Official Polkadot Post: Slot Auction Made History

Official Polkadot Post: Slot Auction Made History

Jonas Gehrlein, a research scientist at the Web3 Foundation, released an overview report on Kusama’s first round of parachain slot auctions yesterday, which mainly introduced:

  • Review the first round of 5 auctions, candle auctions and Crowdloan mechanism
  • And the impact of the auction mechanism
  • The renewal of future parachains and these dynamic events added by new parachains analyze and interpret the influencing factors of the auction from two aspects.

Due to the length of the original text, PolkaWorld has compiled some essential ideas to facilitate everyone’s understanding of important information.

Polkadot /Kusama candle auction

The candle auction is an ancient form of auction around the 16th century, allowing everyone to bid before the candles are actually extinguished. The uncertainty of the actual auction ending time can reduce the problem of auction sniping at the last minute.

Unlike the old candlelight auction, the final result of the slot auction in Polkadot and Kusama is determined by retrospective . In other words, the auction always has a fixed bidding time, after which the actual ending block (“terminating block”) is randomly determined. We can mark four important points and describe the time course of the candle auction with the block height. As shown in the figure below.

Official Polkadot Post: Slot Auction Made History

The first stage of the auction lasts for 27,000 blocks (approximately 45 hours). In this initial stage, the team and users have time to understand the situation, collect information, and set their bidding/participation strategy. After this, the candle phase (or end phase) marks the “real” start of the auction, and this phase will last for 72,000 blocks (approximately 5 days). At this stage, the auction can end with the same probability in any block. You can keep bidding until the auction ends! After the formal end, the termination block is calculated using the combination of the verification random function (VRF). This method of calculating the end block retrospectively can ensure that no one can predict the end time before or during the auction .

What is the crowdloan mechanism?

The Crowdloan mechanism is a decentralized way for teams to get support from auction slots. In other words, the tokens supporting crowdloan are collected by the team, but are kept and protected by the relay chain. Users can withdraw their tokens in two situations:

  • The project you supported successfully won the Parachain Slot auction. Then you can receive your tokens after the rental period is over
  • After the crowdloan of the project you support expires (usually very short), there is also a deadline for the withdrawal of tokens.

For users who support those who successfully bid for the slot, your tokens will incur opportunity costs due to being locked in the relay chain , for example, rewards forgone due to staking or other methods. So in general, in order to thank you for your support of a certain project, the project team will use their own native tokens as compensation to reward everyone!

Looking back at Kusama’s first slot auction

When the team was surveyed, 10 out of 15 teams stated that their goal was to participate in Kusama’s first auction. The majority of teams (80%) stated that they also plan to auction on Polkadot (13.3% of teams only auction on Kusama, and 6.7% of teams only auction on Polkadot).

As of the publication, 47% of all issued KSM tokens are locked in staking and 9.9% are locked in crowdloan. The first five slots won were Karura, Moonriver, Shiden, Khala and Bifrost.

Karura surpassed all other teams by a large margin from the beginning. Moonriver was below the competition at first, but quickly surpassed Shiden before the candle phase began. Then Shiden won third place.

The figure below shows the dynamics of crowdloan contributions summarized by these three projects every day.

Official Polkadot Post: Slot Auction Made History

Compared with the previous three auctions, the fourth auction, especially before the candle phase, is more dynamic . The bidders are Bifrost and Khala. As shown in the figure below, in this head-to-head match, the leading position has been periodically switched.

Official Polkadot Post: Slot Auction Made History

However, at the beginning of the candle phase, Khala suddenly gained a lot of support and maintained the highest bid in all blocks. In the end, Khala won the fourth Parachain slot on Kusama .

At the fifth auction, at first we thought it would be an easy victory, because no other project came close to Bifrost’s bid. However, a competitor named Basilisk announced before the start of the fourth auction that it would compete fiercely against Bifrost. The crowdloan of Basilisk did gain attention and quickly caught up with Bifrost. The vertical dashed line indicates the beginning of the candle phase.

Official Polkadot Post: Slot Auction Made History

Although Basilisk had the highest bid in the block at the beginning of the candle phase, Bifrost eventually had the highest bid in 96.6% of the blocks in the candle phase, which means that Bifrost has a 96.6% probability of winning. In the end, we didn’t see any big surprises, and Bifrost successfully won the fifth auction .

Candle auction mechanism incentivizes early bidding

The candle auction consists of two different stages, namely the beginning stage and the candle stage. The latter is further divided into periods before and after the termination block. This mechanism may cause the highest bidder at the end of the auction to not necessarily win the auction, because if the bidder falls within the range after the termination block, his bid will be discarded.

But in general, the auction mechanism is to encourage every bidder to bid as soon as possible. Taking the data from the first auction as a representative, it is not difficult to see that most of the contributions were made before the candle stage. Therefore, the candle mechanism successfully motivated early bidding.

To sum up

The slot auction of the Kusama network is an exciting time for the entire Polkadot ecosystem and the entire blockchain industry. With the emergence of parachains, we have taken a big step towards a future that is scalable, decentralized, and interoperable. The top five online projects are Karura, Moonriver, Shiden, Khala and Bifrost. These projects will add powerful functions to the Kusama ecosystem by providing infrastructure for DeFi, liquidity solutions, smart contracts (native and EVM compatible), privacy cloud computing, etc.

1. Two characteristics of candle auction mechanism

Through the overall results of the auction, the foundation found that the Kusama/Polkadot candle auction mechanism has two characteristics. First, it guarantees efficiency , that is, it determines that the bidder with the highest bid can win the auction, and it is a fair process; The second is that the so-called “revenue” will not be created during the slot auction process , because this is a decentralized process and there is no so-called profitable entity!

2. Winning the auction is more important than minimizing bids

Another observation is that, especially for Karura, who is the first to win the slot, too many tokens are bound. In theory, this may be considered suboptimal. But we must take into account an objective factor, that is, the primary goal of all teams currently bidding is to get online !

So at the current stage , winning the auction is more important than minimizing bidding. And there are some advantages to doing so. First, you can distribute the tokens to as many supporters as possible; second, more support also shows that the value of the project to the ecosystem is higher!

3. Multiple bidders can share the lease period

Candle auctions can also share lease periods, that is, multiple bidders share a lease period. Although we have not seen this happen, it is because the teams currently participating in the auction hope to bid for the entire lease period! So it can be expected that at this stage of the auction, any bids lower than the full lease term are doomed to fail. And in the preliminary survey, 80% of the participants said they would bid for the full lease term!

4. Crowdloan, which may fail the vote, is an economically costly decision

Except for the 5th auction, the other four auctions have a very leading crowdloan before the start of each candle phase. Since the tokens will be locked up for at least the entire campaign period, voting on crowdloans that are likely to fail is an economically costly decision. Users not only need to choose the team they like, but also need to evaluate which team is likely to win. Especially in the later stages of the campaign, some teams are getting harder and harder to catch up with the leading teams, so their rational choice is to either contribute to other crowdloan-winning projects or not participate at all. Over time, this reason may increase the distance between teams.

Anticipation of the future

It can be expected that in the future, we will experience from no parachains to some parachains that need to extend the lease period to maintain operations, and at the same time, there will be other new parachains that will bid to join for the first time. This will bring a series of dynamic events, which will affect two main aspects, namely the mechanism of contribution and how to use bidding strategies in auctions.

Contribution mechanism

After talking with some parachain teams, we found that crowdloan’s auction format is still an important part of their future economy. Some innovative teams are already looking for more suitable alternative contribution mechanisms. One possible direction is a variant of the crowdloan module that takes advantage of chain interoperability. For example, users can deposit their parachain native tokens into a smart contract that automatically exchanges them for relay chain tokens (ie KSM or DOT) through a decentralized exchange (DEX) parachain. The smart contract can then automatically use these tokens to bid in the auction. In addition to the native tokens of parachains , with the upcoming bridge between Ethereum and Bitcoin , smart contracts may even use ETH (and erc20 tokens) and BTC.

As the initial native supply tokens are finally fully distributed, it will become increasingly difficult to provide platform rewards to contributors. Similar to the previously described smart contract solution, the parachain may evolve into a decentralized autonomous organization (DAO), which raises tokens during its operation and accumulates it in its on-chain treasury. Eventually, in order to ensure preservation, the chain may begin to accumulate relay chain tokens in this way to extend the lease. This means that the chain itself will become more and more self-sufficient.

Auction bidding strategy

As mentioned earlier, the online stage is a unique situation in the network, and minimizing bidding is not the most important factor. Therefore, we see that the focus of most teams is to bind as many tokens as possible instead of using the best bidding. However, once the network reaches the expansion stage , some parachains need to extend the lease period and also compete with those new projects that have joined the auction for the first time. In this case, flexible bidding, that is, project minimizing bidding , is an important factor for effectively maintaining the parachain.

In conclusion , through the slot auction, the team has the opportunity to benefit from the infrastructure of Kusama and Polkadot and begin to realize their vision. In a sense, this helps to motivate the project to continue to work hard, because the team wants to prove that they have an important place in the ecosystem.

The scarcity of parachain slots ensures healthy competition in the future and helps to find and screen out the most suitable projects. This novel contribution mechanism can improve the overall quality of the ecosystem and provide users with a healthy environment that can easily support new projects .

When this article was published, Polkadot officially announced that the second round of Kusama slot auctions will start on September 1, 2021 ! Together we look forward to more parachains joining the Kusama network!


Posted by:CoinYuppie,Reprinted with attribution to:
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