Polkadot rethinks the economics of parachain auctions

Polkadot founder Gavin Wood proposes to overhaul how the network allocates resources, in a plan being dubbed Polkadot 2.0.

During the fourth edition of its annual Decoded conference in June, Wood waxed philosophical at times, as he explained his vision for the ecosystem’s evolution as a network of sovereign chains connected by treaty-like “accords.”

Polkadots’ “voyage of discovery,” Wood said — quoting French novelist Marcel Proust — is not unlike Ethereum’s, a project he also co-founded.

“When you’ve built it, you realize you’ve actually built something a little bit, or even quite different, to what it was that you’re originally trying to build,” he told an assembled audience in his keynote address in Copenhagen, Denmark.

Wood left the CEO role at Parity Technologies — Polkadot’s lead development shop — in October 2022 to become the network’s chief architect. Alongside the Web3 Foundation, Parity launched the initial network in May 2020 after several years of development. But it wasn’t until November 2021, at the height of the previous crypto bull market, that the core primitive of parachain auctions went live.

At the time, Polkadot’s native token DOT hit its peak price, with the network touting a market cap of about $54 billion. Today it’s down around 90% at $7 billion. Today, Polkadot is the 12th-largest crypto asset by market capitalization, excluding stablecoins.

During that time, the idea around auctioning off the limited resource of parachain “slots” proved problematic in a number of ways.

To nab a parachain, projects need to lock up a sometimes significant amount of DOT, which is loaned by token holders to lease their slot for two years. The limited supply of parachains created a highly competitive environment during those first auctions whereby only projects with major financial backing could win.

Acala Network, which scored the first parachain, bid 32 million DOT — worth about $1.3 billion — on Nov. 18, 2021.

Just nine months later, in July 2022, amid waning demand, the 21st slot was awarded to Darwinia Network for just 9,900 DOT ($55,000).

That kind of volatility is not ideal, according to Kenny Li, co-founder of Manta Network, which is in the process of launching its own parachain. 

“From my own personal experience going through these types of auctions, I think that having this on a more consistent basis and having more supply in the market, rather than fighting amongst each other in order to secure parachains, [is] better overall for the ecosystem,” Li told Blockworks.

From parachains to cores

During his appearance at Decoded, Wood said Polkadot is “a multicore computer,” Wood. The parachains — derived in part from the notion of parallelized blockchains, have a reserved core. Part of the 2.0 vision, according to Wood, is simply a shift in terminology.

“What we have built isn’t so much about chains. It’s more about space,” he said. “It’s more about the underlying resources that chains need in order for us to deliver this kind of system.”

Wood placed a focus on making the system more “agile” and “the slot auction model is most certainly not agile,” he said, because it “creates barriers both perceived and actual.”

Instead, the new framework would allocate “core time” via a marketplace, and make it available both on-demand (“instantaneous”) and long-term (“bulk”) — monthly, for instance.

These monthly chunks of core time would be represented by NFTs, Wood suggested, only they can be fractionalized, allowing owners of bulk time to allocate computation on a Polkadot core.

Existing leases, whereby one parachain equals one core, would continue as well, while the new bulk pricing would need to be initialized by governance.

Polkadot co-founder Rob Meier analogized the 2.0 proposal to the allocation of cloud computing resources during a Twitter Space this week.

“In the Web2 or standard computing world you have all these processes, and [they] can duplicate themselves, they can fork they can join, they can spawn children and I think all of these possibilities will open up to the community as well, and it’s going to be really exciting to see the types of infrastructure that are built out on top of this core kernel and the types of collaboration that it enables,” Meier said.

Such an approach suits Francisco Agosti, CEO of Moondance Labs and founder of Tanssi, an appchain infrastructure protocol for Polkadot.

“What excites me the most about this new iteration of Polkadot is that it largely addresses the biggest drawbacks we’ve seen of Polkadot 1.0,” Agosti said during the event on Twitter. 

Tanssi was meant to work with a pay-as-you go model, so the “instantaneous” options Wood proposed struck him as a fine way to “containerize” chains.

Renewed focus on applications

Wood pitched his new vision as “application centric, not chain centric.”

“It’s also important to understand that Polkadot is ultimately a platform for people to build applications for users to use those applications,” he said.

“Polkadot is very heavy duty — it’s basically like cosmos and very similar — You’re not just deploying an application, you’re deploying kind of a pseudo network,” Manta’s Li, said. “You have to worry about the collators, you have to worry about the uptime of the network — it’s a lot more of a lift than just deploying a smart contract on Ethereum or an L-2.”

In some cases, it may be preferable to deploy smart contracts directly on cores, Wood noted, foregoing the parachain concept entirely.

“In reality, if we’re going to use Polkadot’s potential, apps need to span across chains and when they do, this needs to be seamless from the point of view, at least of the user and ideally of the developer.

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