Initial Coin Offerings (ICOs) are the most common means of fundraising for new projects in the cryptocurrency space. Investors who partake in ICOs make judgments based on the credibility of the team, the whitepaper, and the community. However, with the ICO approach, there is no assurance of success for the developers or the investors.
What a wonderful thing it would be if developers could ensure the success of their projects and investors could make low-risk investments. Fortunately, Polkadot and Kusama offer a special workaround for this concern: crowdloans.
What Is a Crowdloan?
A crowdloan is similar to crowdfunding. Crowdfunding is the process through which a large group of individuals raises funds to support a new venture or project. On the other hand, in Crowdloans, a large number of investors (“crowd”) contribute funds (“loan”) as an investment to be recouped at a later time to a project’s team.
For instance, investors contribute funds to a team building a parachain project via Polkadot or Kusama crowdloans. However, the funds are not given to the team directly. Nobody can access the contributed funds since they are locked just for the parachain slot auctions. The auction winner is the project that (on a specific snapshot) has the most DOT or KSM tokens locked to the parachain slot auction. The winning team also rewards investors for their contributions via project tokens.
Investing in a crowdloan can have one of two outcomes. The first is that the project wins in the Parachain Auction, and your contributed DOT/KSM will be unlocked to you after about two years. In the second scenario, if the project fails, your contributed DOT/KSM will be unlocked after a few days. You get all of your DOT/KSM back in both scenarios. This is unlike what happens in an ICO.
What Is a Parachain Slot Auction?
Parachains link to Polkadot by leasing a Relay Chain slot for up to 96 weeks, with an option to renew. An on-chain auction assigns parachain slots, with auction winners locking a bond in DOT for the lease’s entire duration. Auctions and crowdloans ramp up the stakes for blockchain projects by motivating them to showcase their technology and garner community support before going live.
Both Kusama (KSM) and Polkadot (DOT) are built on two types of blockchains:
- Relay Chain: the main network that handles transactions.
- Parachains: custom blockchains linked to the relay chain and use computing resources to validate transactions.
Here’s how parachain slot auctions work:
Parachain teams consent to lock up (or bond) a percentage of DOT/KSM tokens for the term of the lease to participate in an auction. They cannot use the DOT/KSM for other activities like transfers or staking while it is bonded for a lease.
After the lease, all the DOT or KSM tokens are unlocked, so teams don’t have to “spend” DOT or KSM at auctions. Therefore, the opportunity cost of not being able to use the bonded DOT or KSM for other purposes is the best way to describe the cost of the lease.
After the lease, crowdloan contributors get their DOT/KSM back, and parachain teams can reward them in various ways, including by distributing the parachain’s native token.
On Polkadot, auctions feature an open bidding period that lasts around a week. The precise time of the auction’s close is decided retrospectively after the conclusion of the bidding period. This discourages hurried “auction sniping” and encourages more precise price discovery.
Slot Duration & Lease Periods
Each Relay Chain slot can be leased for a maximum of 96 weeks. Parachains can specify the duration of their desired lease while bidding on a slot by choosing from a contiguous range of 12-week increments called lease periods. If many parachains successfully bid on non-overlapping lease terms, they can win the same auction.
Crowdloans: How Do They Work?
The Polkadot and Kusama Network has a built-in feature called a Polkadot/Kusama Crowdloan Campaign that enables projects to borrow DOT or KSM (raise DOT/KSM) from their supportive communities and bid a certain amount to reserve a spot on the Polkadot/Kusama relay chain.
Even though some projects managed to streamline the process, the principles of the Polkadot/Kusama crowdloan campaigns remain the same. Anybody with a registered parachain can launch a Polkadot/Kusama crowdloan campaign.
Here’s what participating in a Polkadot/Kusama crowdloan looks like:
- First, you and other community members lock their DOT/KSM tokens by contributing to your preferred project. These tokens are stored in a special module that is safe and secure on the relay chain.
- The crowdloan module will place a bid on behalf of the project you supported once the parachain auction starts. This process will continue until a parachain slot is secured or the auction is over.
- If the project you funded ends up unsuccessful, your locked tokens will be released to you.
- However, if the project you supported is successful, your tokens will remain locked on the relay chain until the lease expires.
- Even if your tokens are locked up for a long time, successful projects will express their gratitude for your support by giving you unique NFTs or project tokens.
How to Participate in Crowdloans
A project’s website (on-chain), the Polkadot.js GUI (on-chain), or a custodian, like Binance or Kraken, are all ways to access a crowdloan. There are no KYC requirements or restrictions for Crowdloans; however, you must have a Polkadot account or tokens to participate.
Here are the steps to take to participate in a crowdloan on Polkadot.js GUI:
- Go to Polkadot.js.org.
- If you do not have an account, you can create an account by clicking on the Accounts tab on the homepage.
- Click on Add Account and follow the on-screen instructions until you successfully create an account.
- You can now return to the homepage to participate in a crowdloan.
- You can switch between the Kusama and Polkadot Parachains by clicking on the upper left menu. Choose any of the networks under the Polkadot relay chain. In this case, we’ll select via parity.
- After selecting the crowdloan parachain, click Network from the homepage and click on Parachains.
- Click on the Crowdloan tab, and you’ll see a list of upcoming, ongoing, and completed auctions.
- Click Contribute on the right side of the project you wish to donate tokens for (in this case, we can choose between Crust and OmniBTC).
- Choose the account you want to contribute from and put in your desired contribution amount to take part.
- Contribute by clicking the Contribute button.
- Sign and submit the transaction.
What Are the Benefits of a Crowdloan?
A crowdloan can be a crucial tool for projects to launch their network on either Kusama or Polkadot. The benefits of Polkadot and Kusama crowdloans are numerous. As project owners, crowdloans allow you to finance your creative projects without the hassle and stress of finding private funding for your project.
Although the benefits of crowdloans are vast, here are some of them:
- Crowdloans allow a project to convey its demand and attract new participants.
- Through crowdlending, those who are interested in a project can support it.
- Tokens are awarded to those who contribute them.
- You can use either Kusama or Polkadot to jumpstart a project.
- Token distribution is easy for community members and enthusiastic supporters of the project.
- It is an efficient way to raise funds and win the trust of your prospective users.
- There is no need to raise funds to cover the cost of a parachain slot.
Crowdloan vs. ICO: Which Is Best?
The difference between an ICO and a crowdloan is that an ICO is a fundraising event from the public, and a crowdloan is a fundraising event from the community. ICOs are typically for specific projects and can be in the form of coins, tokens, or shares. Crowdloans are generally for anyone who needs funding for a project that meets certain criteria.
The difference between crowdloan and ICO is that with crowdloan, you have the assurance that you will get your funds back whether the project meets its goals or not. With ICO, once you’ve bought into the currency, it’s worth what it’s worth on the market. In this sense, there is less risk with crowdloans than with ICOs. Investing in an ICO may offer a higher reward potential but also greater risk.
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