To understand how Polkadot auctions works, it’s important to first understand parachains, which are individual blockchains running in parallel within the Polkadot and Kusama networks.
The Polkadot architecture will be composed of as many 100 parachains that are connected to — and secured by — a central chain known as the Relay Chain.
The Role of Polkadot Parachain Auctions
Since these parachains must connect to the Relay Chain to reap the benefits of the network architecture, there needs to be a way to determine which parachains can connect, and in what order. That’s where parachain auctions come in.
A parachain auction is a way for parachains (Substrate-based independent blockchains) to connect to the Polkadot or Kusama Relay Chains via an open, permissionless auction. The purpose of the auctions is to allocate parachain slots to projects that want to operate on either network. The overall objective is to have as many as 100 parachains running concurrently. However, these will open up in batches with 20-30 parachains operational within the first year.
These parachain slots are intentionally scarce to encourage competition and the best possible allocation of fixed Relay Chain resources. By limiting the number of available slots, aspiring parachains must outbid each other to earn a lease, both for the initial launch and again for renewal once the lease period expires. On Kusama, for example, these leases last a maximum of 48 weeks, while Polkadot has a maximum 96-week lease period.
This kind of competition and scarcity is an excellent way to help ensure that the most viable parachains occupy each slot: only successful parachains with traction, active usage, and a viable token economic plan can maintain a slot, while deserted or unsuccessful parachains cede their lease to more promising contenders.
How Polkadot Parachain Auctions Actually Work
Now that we’ve walked through the basics of why we need parachain auctions let’s discuss how they actually occur.
To make slot acquisition fair, Kusama and Polkadot will determine the occupants of each available parachain slot via a permissionless candle auction. Play Video Video: Parachain Auctions Explained
Parachain slot auctions follow a candle auction format, which is a variation on the open auction where no fixed end time is given to prevent auction “sniping” (the strategy of bidding at the last moment) for more accurate price discovery. The basic concept is that the candle can theoretically extinguish at any time, adding an element of randomness that encourages projects to deliver their best bids earlier, rather than chancing a final-hour bid that may not be recorded in time before the auction ends. This is all automated on the Relay Chain.
Projects that want to secure a parachain slot can participate in the auction by bidding KSM/DOT tokens in a decentralized candle auction. These can be their own tokens or tokens sourced from their communities in a crowdloan. When tokens are sourced by a crowdloan, participants do not need to actively participate in the day-to-day of the parachain auction once they have contributed to the crowdloan; the crowdloan module does all of that in an automated fashion.
Individual Bids vs. a Crowdloan
There are two main ways to acquire a slot: through a crowdloan or through a private bid.
In a private bid, an individual entity makes the bid for a particular auction. In order to make a private bid, an entity can bid directly, but the amount bid will be bonded until the auction ends. The balances of unsuccessful bids are unreserved once the auction ends. Contributors trust the central entity to set the right amount, provide accurate information for rewards, and return the contribution back if the auction is not successful or the leasing period is over. If projects have gained enough tokens to bid for themselves — with or without external funding — they are able to participate in parachain auctions through this method.
In a crowdloan (as previously outlined), community members contribute tokens to a separate module that bids on a project’s behalf. The crowdloan updates its bid throughout the auction as more contributions are received, always bidding the current balance of contributions. So far, the Kusama crowdloans were scheduled to last the entire duration of the batch of five weekly auctions, which means any contributions received for those projects were added to the projects’ bids in the parachain auction. The Polkadot crowdloans will likely use the same strategy.
A couple of notes on these concepts, though.
You Can’t (Technically) Combine Crowdloans and Private Bids
While it’s not possible to do both a crowdloan and a private bid, a project can act as their own “whale” and contribute large amounts of tokens to their own crowdloan. Otherwise, a crowdloan cannot be combined with a private bid.
Crowdloans Automatically Bid at Auction
It’s also worth mentioning that crowdloans will always bid their full balance, and they will bid for any open auction that meets their lease requirements since projects do not need to bid for the full lease period. For example, on Polkadot, if a crowdloan is set to bid on lease slots 1-5 and the ongoing auction is for lease slots 6-10, then the crowdloan module does not bid.
This also means that crowdloan module bids are always pretty transparent: the number of tokens received through the crowdloan module is bid in their entirety, and the project doesn’t have the ability to abstain from an auction. For private bidders, do not have to follow these rules and are able to bid at any time for any amount of tokens they have available to bond. However, since the candle auction rules state that the crowdloan will end at a randomly chosen time (more on that later), the private bidders are incentivized to place their best and final bids earlier in the auction process.
Private Bids Can Renew Their Slot After the Lease Ends
Once the parachain lease ends (48 weeks maximum on Kusama, 96 weeks on Polkadot), funds are returned to the contributors. Each project will need new funds to renew their lease. This could mean they run another crowdloan, self-finance from their Treasury, or find alternate sources of tokens to pay for the lease. The crowdloaned tokens can’t be “rolled over” in any way.
However, this process is easier for individual/private bids. For parachains that bid directly to obtain their slot, they can utilize the existing deposit to extend their parachain lease. I’ll note that, depending on competition at the time of the slot renewal, they may need to supplement the lease funding to meet market conditions or adjust the lease period to be shorter.
Polkadot Parachain Auction Schedule
After successfully running parachain auctions on Kusama, the Polkadot community is looking forward to the auctions on Polkadot.
In Motion 118, the Polkadot team announced the schedule of the first auctions, which has passed council and has now gone to a public referendum.
The first five auctions will occur one after the other, in succession, each lasting a week. The schedule announced by Polkadot outlined these expected dates:
- Auction 1: From November 11 to 18, 2021. Winning parachain will be announced on November 18, 2021.
- Auction 2: From November 18 to 25, 2021. Winning parachain will be announced on November 25, 2021.
- Auction 3: From November 25, 2021, to December 2, 2021. Winning parachain will be announced on December 2, 2021.
- Auction 4: From December 2 to 9, 2021. Winning parachain will be announced on December 9, 2021.
- Auction 5: From December 9 to 16, 2021. Winning parachain will be announced on December 16.
Winners of the first parachain auctions on Polkadot will be onboarded on December 17, 2021, for the period of December 17, 2021, to October 20, 2023.
More parachain auctions are expected to follow. The initial weekly pace allows completed projects with enthusiastic communities to quickly launch and prove the viability of their parachain before the functionality is rolled out to a broader group of projects.
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