Last updated: September 5th, 10:25 PM CDT
Round 1 Reflections
Now that the first five auctions have come and gone I have learned many things about parachains and slot auctions. Here is a brief summary of the first round of auctions:
- Karura (defi/dex), Moonriver (EVM toolset), Khala (decentralized cloud computing), Bifrost (defi/dex), and Shiden (smart contract tokenization) were the first 5 auction winners.
- A total of 1,114,629.077 KSM were locked during the first round of crowdloans; a current market value of ~$435 million dollars!
- As of writing this KAR, MOVR, and SDN have been listed on exchanges and is trading live.
One of the most important lessons I’ve taken away from the first round of parachain slot auctions is patience. Parachain teams are excited to market their technology and hyping their token is a common strategy, but launching these technologies takes an exorbitant amount of time and effort. Even though the first 6 parachains have been producing blocks for months only a couple of them have products and services which are primitive at best. It’s very likely that some of these projects will not complete their roadmaps before their lease slot expires. So please be patient with the teams you are crowdloaning your KSM toward, they are trying their best to give you functioning and stable technological products and solutions.
I have edited some details in this article but most of it is the same as the original published edition. So if you’ve read all of this before, scroll to the bottom to navigate to the new/ updated articles.
The decentralized nature of blockchain technology is what makes it a valuable tool, but since there is not a central authority on blockchain it can be difficult to find relevant information on new developments. Chances are you have come to this article in search for information relating to parachain slot auctions in the Kusama network; you are certainly not alone in that search. I have seen a huge demand for an accurately compiled source of information about the competing parachain projects and this series of articles strives to be just that. My goal is to provide a general understanding of the parachain slot auction process and to address some key points of many projects competing for a slot. Each article is stand alone and complete without the rest but the ensemble of articles will provide a perspective from which you can compare projects based on their rewards to crowdloaners, the solutions their technologies provide, and the novelty of their solutions.
These articles assume you know the basics of blockchain and how Kusama and Polkadot are related to each other. Make sure you have some sort of technical background and understanding of KSM and how to move or use it. If you do not know how to configure a wallet or how to interact with the Kusama ecosystem, check out the official wiki to learn:
What are Parachains?
At the most basic level the word “para-” comes from the Greek preposition meaning “by the side of, alongside, past, beyond.” Thus the word “parachain” in the context of Kusama literally means a blockchain alongside Kusama’s blockchain. Kusama is a relay chain which means it has slots for unique blockchains to occupy while the network relays the information of these blockchains to every other parachain in the network. The reason for this kind of infrastructure is to provide scalability; one block can only contain so much information but if that one block contains the information of hundreds of other blocks then you can pack in a ton of information. Another benefit to the relay chain structure is that all these blockchains can quickly communicate to each other without needing to adapt to each other. This facilitates seamless collaborations across projects creating a nursery for exciting dApp solutions.
The Kusama network is predicted to have 100 parachain slots which can be allocated in these ways:
- Common good parachains (e.g. Statemine),
- Auction granted parachains,
We will focus on the second and third points since common good parachains do not normally change how a KSM holder might move their tokens. Conventionally, projects approach the Kusama Council and work with the developers of Kusama in preparation for their bid for a parachain slot. For the second round of auctions, 15 projects have prepared themselves to compete and the highest bids will win the next 5 slots.
A project’s bid is determined by how much KSM is bonded toward their project by themselves and by crowdloaners locking up KSM on the project’s behalf. The crowdloaned KSM is released back to the loaners at the end of the winning project’s parachain lease (maximum of 48 weeks, or 8 lease slots) along with any promised reward from the parachain project. The benefit of loaning KSM to a project is the prospect of having some of the first tokens in its native ecosystem. However, this trade off is not clear; it might not be worth it to lose potential staking gains by locking away KSM in parachain auctions. These articles will go over some hypothetical situations in an attempt to grasp the trade-off involved and give you an idea of how things might unfold as parachains roll out.
It’s not extremely important to know what a parathread is so don’t stress too much about it. Essentially it’s a parachain that leases a slot on a per-block auction basis. The difference between a parachain and a parathread is merely an economic difference for the project team bidding for the slot. If you’d like to learn more about this difference you can find that information here.
What are the trade-offs?
Other than the potential economic value of a parachain’s native token you might wonder how else they might be valuable, after all you are required to lock up your KSM in return for these tokens. Every parachain is different but they are all required to be compatible with Kusama. Each one will have an ecosystem that involves a “collator” which is just a fancy word for a node that “hands over” a parachain’s block to a Kusama validator. The validator then relays it to the Kusama network integrating it for any other parachain on the network to use. A parachain’s native token powers the ecosystem in which these collators operate, so the value of having a project’s token is having power (voting, staking, nominating, etc.) within its ecosystem. Kusama has no rules to how these ecosystems incentivize the integrity of parachains so trade-offs are project specific..
Despite which project you choose to support you can be certain that the world of Kusama staking/validating is going to change with parachains. Stake rewards are mostly derived from inflation but validators also get transaction fees for the blocks they author. As of writing this the total amount staked is 4,926,100 KSM with a total supply of 11,441,600 KSM which means that 900 validators will split 529.1219 KSM this era from inflation alone. Here’s the math:
Let x-1 be the proportion of the total supply going to validator rewards in this era
Proportion staked = 4,926,100 / 11,441,600 = 0.4305429
Inflation = 0.025 + 0.075 * (0.4305429/0.72) = 0.06984822
x + 1 = (1 + 0.06984822)^(1 / 1,460) = 1.000046245
Era reward = (x-1) * 11,441,600 = 529.1219
This number used to be ~555 KSM before the first round of parachain auctions. The decrease is due to the proportion of total KSM staked falling further away from the ideal proportion staked which now stands at 72% (75%-0.5% per parachain).
If you look at the reward in the era this was written, it’s actually ~547 KSM. That’s because validators earn transaction fees on top of their inflation reward. So as the network is right now, ~18 KSM is being given to validators from transaction fees and ~529 KSM from inflation. It’s difficult to predict how the number of transactions on the network will increase or decrease over time, in fact transaction rewards are about 2 KSM lower per era for the validator set since the original publishing of this article. Nonetheless we can predict how the inflation reward will change with the coming of parachains. According to the token economics plan, inflation rewards will ease into a new optimization as auction slots are acquired at a rate of minus 0.5% per auctioned slot.
How do you evaluate the trade-offs?
Most cost-benefit analyses are complex because there can be variables which are hard to quantify. To make it easier on you, these articles employs a research-informed evaluation system. Although these evaluations are my own and should be taken with a grain of salt, I try to provide a fair judgment on all projects based on my research. Projects are judged in four key areas:
Is the project likely to succeed if they win? How well prepared are they? Do they have a testnet? Is the token being actively traded?
How much of the total supply is going to crowdloan participants? How long until the reward is released? Is any part of the reward liquid right away? Is the project’s token valuable, can it be spent or staked?
How unique is the project? Does the project bring anything new to blockchain technology? Is this an inevitable parachain or a truly unique technology?
Are the provided solutions valuable to the Kusama ecosystem? Is the project’s dApp user friendly? Can the project’s token be used in governance, used as collateral, or spent on a product or service?
Each of these will be given a rating of either low, medium, or high based on my opinion. I hope that this evaluation system will help simplify the vast amount of information I have collected.
And that’s it! To learn more about specific projects, navigate to their designated article by clicking below. Each project article will be similarly structured for easy side-by-side comparison. Happy reading and may the Canary fly in your favor.