Crypto education

Understanding the role of parachain in blockchain

The first thing that should come to mind when you heard parachain should be Polkadot because Polkadot made parachains possible. 

What is Polkadot? 

Polkadot is a leading Web 3 blockchain built with substrate technology that allows it to be a foundation for other blockchains to coexist, earning it the name “Blockchain of Blockchains”.  

Polkadot created a quite interesting blockchain because before Polkadot was launched, two different blockchains could not interact directly with one another but Polkadot changed that narrative by enabling DMs😅😅 so that they can now interact. 

Any blockchain; whether permissioned or permissionless, public or private can talk to each other and interact within the Polkadot network. 

Polkadot allows developers to create their blockchains using the standard building blocks from their Relay Chain(node). 

The Relay Chain is responsible for the network’s shared security, consensus, and transaction settlements. 

The standard building blocks from the Polkadot’s relay chain are called Parachains.

What Are Parachains?

PARACHAINS are parallel blockchains- meaning that they can run alongside each other and interact/engage. 

The parachains communicate among themselves and with the relay node and prevent the relay node from being congested.

Polkadot allows other crypto projects to lease the parachain for a period of 6 months to 2 years (depending on the lease period agreed upon with the crypto projects).

Polkadot is highly flexible so projects can customize the parachain to suit their needs, own a native token, and have their own rules and use cases. 

Unfortunately, there are limited parachain slots available (about 100; which, according to Polkadot, will take a lot of years to fill) and because of this Polkadots lease the slots via an auction.

How To Auction? 

To win a parachain slot, projects will have to bid $DOT in an auction. The bid is done in a way that no project can tell their competitors’ bid so you really can’t tell whether you’re losing or winning😢. The Polkadot team made things this way to encourage projects to put in their best. 

Projects can fund their bid through their wallet if they have enough funds or ask their community/investors to support them by funding their bids. 

Auction Period

Auction is done within 7 days. The first two days are the opening days and the remaining 5 days are the End days. 

This means, from Day 3, the auction can be closed at any time, projects will usually try to top their bids and maintain a high amount of $DOT in these last five days. The exact time that a winner will be chosen is not revealed until after the 7th day.

The Polkadot team could choose a winning project at 1 pm on the 7th day and the winner won’t be disclosed until the 8th day after the bid. So, everyone is fair game.

However, If an investor decides to fund a particular project’s bid after the winner has been chosen but not disclosed, his $DOT won’t be returned but he’ll have project token rewards allocated to him according to his percentage contribution to the project’s bid.

Where Does All The $DOT Go? 

All $DOT raised during the bid by a project is locked up until the end of the lease agreement with Polkadot. 

During this period, projects reward their supporters by allocating steady rewards in their tokens to them until the end of the lease period.

What Happens To Investors’ Funds If The Project Loses The Auction? 

During my research, I discovered that investors will have to cancel their Dot stake to participate in the bid. 

In simple words, it means that you have to unstake your $DOT if you’re bidding.

Why will I have to unstake my $DOT if I want to bid?

For one reason, what if the project you’re supporting wins, you’ll be getting project rewards, plus getting your $DOT capital back after the least period.

Being able to bid with staked $DOT will result in a double reward. 

You will be rewarded with $DOT staking rewards (in $DOT) and in project reward if the project wins the bid.

So, it is advised that before supporting any project, you do your due diligence and study the project because $DOT will make you choose between them and the project, you can’t choose both.

It is either you are getting stake reward of $DOT or a project reward if you bid for the winning project. 

What Are The Benefits Of Running An Auction Instead Of Allowing Projects To Do ICOs?

There are different benefits, to Polkadot, the benefits are: 

  • It allows them to choose the best projects out of the available options that will contribute nicely to the ecosystem, preventing bad projects and unhealthy projects from being in the ecosystem.
  • It reduces the amount of $DOT in circulation and increases $DOT’s value.

The benefit to the Investors are:

  • It reduces the risks for them because the team behind the project is held accountable. 
  • Also, since the $DOT raised is not given to the team members, their funds are secure and there is no opportunity for a rug pull.
  • There is a guarantee that they’ll get their $DOTs back.

Benefits of the auction to the team:

The team may not benefit from an auction though because all those running around and getting funds from people is a lot of work but winning a parachain slot benefits them in two ways:

  • They get to share Polkadot’s security because they are joined to their relay nodes, this means they’ll not have to go out and recruit their own set of network validators.
  • Because of the interoperability of the Polkadot Blockchain, there’s going to be a lot of data and value being shared within its network.

Why stay in a monochain where you can’t interact with other Blockchains when you can take a shot and land a CrossChain network? 🤔

Example Of A Project That Won The Parachain Auction

A notable project that won the parachain bid is Moonbeam. 

Moonbeam is an EVM-compatible smart contract network that allows one to build Dapps for Eth and Dot.

Moonbeam raised 35million $DOT (worth around $944m at the time). 

Polkadot raised close to a 100million $DOT during that round. 

I initially mentioned that Polkadot accepts projects that can be useful to their Blockchain during an auction. 

ImageTo continue the thread, this Friday 11th March, Tolani Olawore, a renowned Crypto-educator will be talking about the past, present, and future of Blockchain. 

A highlight of the session

The Past:

Why was Bitcoin created & by whom? – Despite the alluring origin story of Bitcoin’s creator being a mysterious individual, Satoshi Nakamoto, or that name being the pseudonym of a merry band of really smart computer scientists and cryptographers, this history to myth to legend nature of its story should not overtake the major point of its history.

The Present:

Corporate blockchains: Blockchain investigation is now rapidly transitioning away from cryptocurrency to corporations thinking about all the use cases for digital ledger technology. How it creates a distributed, decentralized opportunity to seek and to trace providence; all prior knowledge and movement of data around a product or service.

The Future:

There are more than 50 industries that are starting to deploy blockchain, including every major bank in the world. Many are all very new efforts, mainly existing as prototypes and are not production-ready yet. 

Why should this concern you?

I am sure you will not want to miss this session, so join Crypto Smart Telegram Group now!!! 

Previous sessions

Risk management in cryptocurrency trading and investment

Business development in blockchain

How to become a successful trader in the Crypto space? 

How to spot Crypto Gems? 

Understanding the Algorand blockchain

How to start with Cryptocurrency? 

Understanding the Algorand blockchain nodes

1 thought on “Understanding the role of parachain in blockchain”

  1. While going through your blog, I found it good and engaging. Blockchain development is setting a benchmark for every upcoming technology and bringing a revolution to the digital world. Now to support the growth of web 3.0 and decentralized systems, the blockchain named Polkadot has designed its Parachain model. The parallel nature of Parachain enables it to process transactions in parallelize manner with the Polkadot and achieve its scalability. It is one of the prime benefits of becoming Polkadot Parachain. Connect for more:

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