Introduction The Decentralized Finance (DeFi) Revolution is taking over traditional finance (TradFi) and centralized exchanges (CEX), with billions in...
Polkadot’s parachain first auction has ended, which launched what many hope will be a new, low-friction, and potentially very high-volume ecosystem of independent custom blockchains. Stably hopes to see the development of a platform for stablecoins that can reliably outperform current solutions while attracting significant user numbers and investment, so we’re watching the process with a lot of interest.
In this post, we’ll talk about what Polkadot is and how it works, as well as looking at some of the most exciting opportunities it offers in the digital assets space. We’ll start at the beginning.
What is Polkadot?
Polkadot is a three-layer blockchain. First comes the top layer of applications and interfaces that users experience. This layer is different for each business that builds an application, just as each Dapp on Ethereum is different. Next comes the custom blockchain layer with features and functionality unique to the project that built it. And finally, the layer 0 relay chain connects the blockchains together.
Polkadot comprises parachains, each of which is an autonomous blockchain that connects to all other parachains via the relay chain. (If this sounds familiar, it’s because Ethereum is moving to a somewhat similar structure with its Beacon Chain.) Parathreads on Polkadot are temporary parachains, and bridges are used to connect Polkadot with other blockchains.
The Polkadot project emphasizes interoperability to a degree that we’re not used to seeing with blockchains. For instance, the Moonbeam smart contract platform is fully interoperable with EVM, can run Solidity, and users can port their logins across.
The relay chain bundles transactions on all parachains together and mints them into blocks. To have a guarantee that all your transactions will be minted in each block, you must have a parachain, and there are a limited number of slots — eventually a hundred or so, currently just a few.
Polkadot’s parachain auction
Polkadot allocates its scarce parachain slots using a ‘candle auction.’ They used a candle length rather than a clock to time the auction; when the candle runs out, the auction is over, and the highest bid wins. An unpredictable end time made sniping impossible and auctions fairer. Polkadot uses a random number generator at a known end time to generate a time in the past at which the auction is deemed to have finished, meaning you can bid high at the end of the auction and still lose.
The same mechanism is used on the Polkadot canary chain, Kusama. Built with a near-identical codebase and structure to Polkadot, Kusama has begun running a parachain, Statemine, the Kusama version of Polkadot’s Statemint. This is a ‘common good’ parachain, built with several crucial functions in mind. It’s a low-cost place to hold and transfer KSM, with minimum balances and transaction costs well below the relay chain. It is also designed to transfer non-algorithmic stablecoins and the creation, issuance, and transfer of tokens, including NFTs. The next step is for Kusama to start auctioning off slots for other parachains, which began on the day of writing.
Kusama’s parachain slot auction schedule, which Polkadot will likely echo, looks like this:
- 2021/06/15, 12:00 GMT: First Kusama Parachain Slot auction commences. Bids may be placed.
- 2021/06/17, 09:00 GMT: First Kusama Parachain Slot auction ending period begins. Only bids made before this point will certainly be considered in the final result. Bids made following this point have a linearly reducing chance of being considered.
- 2021/06/22, 09:00 GMT: First Kusama Parachain Slot auction bidding ends. No bids may be made on this auction following this point.
- 2021/06/22, 11:00 GMT: First Kusama Parachain Slot auction winner selected. The auction winner is determined as the highest bidder at some randomly selected point over the past five days.
This process has now finished, and Karura, the Kusama sister network for DeFi Polkadot project Acala, won with a final bidding price of 500,000 of Kusama’s native KSM token, equivalent to about $100 million.
The auction for the next slot is scheduled for 2021/06/22, 12:00 GMT. The Polkadot test net, Rococo, has been holding parachain auctions for some time.
Dan Reecer, who is VP of Growth at Polkadot-based DeFi network Acala, tweeted on June 8th that Polkadot’s parent Web3Foundation had emailed him to confirm that Polkadot parachain auctions would begin soon:
“Once at least *one* auction has successfully taken place on Kusama, parachains are running smoothly, and a full external audit has been completed, parachain rollout can begin on Polkadot.”
This suggests that Polkadot parachain auctions could begin in as little as two weeks. The cost for obtaining a parachain will be high: DeFi platform Equilibrium has already raised $8.5 million to bid on a parachain slot and expects to eventually pay 1 million DOT, or approximately $34 million, to land a place on Polkadot.
With such a high barrier to entry, why is there so much interest in acquiring a Polkadot parachain? What do projects get out of it that they couldn’t get out of existing platforms like Ethereum?
Polkadot already works the way Eth2 eventually will. Everything that makes Eth2 fast and efficient — Proof-of-Stake consensus, sharing, the Beacon Chain — is already in place in Polkadot. That means projects are escaping from the two issues that plague users of Ethereum: bottlenecks and gas fees.
Ethereum gas fees are one of the biggest problems faced by network users, and they’re worst for DeFi platforms like Equilibrium. (Gas is Ethereum’s internal currency, and it is used to pay for computational resources on the EVM and inclusion in blocks.)
Because of how gas prices are structured, transactions lock up excess gas, and block minters are incentivized to privilege fewer, larger transactions; but DeFi consists of many, small transactions.
Bottleneck and gas fees go hand in hand. The rising number of NFTs makes the problem worse, as does the explosion in stablecoins; ERC-20 contracts now account for over 50% of the total value stored on Ethereum, and the percentage is rising.
Crossing ecosystems with Polkadot
One of the major issues with existing blockchain platforms is interoperability. Tokens exist as code on a single blockchain; other blockchains can’t incorporate those tokens directly. The problem is more serious than non-compatible operating systems between Windows and Mac OS. As such, maximal interoperability is in everyone’s long-term interests.
There have been several solutions proposed to this problem. One is the BitX protocol used by the BitShares blockchain; outside tokens are minted as a special token type on the BitShares chain, so BTC becomes BitBTC, USD becomes BitUSD. Their values are pegged to the main token, and they’re frozen on the parent blockchain to prevent double-spending. They’re tradeable on every service that runs on the BTS chain, meaning they’re a relatively popular choice for DEXs on Bitshares.
This is blockchain bridging, and it’s the most common method to transfer tokens across blockchains. Another is wrapping. Wrapped coins like wBTC centralize the process using trusted third parties called merchants. wBTC is created by depositing BTC with BitGo, which then mints wBTC of equal value on Ethereum as an ERC-20 token that can be used for Uniswap, Compound, and other popular DeFi protocols.
Polkadot recommends the following bridging methodologies:
- Bridge pallets for Substrate-based chains like Kusama
- Smart contracts for non-Substrate chains like Ethereum
- Higher-order protocols like XClaim for chains like Bitcoin that lack smart contracts
Polkadot emphasizes decentralization and trustlessness as much as possible. Multiple Polkadot projects, including Acala, Equilibrium, and MoonBeam, offer near-total interoperability with Ethereum, letting users take tokens, contracts, and Dapps straight to the Polkadot-based project. That can only bode well for a growing interoperable net of blockchains and drive added value and variety for the use cases for stablecoins, DeFi and NFTs — as well as whatever innovation is next in this fast-moving space.
What’s next for Polkadot and Stably?
What’s most important here is that Polkadot is an ecosystem of ecosystems. Once you’re inside the Polkadot network, bridging between parachains is done by the relay chain to move tokens freely between parachains. This is likely to encourage rapid growth in bridging Polkadot and ETHn and BTC and in DeFi and other applications on Polkadot.
Stably looks forward to seeing the first few parachain deployments, first on Kusama and then on Polkadot. After proof of concept, we can expect a rapid rise in interest and in the cost of winning bids, already forecast to be significantly expensive. However, we can also expect to see rapid growth in industries centered around stablecoins and the NFT and DeFi spaces. At Stably, we’re more interested in what stablecoins can do rather than any particular protocols or chains, but the possibilities of a low-friction, large-scale marketplace that would let stablecoins be issued and transacted easily and cheaply are intriguing!
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