Thread by @danreecer_

This 34-tweet thread simplifies @Polkadot $DOT and @KusamaNetwork $KSM crowdloans and parachain slot auctions.

What is a crowdloan? How is it different/better than ICOs? How do I participate? How do parachain auctions work?

Comment your questions & please share. Let's go ⤵️

First, if you don't know what Polkadot and Kusama are, or still need the basics, check out my thread on Polkadot before you dive into this thread.

https://twitter.com/danreecer_/status/1350933277352341509?s=20

It's important to understand what Polkadot and Kusama are enabling with this new approach to a multi-chain network. Polkadot is a 3-layered platform, unlike legacy networks like Ethereum who are just one isolated chain with apps. Here is a simple diagram to explain:

I'm going to start this thread with some background info, then get into parachain auctions first because crowdloans only exist to support the parachain auction process, so it's necessary to understand parachain auctions first.

Background info on crowdloans and parachain auctions:

Polkadot and Kusama enable a multi-chain ecosystems of several connected parachains (each parachain = to Ethereum). But not any blockchain can join. Teams must win a "parachain slot auction" in order to win a slot to connect.

Think of a parachain slot like a spot in a small parking lot next to the World Cup stadium. These spots will be in high demand and not easy to get because of the value they bring to each car owner. The same goes for Polkadot, especially this early as the very first slots open up.

A parachain slot is the only way to become a "Polkadot/Kusama parachain". Winning a slot offers everything that comes with the Polkadot/Kusama holy grail: plug-and-play security, inter-communication with other chains, governance, forkless upgrades, scalability, low fees, etc

To win a parachain slot, a team or individual must participate in and win a parachain slot auction OR acquire the slot on a secondary market from some person/group who won the slot with the intent to re-sell or rent it (🤯).

Parachain Slot Auctions:

Parachain auctions will begin on Kusama as soon as the code is ready. Teams like @KaruraNetwork, the Acala team's DeFi hub for Kusama, will participate in this first auction. After Kusama auctions start, Polkadot auctions inc. @AcalaNetwork will follow.

The parachain slot auction will look like this: the day will be announced, teams/people will prep but we won't truly know who is participating until the day it starts. The auctions will be these awesome/nerdy tech sporting events that we can all watch live.

Participants can bid in the auction in two ways: using the tokens they crowdsourced in a crowdloan (more on this later) or they can use an ordinary Polkadot account if they're a whale of some sort.

The parachain auction is an unpermissioned candle auction - candle auctions were originally used in 16th century for the sale of ships. In these auctions, a candle was lit and when the flame went out, the auction would suddenly terminate and the highest bid at that point won.

Polkadot and Kusama's auctions will function similarly. We will have a KNOWN open time and KNOWN close time. Once the auction opens, teams can bid using their entire crowdloan contribution or bid with a single account. This will continue into a bidding contest.

Teams will be bidding with two pieces of information: 1) their bid amount and 2) their slot duration. The slot duration can be up anywhere from 6 months to 2 years. A long-term, key parachain like @AcalaNetwork will bid for 2 years, but some temp chains could only need 6 months.

One very important thing to know is that crowdloan contributions don't end until the end of the parachain auction. So, if someone contributes to a parachain and sees they need additional support, they can contribute to the 'crowdloan module' even during the auction.

So how does the auction end? After the pre-defined "close" time, the Polkadot system will generate a random "end time". This end time (red line below) will determine the 'block' or moment in time when the winner will be selected.

The team who wins the auction will then quickly move to its mainnet launch of their parachain. For any team who does not win, they can choose to participate in one of the next auctions (these are expected to happen every couple weeks).

In the very year future, Polkadot and Kusama parachain auctions are going to be a regular occurrence happening almost at all times as we scale up to 100+ parachains on both @Polkadot and @KusamaNetwork over the coming years.

What are Crowdloans?

It was necessary to start with parachain slot auctions, because this is the whole point of a crowdloan. As mentioned above, a crowdloan allows a team to crowdsource DOT (for Polkadot slots) or KSM (for Kusama slots) to use to bootstrap its parachain auction.

We all know how ICOs worked: people would contribute some token, say BTC, that they will never see again. In return, they get a token that they hope appreciates in value. There is no way to know for sure if the team will deliver, and this model has led to many scams.

This year we'll see the beginning of a new, ethical model called a "Crowdloan". Let's stick to Polkadot as the example (but all of this applies to Kusama too). When crowdloans begin, several parachain teams will crowdsource DOT from their community.

If I'm participating, I would contribute, for example, 100 DOT to Parachain 🅰️. That DOT is then locked (sometimes called "bonded") for the duration of the parachain's slot (2 years in Acala's case). For my support, I would be airdropped ACA.

Participation can be done in a variety of ways. Several wallets and exchanges will likely provide crowdloan participation to their customers, and there will likely be more decentralized options using Polkadot.js. There will be more info coming on this soon.

When parachains airdrop their native token, it's likely that a % of this will be transferrable and unlocked, and a portion will be locked in your wallet with a vesting schedule (unlocking over a period of time). In @KaruraNetwork's case, 30% is unlocked and 70% will be vesting.

You can find more info on Acala's @KaruraNetwork and how to sign up for the waitlist here: acala.network/karura-crowdlo…. Karura is bringing a full suite of DeFi apps to Kusama users (AMM, liquid KSM, stablecoin...). It's already built and ready for you to use once launched on Kusama.

It's key to understand that all DOT or KSM contributed by a parachain's supporters will be locked in the Relay Chain for the entire duration of the parachain slot, not touched by anyone on the team. This aligns interests and eliminates risk like ICO teams running away with funds.

At the end of the parachain slot, 2 years in @AcalaNetwork's case, all original DOT are returned to supporters. In my example, I would receive my 100 DOT back after the 2 years. The main tradeoff I'd be making is to sacrifice the ~12% DOT staking returns over that period.

So what happens at the end of the slot when the parachain needs to renew their slot?

There are a few options...1) the team could host another crowdloan 2) the team may decide it doesn't need a parachain slot anymore or move to a parathread (pay as you go model) and 3)...

3) a third option after a slot expires is the case where a team with sophisticated parachain functionality like @AcalaNetwork's decentralized sovereign wealth fund could build up its own on-chain wealth fund / treasury to become self-sustaining and self-fund future slot auctions.

That's a wrap. In summary, parachain slot auctions are the way a blockchain gets a slot on Polkadot's network for up to 2 years. Teams competing on these auctions can either crowdsource DOT (for Polkadot slots) or KSM (for Kusama slots) to bootstrap their auction bid...

...or a team/person could compete in the auction with a regular DOT or KSM account if they're a whale or don't want to do a crowdloan.

If you're excited about parachains coming, check out the Acala DeFi Apps (below) which are live on testnet and ready for launch. You can use the Getting Started guide (wiki.acala.network/learn/get-star…) to get your testnet tokens, then try it out at http:// apps.acala.network.

If you have more questions, please add your questions in the comments of this tweet thread and I'll respond to you. For a full blog-based version of this thread (including the related Q&A I did on Twitter), find that here: danreecer.medium.com/polkadot-kusam…