What Are Parachain Auctions? Polkadot and Kusama Crowdloans Explained

Polkadot and Kusama are among the most exciting blockchain projects today. One of the main reasons why people are excited about them are parachains, which could open up a whole new ecosystem of decentralized finance and other important blockchain use cases. There’s of course also the parachain slot auctions, which give users the opportunity to earn tokens in exchange for temporarily lending out their DOT or KSM to parachain projects. Now, let’s take a quick look at what Kusama parachain auctions and Polkadot parachain auctions are all about.

We’ll mostly be using Kusama as an example in this article, but the vast majority of what we’re talking about also applies to Polkadot.

What is a parachain?

A parachain is a customized blockchain that connects to either the Polkadot or Kusama blockchain platform. Some examples of parachains are KILT Protocol, Karura and Moonriver.

The Kusama platform is centered around a Relay Chain, which coordinates the entire system, including the parachains that are connected to it. The relay chain is secured by users who stake KSM. The different parachains connected to the Relay Chain also benefit from this security, and they also have the ability of communicating and interoperating with each other. The Relay Chain and all of the parachains attached to it have a shared state.

Essentially, parachains give projects the ability to create blockchains that are tailored for specific use-cases, can interoperate with other parachains, and benefit from the security of the Relay Chain.

What is a parachain slot auction?

The Polkadot and Kusama platforms don’t support an infinite amount of parachains – at this time, the upper limit is 100 parachains on each network, but this limit could be adjusted over time through governance.

If a project wants to create a parachain and connect it to the Kusama Relay Chain, they need to win a parachain slot auction. In order to do this, they need to have submitted the highest bid of KSM or DOT (depending on which platform the auction is for) at the time of the auction’s conclusion. The parachain auctions use a candle auction system to ensure that participants don’t know when exactly the auction ends. This mechanism helps prevent “auction sniping”.

For more information on parachain slot auctions, you can check out the official Polkadot Wiki.

What are crowdloans?

Since it can be difficult for projects to amass enough tokens to win a parachain slot auction by themselves, both Polkadot and Kusama have implemented “crowdloans”. In a crowdloan, users can back a project’s parachain slot auction campaign by temporarily lending them KSM or DOT.

Users who support projects by locking up their KSM or DOT will receive their tokens back once the project’s parachain lease expires – the maximum slot duration is 2 years, but it can also be shorter. Since your tokens will be locked through the duration of the parachain lease, make sure to check the length before you commit funds.

Users also get their tokens back in the event that the project fails to win the parachain slot auction.

Why would I want to lend my KSM or DOT to a parachain project?

In most cases, projects will distribute the native tokens of their parachains as a reward for users who are backing their parachain slot auction campaigns. For example, Karura is distributing KAR tokens to its backers, and Moonriver is rewarding its backers with MOVR. Please note that this isn’t always the case, and always make sure to check with the projects you’re interested in backing before committing any funds.

What’s the difference between Polkadot and Kusama?

Polkadot and Kusama are often called “sister blockchains” – they’re both based on practically the same technology, which is called Substrate. The main difference between Kusama and Polkadot is governance. In Kusama, the governance parameters are looser, which means that the process of adding new features isn’t as rigorous as it is on Polkadot.

In practice, this means that Kusama is a sort of experimental platform where new features are deployed and tested before they are added to Polkadot. Parachain slot auctions themselves are an example of this, as they are already live on Kusama, but not on Polkadot (as of September 14, 2021).

How can I participate a crowdloan for a parachain slot auction?

If you want to lend your KSM or DOT to a project that’s bidding for a parachain slot auctions, there’s two main ways of going about it. You can do it on your own through a wallet like polkadot.js or you can use third-party services like cryptocurrency exchanges. For example, the Kraken cryptocurrency exchange lets users participate in crowdloans for parachain slot auctions.

For a quick guide on participating in crowdloans on Kusama, you can check out the following video: