Crypto Market Cap$2,411,636,528,3881.28%
Proof-of-Stake Marketcap$326,775,928,658-6.97%
Total Value Locked$308,887,336,216-4.06%
Proof-of-Stake Dominance18.85%-4.89%
Average Interest Rate8.51%-2.18%
Average Total Staked52.45%-0.12%
Crypto Market Cap$2,411,636,528,3881.28%
Proof-of-Stake Marketcap$326,775,928,658-6.97%
Total Value Locked$308,887,336,216-4.06%
Proof-of-Stake Dominance18.85%-4.89%
Average Interest Rate8.51%-2.18%
Average Total Staked52.45%-0.12%

      In a crypto environment that continues to be very dynamic, the Polkadot ecosystem represents one of the most significant players. Kusama – the “canary network” of Polkadot – has the purpose to serve as an experimental environment to test new code and features before they can be rolled out on Polkadot. Especially the speed with which the Kusama network is growing is impressive. Many new and impatient teams are competing to lease a parachain slot in the network and have the support of a large crowd of users. Parachain status provides several benefits to the projects, including shared security, the ability to communicate seamlessly with other connected parachains, and the use of established infrastructure elements.

      To get one of these rare slots, projects must win an auction. Slot auctions are one of the unique features of the Polkadot and Kusama ecosystem. It provides an infrastructure for blockchains to connect and share security with each other. Projects are given the opportunity to create a system with a scalable multichain architecture by leasing a slot on their respective relay chain. This allows them to participate in the consensus mechanism of the whole network and create a setup of shared security. The parachains benefit from the economic security provided by the relay chain.

      Currently, the second batch of Kusama parachain auctions runs and a lot of teams are interested in having their own slot. In order to lease a Kusama parachain slot, projects must commit a certain number of KSM tokens for the duration of the lease (from 6 months to 2 years). Whoever bids the highest amount of KSM will win the slot. To achieve this, they launch crowdloan campaigns to raise funds from their community. Also called parachain lease offering (PLO), the rewards for investors vary greatly here, so each individual must weigh up whether staking the native token or investing in new projects and teams is the best option. In addition, the first liquidity mining programs are being rolled out, so that additional investment opportunities are being generated.

      For those just starting out, here is a brief overview of Polkadot, Kusama, and parachain auctions.  


      Polkadot

      Polkadot is a concept of a heterogeneous multichain, based on shared security and interoperability. The protocol is designed by Gavin Wood, who was previously one of the Ethereum founders. In contrast to conventional blockchains, Polkadot offers aggregated security and trusted interchain transferability. This is achieved by largely parallelizing and scaling projects and problems and distributing them across numerous shards known as parachains.

      Polkadot follows the approach of Nominated Proof-of-Stake (NPoS). It is designed with the roles of validators and nominators, to maximize chain security. Actors who are interested in maintaining the network can run a validator node. They can confirm the legitimacy of transactions, produce blocks and participate in consensus with other validators. By doing this, they earn DOT from transaction fees and block rewards. Nominators can delegate their DOT to earn staking rewards. Here you can find the current rewards, validators, and other stats for Polkadot staking. The DOT token serves the purposes of governance, operation, and interconnectivity of the network. This whole process happens on the relay chain, the main chain of the Polkadot ecosystem. It’s responsible for the network’s shared security, consensus, and cross-chain interoperability. Smart contracts and similar operations are not supported. 


      Kusama

      Kusama is called the “canary network” of Polkadot. Founded in 2019, it can be considered as the experimental version of Polkadot with nearly the same codebase and functionalities. Like a canary in a mine, Kusama should point out warning signals that might occur in the protocol. It operates completely independently from the Polkadot chain and has its own native token KSM. The protocol is set up with faster governance parameters and lower barriers to entry. With this, an early-stage deployment of projects under real-world conditions should be enhanced. This is especially beneficial for teams that are still iterating their technology and business model. The consensus mechanism is also NPoS and works like the one of Polkadot. The current rate of KSM staking rewards and validators can be found here. Despite many similarities, the network could converge or diverge over time, depending on how the respective communities decide.

      The following table illustrates the similarities and differences between Polkadot and Kusama.

      Table 1 Comparison Kusama and Polkadot

      Parachains

      Parachains are considered the solution to enable high scalability of the Kusama and Polkadot ecosystem. They are so called because they run parallel to the relay chain. A specific functionality and an own governance structure represent the most important features. Interested teams can win such a slot in an auction, which is described in the section below.

      Figure 1 Parachain structure

      Parachains are fully connected to the relay chain as shown in the figure above. Similar to a validator for the relay chain, a collator has the task to maintain a full-node of the parachain and to produce new blocks. Additionally, the collator has to pass them to the relay chain validators for verification. Instead of being incentivized to get DOTs, each parachain has their own economics and incentive structures. The most common here is an own native token combined with a special proof-of-stake mechanism, but other incentives models are still possible.

      The communication between parachains and relay chain will work through the Cross-chain Message Passing (XCMP) transport protocol. It allows communication by messaging from one collator to another collator on different parachains. Cross-chain transactions are handled using a simple queuing mechanism based on a Merkle tree to ensure correctness. The task of the relay chain validators is to move transactions from the output queue of one parachain into the input queue of the destination parachain.

      Only the associated metadata is stored as a hash in the relay chain storage. XCMP is currently under development and the details are subject to change. As a temporary substitute, the Horizontal Relay-routed Message Passing (HRMP) is implemented. HRMP has the same interface and functionality as XCMP. It’s more resource-intensive, because it stores all messages in the relay chain. Once the XCMP has been implemented, the HRMP will be detached to enable a higher network efficiency. Nevertheless, a certain latency in communication remains between the parachains. In the best scenario, it lasts at least 2 blocks for sending and receiving a message. For this reason, some parachains are planning to become a hub for specific applications. Especially financial data and DeFi applications cannot afford latent times.


      Parachains and Slot Auctions

      There is a limited number of parachains available for Kusama and Polkadot. This limitation is intended to create competition for the scarce number of slots. It is estimated that about 100 different parachains can be supported in the current status. More will likely be available as development continues and the demand for this exists. To allocate one of the few slots, there are 3 ways: 

      • Common good parachains
      • Auction granted parachains
      • Parathreads

      Common good parachains

      The first type, common good parachains, are allocated by the Polkadot respectively Kusama on-chain governance. Their purpose are use cases from which the whole ecosystem benefits. They can be classified as system level chains and public utility chains. System level chains move functions from the relay chain to parachains, minimizing administrative use of the relay chain. For example, a governance parachain could move all governance processes from the relay chain to a parachain. Public utility chains are adding features that don’t yet exist but that stakeholders believe will add value to the entire network. Examples are core functionalities like bridges between different parachains. Mostly, these common good parachains have no economic model or token. Unless the governance wants it, their lease doesn’t expire. 

      Statemint (Polkadot) or Statemine (Kusama) is an early and important common good parachain in development. As a public utility chain, it enables the creation and management, and offers an interface similar to ERC-20 for fungible assets and ERC-721 for non-fungible tokens. Like most common good chains, Statemint will use the DOT token as its native token and will stay fully aligned with the relay chain – updates will require a referendum.

      Auction granted parachains

      The focus of public attention is on auction granted parachains. A slot for teams on a free Parachain can be granted in a special type of auction. For this, the teams bid with their own DOT/ KSM or source funds from the community using the crowdloan functionality. The slots will be sold in a modified version of an unpermissioned candle auction. This is a variant of an open auction and is derived from an auction format from the 16th century when bidding was allowed until an actual wax candle went out. The highest bidder at the conclusion of the auction is the winner. The special is that the moment of termination is determined retrospectively by a random number. That means, the time for bidding has a fixed length but the actual ending block, called termination block, is randomly determined only after this.

      The following figure illustrates the flow of a candle auction on Kusama.

      Figure 2 Candle auction

      The first 27,000 blocks (around 2 days), serve as a grace period where teams and investors have time to get an overview, gather information, and set up their bidding or contribution strategies. Bidding is already possible in this status. 

      The start of the candle phase marks the beginning of the auction. From now on, the auction could end at any given block with equal probability. The next 72,000 blocks bidding is still allowed until the end of the auction is reached. With this end, a termination block is computed by using a combination of verified random function (VRF). By calculating this block retrospectively nobody can predict the “real” end before or during the auction. 

      The winning bids that are contained in the termination block are then used to determine the outcome of the auction. All later bids are discarded and will not be considered further. This mechanism incentivizes early bidding and reduces the risk of sniping. 

      One of the major differences between Polkadot and Kusama consists in the different slot durations and periods. The slot durations on Polkadot are capped to 2 years and divided into 3-month periods. On Kusama the slot durations are capped to 1 year and divided into 6-week periods. Parachains can lease a slot for any combination of periods of the slot duration.

      Figure 3 Kusama parachain slots at genesis

      In the case of Kusama the slot ranges may be any of the periods between 1-8, each period represents 6 weeks. Each team can bid for a specified time range of the slot that they want to lease. Therefore, they have to submit the token amount they are willing to bond and for which periods. The winner selection algorithm will pick bids that may be non-overlapping in order to maximize the amount of tokens held over the entire lease duration of the parachain slot.

      This means that the highest bidder for any given slot lease period might not always win. For a deeper understanding, an example can be found here. When a team wins an auction the token that it bid gets reserved until the end of the lease – staking or other operations with those tokens are not possible anymore. At the end of the lease, the token becomes transferrable and can be used otherwise. If there is no new lease the slots will automatically become Parathreads.

      Parathreads

      Parathreads are projects which are not able to acquire a full parachain slot, or do not find it economically sensible to do so. Also, parachains for which the lease expires or no dedicated parachain slot is anymore required – but would like to continue using the relay chain – can become a parathread. They use the same API as parachains, but their execution works on a pay-as-you-go basis, so there is an auction for every block. A fixed fee for the registration of a parathread is required, but it’s much lower than acquiring a whole parachain. Typically, parathreads are shared by multiple projects, in particular by those that rarely need to commit transactions to the relay chain.


      Crowdloans and parachain lease offerings (PLO)

      To get the amount required to win the auction, Polkadot and Kusama give their parachain teams the opportunity to source tokens for their bids in a decentralized crowdloan. Hereby, anyone can create a new crowdloan campaign for a slot. This campaign is configured as a range of slots, a cap and a duration. The teams encourage people to contribute to their PLO by distributing tokens when a parachain slot is won. So if the first attempt to secure a slot fails the campaign still continues for the next slot. When setting up a campaign, various parameters must be taken into account. A crowdloan cap, the maximum amount the campaign can collect, and the desired end have to be set.

      Investing in a successful crowdloan results in a lock-up for the invested token, KSM on Kusama and DOT on Polkadot. Only when the end of the lease is reached the participants can withdraw their token which they contributed. Contributors thus have a significant risk bonding their tokens, as they are not liquid in case of a sudden price drop or rise. If the campaign was not successful, the retirement phase will begin at the campaign’s configured end and participants can withdraw their tokens.

      PLO returns = staking returns + illiquidity premium for DOT/KSM – liquidity discount for PLO rewards

      Investors should consider whether participating in the PLO is worthwhile versus staking KSM/DOT. The returns here should be based on the equation set up by Robonomics. The illiquidity premium is generally understood to be the increased return received for the additional risk of tying up capital in a less liquid asset. 

      Crowdloans and parachain lease offerings are an exciting tool to raise funds. After the first PLOs are finished and their initial leases are over, it will become clear how profitable they were.


      Kusama Parachain Auctions

      Figure 4 Auction Timetable, Source: https://kusama.network/auctions/

      Auctions 1-5

      June 17th, 2021 – July 20th, 2021

      The first batch of five parachain auctions on Kusama were completed on July 20th, 2021. In this first round, 18 independent teams have registered to compete for a free slot. The crowdloan campaigns received funds from 19,017 unique accounts, which contributed a total of 1,320,458 KSM – around $500 million! All five winners – Karura, Moonriver, Shiden, Khala and Bifrost – now have their own Parachain slot on Kusama. Their lease runs until May 13, 2022 for all teams in this case. By incrementally expanding their functional scope, they are already taking advantage of the built-in and forkless upgradeability provided by Substrate and have added value to the ecosystem. Nearly 10% of all KSMs have already contributed to PLOs in this first phase of parachain auctions.

       Auctions 1-5 in numbers

      • 18 crowdloan campaigns
      • 19,017 accounts that contributed
      • 1,320,458 KSM bonded in crowdloans (successful + unsuccessful)
      • 1,114,629 KSM locked in slots until May 13th, 2022

       KSM stats during this time

      • 47 % locked in staking
      • 9.9 % bonded in crowdloans

      In the following, the success of the crowdloans will be shown. For better demonstration, the returns have been simplified. Vesting rewards and ref codes are disregarded and the pure return of invested KSM is shown. The last phases of the crowdloans are shown, without early-bird or similar bonuses. Certain biases in the results are present for this reason.

      Table 2 Kusama Auction 1-5 Winners

      The first Kusama parachain slot has been granted to Acala’s Karura Network (KAR). Karura describes itself as the “all-in-one DeFi hub of Kusama”. It’s an EVM-compatible network, which offers a suite of financial applications, like staking derivatives, a multi-collateralized stablecoin or an AMM DEX. It serves as the ultimate test for the Acala network that will later be built on Polkadot.

      Over 500k KSM by 14k contributors were raised in the crowdloan. For each KSM locked, participants received a minimum of 12 KAR – currently 22 KAR estimated. About 70 % will be vested and released over the duration of 48 weeks. So there is at least a reward of $111 per contributed KSM. Additional KAR can already be earned here, AMM DEX is already live and a first liquidity mining program has been launched. For the next launch phases you can have a look here.

      The second winner is Moonriver (MOVR), a companion network to Moonbeam. Moonriver is a full Ethereum-like environment and works with industry-standard Ethereum tools, dApps and protocols. Through the EVM implementation it supports smart contracts and the full range of Ethereum decentralized applications. Their goal is to easily deploy new or existing Solidity dApps on the Moonriver parachain with few or no changes. Moonriver serves as a test environment for new code to be tested under real economic conditions. Once proven, the same code ships to Moonbeam on Polkadot.

      Moonriver has won the parachain slot through an excellent participation of its community. Thus, contributors have received more than 14 MOVR for 1 KSM. While a large portion of these funds – about 70 % – are linearly vested, the returns are considerable. The reward per KSM contribution is about $5,000 in MOVR. 

      Shiden (SDN) – “the multi-chain dApp hub on Kusama” – was the winner in the 3. parachain auction. It wants to solve the problem that Kusama does not support smart contracts by design. For this reason, Shiden provides full compatibility with the Ethereum Virtual Machine, WebAssembly, and Layer2 solutions from day one. Various applications such as DeFi, NFTs and more are thus imaginable. Shiden is also a canary network for the Astar Network (formerly known as Plasm Network) that will later be deployed on Polkadot.

      Over 4600 participants joined the Shiden crowdloan and contributed 138k KSM. Per KSM invested, revenues of more than $340 have been achieved.

      The fourth auction winner is Khala Network (PHA). It can be described as a privacy-preserving cloud computing service. Khala is the canary network for the Phala network, which will be launched on Polkadot. The network is a trustless computation platform that enables processing in the cloud without compromising data confidentiality. It will provide computing power to other blockchain applications while protecting the data layer. In particular, sensitive data in DeFi trading, cross-chain bridges and others can benefit from this technology.

      Khala was able to raise 132k KSM in the PLO. With a current price of $0.85 per PHA each contributed KSM realized a profit of $127, while 66 % will be released linearly over the entire duration of the lease. Recently Khala’s Secure Workers system officially launched, and the first miner minted PHA.

      Bifrost (BNC) secured the last slot in the first parachain auction phase. It can be considered as a parachain designed for staking liquidity. In return for staking, users receive vTokens of the same value. This opens the opportunity for double rewards through DeFi interests and/or through vToken lending leverage. The vision is that it should be possible to move assets through parachains bridges, convert them into vTokens and then get returns for providing liquidity on proof-of-stake systems.

      The risk of locking could be overcome here. For example, DAI could be locked and vDAI be generated in this process. These could then be used via various parachains and generate rewards. For auctions, Bifrost has additionally introduced the Slot Auction Liquidity Protocol (SALP). SALP aims to issue vsKSM for KSM contributors. These vsKSM can be used for DeFi applications such as swap and liquidity mining during the KSM bonding period and exchanged to KSM in AMM at any time. After the parachain lease expires, derivatives can be fully redeemed for KSM in 1:1 peg.

      In the parachain auction 136k KSM could be raised by the Bifrost crowdloan. About 22 BNC will be distributed per bonded KSM, while 50 % of these rewards are released linearly within the entire duration of the parachain lease. At the time of writing there is no price for BNC, however a cross-chain BNC-USD pair will appear on Karura shortly. More information can be found here.

      Auctions 6-11

      September 1st, 2021 – October 13th, 2021

      Since September 1st, the auctions for the next six slots have been in progress. Again, there are exciting teams competing for a spot. The plan is six auctions over six weeks, with a pause to evaluate overall network performance before a third series of auctions begins on a similar schedule. This time, the last slot will be allocated on October 13th.

      Table 3 Kusama Auction 6-11 Winners

      The 6th winner of the parachain auctions is KILT Protocol (KILT). KILT describes itself as “a blockchain protocol for issuing self-sovereign verifiable, revocable, anonymous credentials and enabling trust market business models in the Web 3.0”. The protocol aims to solve the problem that users of the traditional web2.0 have to re-register with each service and thus have to provide their data each time.

      This carries the risks that their data will eventually be hacked, that some service providers will hold data monopolies, or that some services will have an unfair advantage in terms of artificial intelligence. KILT would like to offer an alternative. It would like to enable the issuance and storage of credentials on the Internet, allowing companies and individuals to control their own data. A checksum (hash) of these credentials will be stored on the Kilt Blockchain. With this system, KILT aims to establish a fair relationship between attester, claimer and verifier and create true data integrity.

      The crowdloan campaign of the KILT protocol was very successful. Already in a short time the cap of 220k KSM was collected from almost 8000 contributors.

      The Calamari Network (KMA) was able to win the 7th slot in the parachain auctions. Calamari, Manta Network’s canary network, is the plug-and-play privacy parachain designed for the Kusama DeFi world. It combines Kusama and zkSNARKs to bring on-chain privacy to transactions and swaps. The two products that will be launched soon are MariPay and MariSwap. MariPay supports the private transfer of Kusama and its parachain assets. Users can transfer popular assets such as stablecoins and wrapped BTC while enjoying the benefits of on-chain privacy through ZKP. MariSwap offers users the ability to swap between parachain assets while maintaining the privacy of user addresses. It will also offer “features never before seen in the industry”. Privacy is a major aspect on public blockchains. For this reason, it is really exciting to follow the upcoming developments.

      About 16000 people took part in the Calamari crowdloan. For each KSM contributed, they receive 10,000 KMA, 66% will be vested over the lease period of 48 weeks. There will be a valuation for KMA soon, as Calamari is holding a Bento Box Event on Miso.

      The 8th auction was easily won by Basilisk (BSX). Basilisk is a liquidity bootstrapping protocol developed for Kusama. Its role is to provide frictionless liquidity for long-tail crypto assets. The modular design of Basilisk allows new crypto assets to bootstrap liquidity by choosing the Automated Market Maker (AMM) model that best suits them. In subsequent iterations, Basilisk will include more advanced pricing mechanisms such as auctions and bonding curves. An NFT marketplace is also in the process of being developed. Basilisk maintains close relationships with HydraDX, which aims to become the leading liquidity provider in the Polkadot network. Together, Basilisk and HydraDX create a synergy that meets the diverse liquidity needs of crypto assets throughout their lifecycle.

      This connectedness between the protocols is also reflected in the rewards for contributing to the PLO. Per contributed KSM participants get 67500 BSX and additionally 255 HDX. Again, the maximum amount of KSM was contributed, which may be a very optimistic sign for the future of the protocol.

      The auction for the 9th slot was particularly close and has once again shown the special characteristics of a candle auction. The almost surprising winner here is Altair (AIR). Altair wants to be the industry-leading infrastructure on Kusama. It’s the canary network of Centrifuge with the goal to test and implement the newest experimental features – before they go live on Centrifuge Chain. Interoperability is key to increasing liquidity in DeFi. Altair will bridge the Kusama, Polkadot, and Ethereum ecosystems to enable assets to access funding wherever it is available. In the future, Altair will be able to connect more and more projects across these ecosystems. Even when Centrifuge on Polkadot is fully operational, Altair will be used to mint art NFTs, fund undiscovered assets, and anything else the Kusama community brings to the table.

      Over 187K KSM were raised in the crowdloan campaign. 430 AIR tokens per KSM will be received by the about 11k contributor. The AIR token will have the following four main functions: govern Altair development, pay for transaction fees, secure the chain, and reward adoption.

      Heiko Finance (HKO) was granted the 10th slot in the auction. It is a decentralized money market protocol that offers lending, staking, and borrowing in the Kusama ecosystem. Heiko Finance is the sister network of Parallel Finance. After a successful launch and testing elementary functions on Kusama, Parallel is looking to secure a parachain on Polkadot.

      The team has already let the crowdloan campaign expire early, as the probability of being outbid was low. So the maximum of 200k KSM was raised by over 10k contributors.

      The remaining 11th slot in this second phase of the Kusama parachain auctions will be awarded till October 13th. This additional slot was retroactively granted by the council. The competition for the last slot is still in full swing. Although Kintsugi – issuer of 1:1 Bitcoin-backed kBTC – has already reached their cap of raising KSM, there are other promising candidates.

      It can already be said that the second phase of the auctions is also a complete success. 16 teams competed for the available 6 slots. So already now before the end of the auctions over 1,324,099 KSM were contributed, and it could have been even more if they had not been capped. With excitement, the third phase can be started soon. There is no lack of excellent teams and people who want to contribute.


      Conclusion and Outlook

      The rollout of slot auctions on the Kusama network marks an exciting time for the entire Polkadot ecosystem. The launch of parachains was a major step towards a scalable, decentralized and interoperable future. The first ten auction granted parachains to go live are Karura, Moonriver, Shiden, Khala, Bifrost, Kilt, Calamari, Basilisk, Altair, and Heiko Finance. These projects will add great features to the Kusama ecosystem by providing infrastructure for DeFi, liquidity solutions, smart contracts, confidential cloud computing, privacy, RWAs, and more.

      The next auction phases will show if the demand for KSM and the competition between the teams will remain high. In particular, the end of leases and the resulting return of liquid KSM will be significant here. Approaches to solving such problems are already available. For example, Bifrost offers investments in PLOs through its dashboard, where KSM remains liquid as a derivative. What is already being added as a price-driving factor are liquidity mining programs.

      The transition to Polkadot will be exciting to follow. Almost all projects that have won the first Kusama parachain auctions want to roll out their final product on Polkadot in the near future. So these parachain auctions will again be full of competition and probably result in even higher contributions. With two networks existing in parallel, it will be interesting to see in which direction Kusama moves from Polkadot. 

      Furthermore, there will be a focus on the technical development and the associated scalability of the networks. In recent weeks, Polkadot founder Gavin Wood has published more specific explanations of XCM – the cross consensus message format. One of the fundamental questions here is how XCM can change over time without introducing breakage between the very networks it is meant to connect. Resolving these technical issues in combination with the further development of the ecosystem will be a critical issue. Especially in simultaneous competition with the market leader Ethereum, which takes a different approach to scalability. In the future, the aspect of shared security could become even more important, so Polkadot could have an advantage here. 

      **This blog post is not an investment advice, and potential PLO participants should consider all risk factors**

      Sources:

      About The Author

      Christoph Matthias

      became a digital asset enthusiast in 2017. He has a master's degree in economics with a special focus on digital innovation. In his master's thesis, he researched the beginning of Decentralized Finance (DeFi) and in particular the impact that stablecoins have on this growing ecosystem. After his graduation, he worked as a securities trader on various German stock exchanges. The focus of his current work is on the upcoming changes that Web 3.0 will have on the areas of traditional finance.

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