History of emergence
The history of parachains began in 2016 and is inextricably linked to the name of English scientist and programmer Gavin James Wood, who was one of the creators of the Ethereum blockchain and contributed greatly to the project, which he repeatedly called "one computer for the whole planet."
Wood was involved in writing the initial programming code for Ethereum and created the Solidity programming language, but left the development team in January 2016 to pursue features and ideas that had no place in Ethereum.
According to Wood himself, he came up with the idea of a parachain project while studying the technical documentation on sharding (distribution of data between several physical servers) within the Ethereum 2.0 project. The essence of the idea was a fundamentally new approach to the issue of scaling the blockchain, the increase of computing power and bandwidth of which in the classical way was associated with high costs. Wood's know-how was to create multi-chain structures in which the core of the network, the so-called zero-level blockchain, would be surrounded by multiple parachains, the first-level blockchain, which would use the resources and capabilities of the "parent" blockchain in their work. The result would be a union of effectively interacting networks that would not need to access the primary blockchain (Ethereum in Wood's project), or even the "parent" blockchain, to perform their assigned tasks. In turn, first-level parachains could have their own second-level solutions, which further increased the scalability of the system as a whole.
In the proposed structure, all transactions would occur simultaneously, in parallel, and would be protected by their own validators. Compared to the traditional sequential blockchain entry scheme, this would provide an impressive performance boost.
The main ideas of the new project were finally outlined in the fall of 2016 in a white paper (a marketing tool that implies a detailed presentation of a new concept or technical solution to some specific problem) by the startup Polkadot. In October 2017, the project entered the ICO and raised more than $145 million. The presentation of the experimental version of the blockchain interaction protocol on the new platform (Kusama) took place in August 2019, and the first phase of the main Polkadot network was launched in late May 2020.
Currently, more than 130 software teams are actively developing and implementing blockchains. Parachain solutions provide them with ample opportunities to customize their products. In addition, not only tokens can be sent between parachains, but also any data at all, which makes the horizons of their use simply limitless.
The standard protocol of a parachain project consists of several main components.
Relay Chain or Layer 0 blockchain is the basic blockchain, on the basis of which developers provide third-party teams with functionality and resources (computing power) to create their own projects. A Layer 0 blockchain is needed to provide security guarantees and to build efficient inter-platform communication between any parallel Layer 1 blockchains (parachains), as well as to transfer data to the main blockchain, on which the parachain project is built.
Parachain are parallel blockchains whose main difference from conventional blockchains is that these distributed registries are created by third-party developers using their own tools, and use the computing power of a Tier 0 blockchain for their purposes. As a result, parachains can communicate directly with each other within the same ecosystem without reference to the root blockchain.
Parathreads are blockchains that operate on the same principles as parachains: they have the same API and functionality, but are paid for as they are actually used. That is, Parathreads is rented instantly and for a short term, while renting a fully functional parachain slot (a certain amount of long-term allocated computing power) requires a large deposit and can last up to two years. Given this specificity, Parathreads is suitable for projects that have not had time to form large communities and do not have enough money to fight to get a full slot in a parachain.
With Parathreads, projects can also send blocks to the main blockchain as needed. In other words, it's a budget-friendly tool for accessing the broad functionality of the parachain platform, but with less bandwidth.
What is a parachain auction and how does it work?
The promise of Polkadot's technological solutions is not in doubt. However, there are several limiting factors on the way to their practical implementation. The main one is the performance of the "parent" blockchain. Currently, the Polkadot team has forcibly limited the number of supported parachains to 100. Each of them has its own slot (reserved processing power). The problem is that the number of projects wishing to become part of the Polkadot ecosystem many times exceeds the declared number of connections. The promised increase in the number of available slots up to 200 will not fundamentally change the situation - the deficit will remain.
How are the slots distributed between competing projects? By means of one of the most fair market mechanisms - an auction. In both Kusama and Polkadot, the object of the auction is the lease of a connection to the main blockchain (for up to 48 weeks and up to 24 months).
During the slot auction, competing projects lock in Polkadot and Kusama's internal coins (DOT and KSM, respectively) as bids. These can be the projects' own funds as well as the "votes" of community members. The winner is the project in favor of which the largest number of tokens was blocked.
Parachain auctions have an interesting feature: they do not take place according to the usual scheme with rigid timing, but according to the "candle" auction model, which was actively used in the Middle Ages in the cities of the Hanseatic League. Its essence was that the bids could be done exactly until the moment when the auctioneer's candle was not extinguished. It could happen at any second, so people interested in buying a lot were actively involved in the competition, not waiting for the last flashes of flame.
During parachain auctions, of course, no candle burns, but the essence of what is happening is subject to the same logic: not to allow bidders to decide the outcome of the struggle with several bids in the last seconds of the auction.
Thus, development teams claiming a direct connection to Polkadot or Kusama blockchains find themselves in a situation of complete uncertainty: no one knows exactly when the "final gong" will sound, it depends on a blind decision of the algorithm embedded in the bidding program.
The winner of the auction is the project in whose favor the largest number of DOT or KSM tokens are blocked, which remain "frozen" on the platform for the entire term of the slot lease in a special storage. What happens to the blocked tokens in favor of the projects that lost the battle for the slot? After the end of the auction, they are automatically returned to the wallets of their owners.
The benefit of almost all participants in this process is obvious: limiting the time of leasing parachain slots promotes competition between development teams and increases the credibility of the platform in the cryptocurrency community. The blocking of coins for auctions promotes a gradual increase in the value of DOT and KSM (the more parachain slots will be filled, the less coins will remain in free circulation). In turn, the teams of projects that manage to win in parachain auctions get access to the developed infrastructure of Polkadot or Kusama. The question remains to be answered: what is the benefit for investors who vote with their tokens for other people's projects?
The main motive to participate in voting is to receive a reward from the parachain. This is usually expressed in the projects' native tokens. The size and frequency of payments are strictly individual. The tokens of dynamically developing projects increase in value, which allows their holders to earn good profits.
Of course, this income is not guaranteed, because sometimes even the most promising project does not meet expectations. For example, the reward for participants in the Acala project was at least 4.61 ACA tokens for each DOT blocked. In October 2021, ACA was worth about 4 cents, by November it rose to 20, but today the token is worth almost nothing, its value has fallen to $0.0002 per ACA. A similar situation occurred with the Moonbeam project, which gave out as a reward at least 4 GLMR tokens for each DOT. But if in the first few weeks of this token's existence its value was approaching $14, now it does not exceed 50 cents.
However, investors' principal funds are still protected by the Kusama and Polkadot protocols and will return to their owners in full at the expiration of the parachain slot lease.
Advantages of parachain auctions
Compared to ICOs and IDOs, where investors risk their own money by purchasing startups' tokens in the hope of their intensive development and the integrity of the development teams, in Initial Parachain Offering (IPO) Kusama and Polkadot themselves act as return on investment guarantees. Investors' funds are used to book connections to slots, which means that they remain in the system and cannot be stolen.
Thus, parachain auctions represent an investment platform devoid of the vast majority of known risks, where users get a unique opportunity to invest in projects of interest to them without the threat of losing their investment. In the worst case scenario, the user will simply get back the previously invested tokens after a known period of time, and in full.
How to participate?
Participation in parachain auctions is not very difficult. The only thing is to pay attention to the special conditions of each particular crowdsale. In order to reduce legal and regulatory risks, auction participants may be asked to undergo a KYC. In addition, the organizers can limit the geography of participants to certain countries and regions, not allowing, for example, residents of sanctioned states. However, this information is open and can be viewed by anyone.
Technically, to participate in crowdslots on the Kusama and Polkadot platforms you need a Polkadot wallet and a minimum amount of KSM and DOT (0.1 and 5 respectively).
Next, in the "Network" section of the official Polkadot wallet you need to find the "Parachains" tab, go to the "Crowdloan" tab, select the most promising, credible project and click "Contribute". After that you only need to fill in the details of the transaction.
Users also have the opportunity to participate in parachain auctions through major cryptocurrency exchanges such as Kraken or Binance. The mechanics of the process here is very simple: a registered user just needs to log into his account, in the tab "Earn" find the item "DOT Slot Auction" or "Parachains" (depending on the exchange), then select the desired project from the list, determine the number of blocked tokens in its favor and confirm your action.
Considering all of the above and knowing the size of the audiences of the largest cryptocurrency exchanges, it is not surprising that most of the tokens in favor of a particular startup participating in a parachain auction are blocked through exchanges.
Parachemes are a fundamentally new stage in the development of distributed ledger technology. Blockchains that are part of another blockchain and form a complex architecture capable of interacting, distributing tasks, and maintaining stable operation even under high loads, compare favorably with competitors. For example, it costs less to launch a project in Polkadot than in Ethereum, and its performance will be higher.
The cryptocommunity has appreciated the advantages of parachains. During the first parachain auction on the Polkadot platform, users contributed more than 87 million DOT. At that time (November 2021), they were worth about $3.5 billion.
The first winner in the fight for the parachain slot was the project Acala (developer of DeFi-applications), in favor of which about 33 million DOT were blocked for a total amount of more than $ 1.3 billion.
The second auction was won by the Moonbeam project, a platform created to work with smart contracts, which allows to make universal those projects that were originally developed for Ethereum. More than 35.5 million DOTs worth more than $1.4 billion were blocked in favor of Moonbeam in the auction.
The result of the third winner, Parallel Finance project, was already far from a record, but still impressive: 10.7 million blocked DOTs worth about $70 million. Parallel Finance is a decentralized protocol that offers credit, steaming and cryptocurrency exchange services in the Polkadot ecosystem.
To win the fourth and fifth auction projects Astar and Clover Finance were already enough to about 10 million DOT, which at the time of the auction was worth about $ 65 million.
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