Polkadot’s upcoming parachain slot auctions, in which projects will bid for one of one hundred parachains, have the potential to revitalize the massive fundraising movement that was seen with ICOs in 2017. It will also bring lots of capital and interest to the Polkadot ecosystem, which will help it to become the main interoperability project.
In 2017, right around the time that cryptocurrencies were first becoming mainstream and Bitcoin was beginning its ascent to $20,000, a new fundraising model was born: the initial coin offering, or ICO. This funding option, which is similar to the traditional initial public offering, or IPO, allowed for Ethereum-based projects to sell tokens to users for Ethereum, and resulted in projects raising large amounts of capital in order to fund their endeavors. The capability to raise money without having to go to venture capital firms was revolutionary, and immediately became one of the hottest cryptocurrency topics of the time.
Much like the NFT craze of early 2021, there were many legitimate projects using the ICO model, like Chainlink, Basic Attention Token, and EOS, but there were also many more simply taking advantage of the hype and running away with investor funds. For this reason, along with greater regulatory scrutiny from world governments, most modern projects have abandoned the ICO model, and have instead returned to the traditional method of going to venture capital firms and accredited investors for their initial offerings.
However, there is a new project that, through their token offering method, may revitalize public cryptocurrency offerings.
Polkadot, a top 10 cryptocurrency created by Ethereum co-founder Dr. Gavin Wood, is an interoperability solution which will allow independent blockchains to interact with one another. This is a revolutionary concept, as it will help something like the Bitcoin blockchain to easily and trustlessly interact with Ethereum or Cardano. This will allow the hundreds of billions of dollars locked on the Bitcoin blockchain to be able to interact with DeFi and other smart contract capabilities, which will significantly increase the usability and flexibility of cryptocurrencies.
They are accomplishing this feat through a model that uses a relay chain and parachains. The relay chain is a main chain that connects all of the different blockchains, and a transaction from one blockchain to another requires going through the relay chain. Parachain is the technical term for the blockchains that will connect to the relay chain.
An interesting characteristic of the Polkadot ecosystem is that they are planning on supporting a mere 100 parachains. In order to decide which projects get to use the parachains and join the interoperability ecosystem, they are holding a parachain slot auction for each slot, which will be bought in DOT, the native currency of Polkadot.
In order to raise enough capital to guarantee a parachain slot, many projects are offering their tokens as incentive to potential supporters. At first glance, this may appear similar to the traditional ICO model, where a project takes DOT in exchange for their own tokens, but there is a unique twist never-before-seen in ICOs: project supporters do not need to sell their DOT in order to support a project and receive its tokens. Instead, they delegate their DOT to the project, which is similar to staking to a validator, and then their DOT is locked for the next 52 weeks. This is because projects do not “buy” a parachain, but instead rent it for a specified amount of time. In exchange, an investor will receive the project’s tokens, and get their DOT back at the end of the lock-up period. This model is extremely interesting, as it allows for investors to support projects while not having to worry about losing funds or getting scammed.
If a project wins a parachain slot, it is almost guaranteed that their token will perform well as long as the Polkadot ecosystem grows. If it does not win, an investor’s funds will be kept for the next couple of auctions, as a project continues to try and win a slot, but will eventually be returned.
For an investor who holds DOT, these token sales are almost a no-brainer. The only downside is that the funds are locked for a year, and that these tokens cannot be staked for a 13% APY. However, tokens offer much higher upside potential than staking, and could be the ticket to sky-high returns.
Right now, slot auctions are taking place on Kusama, which is the incentivized testnet of Polkadot. Assuming all goes well, Polkadot slot auctions are expected to start in Q3 2021, and continue for the next year.
The excitement around the parachain slot auctions may also have a direct impact on the price of DOT, since users need to buy DOT to participate in the auctions. Since this happened with ETH during the ICO craze, there is precedence for this to happen again with DOT. Furthermore, as users stake DOT for an entire year, there will be significantly less in circulation, and a decrease in supply with no change in demand leads to an increase in price by the basic laws of economics.
The Polkadot parachain slot auctions are going to be one of the most exciting opportunities in the cryptocurrency space since the ICO craze from four years ago. It will bring new capital to the Polkadot ecosystem and help it achieve its goal of becoming the main interoperability protocol for the cryptocurrency space, while also offering investors risk-free exposure to new and exciting projects.
By Lincoln Murr