Polkadot Parachain Slot Auctions Explained

The very first Polkadot parachain slot auctions (also called Parachain Auctions) start on November 11th, 2021, hopefully also beginning an era of more connected blockchains. Polkadot is a multichain protocol that enables other blockchains connected to the Polkadot network to interoperate, which means that cross-blockchain transfers of any kind of data or asset type will be possible inside its ecosystem.

The interoperability occurs through an architecture in which Polkadot operates as a “Relay Chain,” which by design hosts blockchains called “Parachains.” The Relay Chain is the main Polkadot chain where network transactions are finalized and secured, and parachains are custom blockchains pegged to the relay chain. But, if a blockchain project wants to become a parachain, it needs first to win a parachain auction.

Relay Chain and Parachains | https://wiki.polkadot.network/docs/learn-parachains

The Polkadot network consists of one relay chain and up to 100 parachains, a quantity that is open for change by governance vote over time. This system allows parachains to have distinct purposes and specifications like decentralized finance (defi) or gaming but remain interconnected, which means that different applications can leverage one another’s features and innovations.

Specification and interoperability are essential for the future of blockchains and crypto as it is not efficient for individual blockchains to offer “everything for everyone” or for the ecosystem to have many separate blockchains unable to communicate with each other.

However, as the slots are limited, not all blockchain projects can become a parachain on Polkadot. The Polkadot team came up with a unique auction mechanism for selecting parachains: a “candle auction” and crowd loans to make the process fair and open.

The name “candle auction” comes from a historical way of selling ships in the 17th century. Auctions would start with the auctioneer lighting a candle, and bidders could only place a bid if the candle was still burning. This system prevented people from trying to bid low until the last second (a habit known as auction sniping), as no one knew exactly when the auction would end.

Polkadot’s parachain auctions use a blockchain-based “candle” with an unknown, randomly generated end time to ensure that bids are entered at a fair value, and that the bidders who value the slot the most are most likely to win the auction. For more detailed information about candle auctions, you can find out more on the Polkadot Wiki.

In addition to the project’s own bids, individuals can also help projects win the parachain auction with crowd loans. They allow the community of DOT holders to signal which project they trust and want to win by staking in them. Tokens provided by the community in this way enable a project the submit a higher bid and therefore increase its chances of winning a parachain slot.

If the project wins the auction, the Polkadot network will automatically lock the staked tokens for a maximum of 96 weeks, which is the parachain slot lease period. In return, the winning project will reward users with token airdrops or other rewards. Once the locking period is over, the staked tokens are returned to users.

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