Blockdaemon’s Closer Look at Kusama’s First Parachain Auction

We recently saw the successful roll out of the world’s maiden public parachain slot auction, which commenced 15th June 2021 on the Kusama blockchain! The winning project, Karura, is now the very first project to win a parachain auction. More than 15,000 network stakeholders locked up their Kusama (KSM) tokens to support the project’s success. This gives Karura a 48-week lease of a Kusama parachain. 

What is Karura, the winning project? 

Kusama’s Parachain Auction Timeline

The Kusama parachain auction followed broadly three phases:

Phase 1: Auction commenced (15th June)

At this time, bids were allowed to be placed. 

Phase 2: Auction ending period began (17th June) 

Only bids made prior to this point were certainly considered in the final result. Bids made following this point had a linearly reducing chance of being considered. 

Phase 3: Bidding ended and winner selected (22nd June)

The ending period wrapped up on the 22nd June, by which point the winner Karura was selected. The winner was determined retrospectively on the bidding end date. 

ELI5: What is a Kusama parachain auction? 

A parachain auction is the way Kusama determines who gets to occupy a parachain slot to build their specialized shards that perform specific functions. It could be compared to a building leasing out a unit that the renter uses as their own business premises, with the building owner being Kusama. It is a variation of a candle auction, where bidders submit increasingly higher bids until an amount of time has elapsed and a winner is declared. A team bids on at least one range of 1 – 8 lease periods (each period representing 6 weeks) and the amount of Kusama (KSM) tokens they want to lock up for the duration of this range. Bidding for a slot on Kusama takes place publicly, meaning all participants have full visibility of what other teams are bidding. The end time of an auction is determined retroactively by a Verifiable Random Function (VRF) during the auction ending period. The successful winner is onboarded at the beginning of the lease and their bid remains locked until it ends. A lease can be extended by winning another auction before the occupancy of their allocated slot expires. 

Crowdloans for Funding Parachain Auctions

Crowdfunding bids to win a parachain auction can be facilitated by Kusama’s on-chain crowdloan mechanism. It ensures that only projects with substantial community backing (to some extent some proof of concept) are selected. In return, supporters are rewarded with the parachain’s native token, which is also a token distribution event for parachains.  

The crowdloan mechanism allows anyone to contribute towards a project’s auction bid by agreeing to lock up their own KSM tokens until the end of the parachain lease. Such contributions can be submitted until an auction is won, up until the maximum amount required by the team creating the campaign is fulfilled. By participating in the crowdfunding, loaners can be rewarded financially with parachain tokens on the blockchain. Crowdloans can be hosted either on Kusama or a 3rd party platform. At the end of a lease period, all KSM tokens are returned. This is also applied in the event of a slot auction bid being unsuccessful. 

“So What?” – The Importance of Parachains

Parachains are important because it allows the community to build specialized blockchains while leveraging the rigorous security and high transaction throughput of the Polkadot and Kusama Relay Chains. The parachain component in the Polkadot ecosystem allows efficient allocation of computation power, where chains with higher market demand have more computation power (parachains) while other ones can bid on an on-demand basis (parathread). This allows a great degree of flexibility for the ecosystem to scale. 

Kusama, as Polkadot’s canary network, has taken the first step towards proving out a real-world launch of a parachain auction, a functionality which will ultimately be added to Polkadot. Karura will go down in the blockchain history books as the first project to be added to this innovative new chapter of DeFi on Kusama. 

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