What Are Parachain Auctions And How Do They Work?

Parachain auctions occur on the two sister blockchains, Polkadot (DOT)

and Kusama (KSM). The auctions allow developers to create new crypto

assets and decentralised applications (dApps) on top of these blockchains.

However, before we understand what parachain auctions are, it is vital

unique construct consisting of two chains — the relay chain and the

parachain.

The Relay Chain:

The main blockchain where vetted and finalized

transactions are added as blocks.

Parachains: These are independent blockchains linked to the Relay

Chain such that they can use the Relay Chain’s computing power to

scrutinize transaction data.

Parachains on Polkadot and Kusama allow developers to create

independent blockchains that are linked to the relay chains of the two

sister blockchains. This allows each parachain to have its own unique

specifications, including block times, transaction fees, governance

mechanism and mining rewards.

This is unlike Ethereum, where dApps need to be built within the specifications set by the network. Therefore, the parachain can be thought of as an interoperability chain. It allows third-party dApps and crypto assets to be integrated within the Polkadot (DOT) and Kusama (KSM) networks.

The relay chain handles network security, the consensus mechanism and

transaction settlement. And by virtue of being linked with the relay chain,

all independent projects on the parachain benefit from the features of the

relay chain.

What are Parachain Auctions?

Presently, both blockchains are capable of supporting 100 parachain slots

each. These slots can be occupied for three months at a stretch with a

maximum duration of 96 weeks.

At any given time, various projects are vying for a spot on the parachain. And instead of adding parachains to the blockchain based on the amount

of funding they bring, the Polkadot team introduced Parachain Auctions

(short for Parachain Slot Auctions) to ensure that the available slots are

utilized optimally.

How Parachain Auctions Work:

When a Parachain Auction is held, DOT or KSM holders can pledge their

respective tokens to the project they think deserves the parachain slot.

The project may send them airdrops or some other reward in exchange for

their support. The winner of the parachain slot may also sell it on the

secondary market to a developer, who wishes to deploy their project

on that parachain.

But how is a slot winner determined?

The auction method: Parachain Auctions use ‘candle auctions’ to ensure that the winner is picked randomly without any human intervention. The process gets its name from an ancient bidding practice wherein a candle would be lit at

the start of a ship auction, and the highest bidder would win the ship at

the time of its extinguishing.

The same logic is applied to Parachain Auctions. Bidders have a fixed

window within which they must place their bids on the projects whose

execution they think should move forward. However, unlike the traditional

candle auction, the parachain auction never really ends. Instead, a

snapshot is taken at a random period and the parachain with the most

support in that period is the winner. This is done to maximize the fairness

of the bidding process.

Crowdsourcing: Blockchain projects are allowed to crowdsource support

over and above individual bidding. In this process, KSM and DOT owners

can bond their assets to these projects on either network to indicate

support for that particular project. If the project is deemed the winner,

these bonded assets are locked and can only be redeemed at the end of

the lease period (96 days).

How is this different from an Initial Coin Offering (ICO)?

In the case of an ICO, users provide funds to the project developing team

to use them in a manner of the team’s choosing. However, in the case of a

Parachain Auction, the bonded tokens are never in control of the project

developers and are sent back to the owners through airdrops or other

reward systems.