Polkadot Reaches Major Milestone with Launch of Parachain Auctions

Polkadot (DOT), the ninth-largest digital asset with a market capitalization of $53.6 billion, is set to launch parachain auctions today. The launch of the auctions will finally enable projects vying for a spot in the Polkadot ecosystem to launch their own crowdfunding efforts using DOTs pledged to their cause.

Some of the most highly anticipated projects planning to bid to launch on Polkadot include Moonbeam, an Ethereum-compatible smart contract parachain, Centrifuge, a decentralized bridge between the real world and decentralized finance (DeFi) that will let users finance their real-world assets without banks or other intermediaries, and the Acala Network, another Ethereum-compatible smart contract platform optimized for DeFi.

These three projects are among approximately 10 projects vying for funding via crowdloans enabled by the auctions.

Connecting the DOTs

Polkadot (DOT), created in part by Ethereum co-founder and creator of the Solidity smart contract language Gavin Wood, is a blockchain designed to support various interconnected, application-specific sub-chains called parallelized chains, or parachains for short. 

Polkadot is an entire ecosystem of parachains that plugs into a single base platform called the relay chain. The relay chain’s role is to provide security to its network of parachains instead of supporting application functionality. This stands in contrast to Layer-1 chains like Ethereum and Solana which support DApps directly on the base layer. Parachains can be thought of as similar to the proposed sharding specification of Ethereum’s planned 2.0 upgrade, as well as the existing Layer-2 scaling solutions like Arbitrum, Optimism and Starkware.

What is a DOT token?

The DOT token serves four primary functions: governance over the network, payment for fees, interoperability and bonding. In order for new parachains to be created, tokens must be bonded to ensure that incentives amongst all parties are aligned. 

On November 1, the Polkadot council passed a motion to enable parachain registration and crowdloans, which was then passed on to DOT token holders for voting. The vote ends in approximately three hours. The vote tally shows unanimous support among DOT governance.

Once the voting has concluded and has passed, teams will be able to register their parachain and later open their crowdloan on November 11, 2021.

As described by the Moonbeam Foundation, “a crowdloan is a way for new projects to garner the support they need to connect to the Polkadot network as a parachain. A crowdloan participant can show their support for a project by locking up their DOT for the length of the parachain lease in exchange for a reward, usually in the form of the project’s native token.”

DOT holders can bond these assets to the Polkadot network to signal support for a particular project. If the project wins, the bonded DOT is locked by the network for the duration of the parachain slot, after which the tokens are unlocked and may be re-claimed by those who contributed, according to a primer provided by the Kraken exchange. 

Parachain auction vs. ICO

Parachain auctions differ from initial coin offerings (ICOs) by not forcing investors to transfer ownership of their DOT to the bidding team or any third party. User funds can be returned if the project loses the auction. In case the project wins, funds are returned once their access to the parachain slot expires.

In mid-October, Gavin Wood announced the Polkadot treasury — consisting of 18,936,300 DOT, worth more than $1 billion at today’s prices — will be used to build out the Polkadot ecosystem. This fund will be allocated to wherever DOT token holders see fit via crowdloans powered by the auctions.

Investors are clearly feeling bullish on the future of DOT, with the price surpassing its prior all-time high of $49.78, seen on May 15, 2021, and the tokens are trading just below $55 at time of publication. The market capitalization of DOT sits at $53.6 billion, making it the ninth-largest digital asset. The 12-month performance has been impressive, rallying 1,215% over that time frame. 

This story was updated on November 4, 2021, at 12:20 pm ET.