HashKey Cui Chen: Brief analysis of Kusama’s first batch of parachain auction process, results and impact
Kusama was originally launched as a testnet for Polkadot, but after Polkadot was launched, it was still reserved as a pioneer network. Some functions that need to be deployed on Polkadot will be launched on Kusama first. These two are independent of each other, and KSM and DOT tokens were issued respectively. Their mechanism parameters are also different. For example, Kusama’s decision-making deployment time in governance proposals is shorter than Polkadot, and the cost is also less than Polkadot. In terms of positioning, Kusama is suitable for start-up teams to test new ideas, while Polkadot is more suitable for enterprise-level financial applications. Due to Polkadot’s official esteem for Kusama, projects that are ready to deploy on Polkadot will usually choose to deploy a similar pre-release version on Kusama to be the first to experience the new features in Polkadot. In this context, Kusama gradually formed its own ecology.
As one of Polkadot’s core functions, the auction and distribution of parachains will be prioritized on Kusama. At present, Kusama has ended the first batch of parachain auctions, and a total of six projects have obtained parachain card slots. This article mainly discusses the auction process, results and impact of Kusama Parachain Card Slots.
Parachain in the Polkadot ecosystem
Ecological projects need parallel chains
The ecology of Polkadot is growing day by day, with nearly 500 projects displayed on Polkaproject and 165 projects based on Substrate technology. Among them, DeFi projects account for the largest proportion, and NFT projects have the largest increase, which is in line with the trend of the entire industry. The Web3 Foundation is also vigorously promoting ecological expansion and has issued ten rounds of grants to nearly 300 projects.
Figure 1: Polkadot Ecological Layout
Polkadot is very different from the current mainstream Ethereum public chain architecture. Ethereum is a blockchain that is jointly maintained by many nodes and provides functions such as smart contracts. Polkadot is a model of relay chain plus parachain. The verifier in the relay chain is responsible for running the relay chain nodes, packaging blocks and ensuring security through consensus, and the collector in the parachain is responsible for keeping the account book of the parachain and collecting the parachain. Information to the verifier. Verifiers make profits through Polkadot’s Staking additional issuance of rewards, and collectors make profits through fees. Parachains and parachains can be cross-chain through XCMP (cross-chain information transfer scheme) to complete interoperability. In Polkadot’s architecture, the relay chain does not provide services such as smart contracts, but only guarantees the security of each parachain. Unlike the Ethereum public chain that serves applications, Polkadot serves the chain itself, and projects that obtain parachains can carry out applications or platform-type businesses.
This makes Polkadot different from other public chains. For general applications, it can be directly deployed on the public chain and pay a fee to enjoy public chain services. Polkadot is a public chain (parachain) service. In addition to enjoying the security of the relay chain, the parachain can also use the built-in governance function to achieve scalability through the cross-chain of the relay chain. The card slot is an entry ticket to the Kusama and Polkadaot ecosystems, and the project needs to be connected to the relay chain through the card slot. Parachains are a scarce resource in the Polkadot ecosystem. It is estimated that there will be 100 card slots in Kusama and Polkadot, which will be released in batches. Becoming a parachain can ensure that information is safely recorded in the blockchain, which means that the project is officially launched.
Owning a card slot is of great significance to the project, and the competition will be fierce. Parachain has launched Kusama, a pioneer network, and released a total of 6 card slots. The time for the second batch of card slots to go online is undetermined. As the first attempt of the Polkadot ecosystem, the ownership of the first batch of card slots will attract more people’s attention.
Limited resources need to be allocated through competition, and card slots are allocated through auctions. The auction content is not the ownership of the card slot, but the right to use it, so it is a leased card slot auction. This time Kusama’s card slot auction is open for 48 weeks and is divided into 8 time periods. Each item can choose a time period to auction the card slot, and finally calculate the total rent for each time period. The highest overall rental bid or Multiple project parties can get the card slot. Due to the fierce competition this time, most projects have chosen the entire cycle of auctions. The card slot auction is not to spend KSM to pay rent, but in the form of mortgage tokens. The bid represents the willingness to lock KSM for the entire lease period, and the project with the largest amount of mortgaged KSM will get a card slot. After the lease period is over, the mortgaged KSM will be returned to the original owner, and the leased card slot will pay for token liquidity and opportunity cost.
Kusama’s card slot auction will be conducted on the blockchain, using an open bidding method, and everyone can view the team’s bid. In this case, the best auction strategy is to bid at the last minute before the end, just slightly more than the first place. However, such bids cannot reflect the true value of the auction items, and may be manipulated, such as manipulating the network to congest it just before the end, in order to achieve the purpose of successful bidding. To prevent these problems, Kusama uses candle auctions. In the past, a candle was lit during the auction, and the time when the candle was extinguished was used as the end of the auction to achieve the effect of random end of the auction. The same effect can be achieved by random end on the chain. In the Kusama card slot auction, the period is seven days. The first two days are normal auctions, and the next five days are candle auctions. The end time is determined by the random verifiable function (VRF), so that bidders can give a reasonable early And in line with the expected price.
Projects that have won card slots through auction will be automatically deployed at the beginning of the lease period. During this period, KSM will automatically lock them. If the card slots are not obtained, they will automatically bid for the next cycle. Of the first six card slots on Kusama this time, five are allocated through auctions, and one is a charity card slot allocated through governance.
Kusama’s Parachain Auction
Participating in the parachain card slot auction requires certain prerequisites. The most basic requirement is to use Substrate to build a network. The requirement for participating in the parachain auction is that Substrate is a template that integrates various functions, and developers can directly call the module to save development time. Before applying for the card slot auction, it must be deployed on a test network such as Rococo for local testing and wait for the operation to stabilize. After that, the project party needs to decide the auction strategy. The bidding period is about one week. If it succeeds, it will be deployed on the card slot obtained, otherwise it will participate in the next auction.
The auction will start on June 15th, and one card slot will be released every week until July 20th. After the auction, the card slot is automatically handed over to the winner until the end of May 13, 2022. It can be seen that the online process is relatively complicated, and the project party needs to deploy according to the Kusama environment. Once the card slot is obtained, it will be launched online. Only the well-prepared project will participate in the card slot auction. A total of more than 20 items participated in the card slot auction this time, and a total of 5 winners were determined.
The first batch of projects that won the parachain auction
The introduction of the 6 projects that have obtained Parachain card slots is shown in the following table, where Statemine is the card slot obtained through governance.
Table 1: The first batch of projects to obtain parallel chain card slots
Among these projects, Statemine, Moonriver, and Shiden are platform projects. Both Moonriver and Shiden support smart contracts, allowing applications to be deployed on the platform, and these platforms will profit from handling fees. Karura is one of the most concerned DeFi platforms in the Kusama ecosystem, which can provide one-stop various DeFi services. Khala is also a platform project, providing cloud services for applications and protecting program privacy. Bifrost does not separate the Kusama and Polkadot ecosystems, and is a project that provides liquidity solutions for token pledges. These parallel chains will form their own independent ecology, which can be connected through the cross-chain function of the relay chain, but they will also form a competitive relationship due to similar functions.
After the card slot is obtained, the parachain will gradually improve its functions. The steps include going online and stably generating blocks, opening governance, opening transfers, issuing rewards and attracting application participation. The whole process takes a certain amount of time, and the Kusama ecosystem will not burst into an application boom immediately after the auction ends. At present, the projects that have obtained parachains are more of the underlying basic applications, and they need the first-mover advantage brought by the card slot.
Crowd loan rewards
Parachain’s card slots are allocated in the form of auction leases. The lease requires KSM to be mortgaged. Kusama allows anyone to mortgage KSM to help the project auction card slots. This behavior is called crowd lending. KSM can participate in staking, DeFi, etc. to obtain rewards, so the opportunity cost of participating in crowd lending KSM can be estimated. In order to reward users for crowd-lending behavior, the project party will distribute its own tokens to supporters after winning the card slot to make up for the opportunity cost of KSM’s loss. This is different from the token sale behavior, because the user has no actual purchase behavior, and the project party cannot control the KSM raised. The project team’s reward for crowd loans is more similar to an economic incentive method. The team sets the amount and distribution method of crowd loans. Supporting users lock KSM on the chain. If the project does not win the card slot, the locked KSM will automatically participate. One auction until the project gets the card slot locked to the end of the card slot cycle, or the project abandons the card slot auction. The following table shows the crowd loan reward method and token model adopted by the project party that won the card slot auction.
Table 2: Crowd Loan Rewards and Token Model
In order to compensate the KSM locked by crowd lending users, the project party needs to distribute its own tokens for rewards. This process is also known as PLO (Parachain Issuance for the First Time). Although the card slot leasing does not require the paid KSM, in essence, the crowd lending process is still the project party using its own token to purchase the right to use the Kusama card slot. The distribution of tokens is related to the interests of project parties and crowd loan users, and is also used as a reference for the next card slot auction.
The validators and nominators in Kusama can earn income through staking, and the mortgage rate is related to the inflation rate. In Kusama (and Polkadot), the official pre-set ideal mortgage rate is 50%. At this time, the highest inflation rate of the entire network is 10%. When it is less than 50%, the inflation rate will increase with the mortgage rate, and when it is greater than 50%, the inflation rate will decrease with the mortgage rate. For the pledger, their income will decrease as the mortgage rate rises. After the mortgage rate reaches 50%, the pledger’s income will drop significantly. As shown below.
Figure 2: KSM’s mortgage rate and inflation rate and interest rate, where the blue line is the inflation rate and the green line is the income
When the mortgage rate is 50%, it will reach the ideal state of Kusama. At this time, the ideal return of participating staking users is 20%. The number of KSM pledged in these five auctions were 501137, 205935, 138457, 132280, and 136817 respectively. Calculated at an interest rate of $200/piece and 20%, the amount spent by the project party for card slot leasing for one year is between $5 million and $20 million, which is a huge amount for start-up projects. Based on the market value of Ethereum and BSC, the market value of DeFi in circulation, the market value of Polkadot and the market value of Kusama, the market value of projects in the Polkadot ecosystem can be estimated in the future.
Table 3: Forecasting the market value of application projects in Polkadot and Kusama (data on July 30, unit: USD)
According to both Ethereum and BSC, two different market value models can be estimated. Since Ethereum is endowed with a certain value storage function, BNB also has other functions. Therefore, according to these two models, the DeFi valuation in Polkadot and Kusama will be Somewhat biased. Among the projects for crowd loan rewards, some projects have issued tokens in the Kusama ecosystem, and some are common to Polkadot. Among the projects dedicated to the issuance of tokens, crowd loan rewards account for approximately 20%-34% of all tokens. For projects that do not issue tokens separately, crowd loan rewards account for approximately 1.5%-2% of the total issued tokens. According to the valuation of the project in the table and the proportion of crowd loan rewards, it can be judged that the amount they have prepared for the card slot auction is approximately US$670,000-US$3.2 million (based on Ethereum valuation), or US$1.5 million-US$18 million (According to BSC valuation). In both cases, it is difficult for crowd lending participants to obtain the desired income. For the first time, Kusama’s card slot auction price was too high, and too many KSMs shared the income equally. The second Kusama parachain project has a low valuation, and the value of the tokens allocated is not high.
According to the design of the Kusama token model, the ideal ratio of staking, parachain pledge and flow is 3:2:1, that is, the tokens pledged by parachain account for 33% of all tokens. The number of KSM locked in this parachain card slot auction accounted for 13% of the total. According to the current price and taking into account the factors of staking inflation, if 15 card slot auctions are held within a year, the ideal number of locked KSMs can be achieved. With the experience of this card slot auction, it is possible to hold two or more similar auctions within a year. This time the card slot price may be higher. Of course, this is also the cost of first-mover advantage.
Regarding the valuation of Parachain projects in Polkadot and Kusama, under normal circumstances, they are considered to be higher than ordinary DeFi projects, because some of them are not just an application, but a platform that provides functions for the application. However, the current overall lock-up volume has declined, DeFi enthusiasm has weakened, and the number of users and attention of applications on the Kusama platform will be affected.
The impact of this parachain auction
For projects that have already obtained card slots in Kusama, the first task is to run smoothly in the Kusama network and achieve the established target functions. After the 48-week card slot expires, the project team also needs to consider the issue of continuation. If the card slot is no longer used, the safety of the project cannot be guaranteed by the relay chain, which is very likely to affect the safety or even cause the project to stall. As mentioned above, leasing card slots is a heavier expense for the project party. If you want to connect to the Kusama system for a long time, you need to prepare a card slot auction every other year to design crowd lending rules that are sufficient to attract users. In order to solve the sustainability problem of the card slot auction, the project party generally has three options:
1. Reserve the next few parallel chain auctions in the token distribution;
2. Waiting for the future use of state treasury revenue or the use of inflationary funds to conduct auctions;
3. Abandon the use of parachains in the future. For projects that have not yet obtained parallel card slots, they will choose to participate in the next card slot auction, or deploy in the project platform that has obtained card slots, or use the official parallel thread.
When Polkadot is launched on the card slot auction in the future, the project team needs to prepare more rewards. Based on the comparison of market value, the cost is expected to be about ten times higher than that of Kusama. The intensity of competition and the valuation of the project will affect the income of crowd loan users. Polkadot and Kusama are important projects in the Web3 ecosystem. The launch of the Kusama parachain means that the entire ecosystem is officially put into use, and the implementation of the application platform and XCMP will also be verified. This is of great significance to the Polkadot ecology and the entire blockchain industry.
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