polkadot’s main offering: a universe of blockchains able to work together. Polkadot’s central relay chain joins the dots between its different native blockchains, enabling them to communicate with one another. In other words, blockchains within the network (and their projects) become interoperable.
To put this in perspective – interoperability is the key characteristic of the current Ethereum-based DeFi ecosystem, enabling users to leverage their Ethereum-based tokens on platforms across the ecosystem. But it is exclusively for Ethereum.
Imagine this level of utility – but for multiple different blockchains all working with one another. This is the biggest advantage Polkadot is bringing to the table, and why it’s categorised as a Third Generation Blockchain.
Going, going, gone! Polkadot’s Parachain auctions
So now we’ve explored the benefits of Polkadot, let’s talk about how YOU can personally get involved and support new projects on the network.
How do Parachains work?
If you could visualise the Polkadot network, you’d see one main chain (the relay chain) and multiple smaller chains (parachains). The relay chain handles the underlying security for the Polkadot network (sort of like a layer 1 blockchain) while the surrounding parachains can be occupied by different projects, all of which benefit from the security of the main chain, while being programmed with bespoke rules and functionalities.
You can think of these parachains as prime real estate “blockchains for hire”. For a project to occupy one of Polkadot’s parachain slots, and benefit from the security they offer, it needs to first win the slot in a parachain auction.
What is a Parachain Auction?
If a project wants to be part of the network, it needs to submit a bid using Polkadot’s native currency (DOT) to the relay chain: the winning bid gets the slot. Sounds simple enough, right? It is!
Parachain auctions are sold as a candle auction, a method used back in the 1600s when an actual candle was used. The idea is simple – when the candle burnt out, the auction was closed. This means there’s a random end to the auction and the winning bid can come at any time. With parachain auctions, the winner is determined when the (proverbial) candle goes out.
The DOT that was bid goes to secure the slot for a determined amount of time (as a lease). And if the bid doesn’t win, the project team’s DOT is returned back to them – they can always try again (since auctions occur on a consistent rolling basis).
Crowdloans: Enabling You to Support a Project
But the options for projects hoping to bag their own parachain don’t end there – rather than raise the capital needed for the auction internally, project teams can also source DOT from their community. This is called a crowdloan – and for you and me, this is where things get pretty cool.
A crowdloan allows regular people to support a project by contributing their own DOT for the parachain auction. It means that users have an active buy-in to projects, creating a culture based on community building.
It also entails a pay-off. There are rewards for lending DOT, ranging from a payout of the project’s native token after a specified time, to special access to certain privileges and functions of their network.
Getting involved: How to participate in a Crowdloan
If you’re not part of a project’s team but want to be part of its development, crowdloans are a great option. Firstly, you get to participate in supporting a network and helping a project succeed. Secondly, you sign up to reap rewards laid out by the project!
So let’s see how it’s all done, shall we?
Before you begin reading, you’ll need to make sure you’ve set up Polkadot.JS, which enables the app to access and work with the DOT accounts within your Ledger.
To participate in a crowdloan, you’ll need to use Polkadot app version 22.214.171.124. Crowdloans are only available on the most up-to-date version of the app, which is why it’s so important to ensure you’re using the correct one from the get-go.
Navigate to Crowdloans
From here, you’ll navigate to the Network tab and select the Parachain option from the dropdown menu. This will bring you to a page displaying all parachains currently active on Polkadot. From here, you’ll toggle to the Crowdloan section, where you’ll see all active crowdloan auctions, along with their ending dates and key details such as fundraising objectives, rewards and the length of the proposed lease.
It’s worth noting that not all of the crowdloans you can see will be an option from your Ledger Nano; that’s because in order to claim your rewards from a given crowdloan, its official parachain app must be integrated within Ledger Live. Without this, you will have no way of submitting your address to receive the reward tokens.
So before you do anything further, this should be the point when you check the crowdloan you’re interested in has its own app within Ledger Live – you can do this by consulting the Manage section of the app, and searching our App Catalogue.
Select a Crowdloan
Once you’ve chosen which crowdloan to support, you can hit “contribute” on the right of the page, which will open a window designated to managing your funding contributions.
Here, you’ll decide exactly how much to contribute, and confirm the transaction on-screen. The transaction details will then be shown on your Nano device, and you’ll be asked to approve it here too. Once that’s done, your DOT has been contributed to the fund!
What happens now?
Once you’ve made your contribution to your chosen crowdloan, the next step is waiting to see if it wins the auction. If it doesn’t, your bonded funds will be returned to you directly. On the other hand, if your project wins its auction, you’ll receive rewards as per the project’s terms (and according to its timescale).
It’s worth bearing in mind that you won’t be able to recover those rewards until the relevant app is installed on Ledger Live – in other words, if you’ve bonded funds to OmniBTC project and it wins the auction, you won’t be able to receive them until the OmniBTC app is installed within the Ledger Live app.
Parachains with security and beyond
If delegating your DOT to a project that needs help with a crowdloan is up your alley, bravo! Helping fund an innovative project is an exciting step and you’ll be rewarded with some tidy offering for your participation!
Remember, the overall impact of parachains has rippling benefits for the market as a whole. It offers parachains to provide a method for individuals and communities to support projects, while incentivizing projects to work and interact with one another. Normalizing this level of interoperability in the crypto space will influence peoples’ expectations going forward, helping the industry as a whole to advance, not to mention allowing new and exciting projects to rise up and make their own contributions. And that’s a big win for everyone involved.