Polkadot, Parachains and infrastructure for the ‘new’ internet
The Polkadot and Kusama networks (sometimes referred to as Dot-Sama or simply as Polkadot or the network) have taken great strides to fulfil their vision to become the networks of the new and innovative world of Web3. Seeing Ethereum’s slowness to keep up with innovation in early 2016, Gavin Wood saw this as an opportunity to create an operating system of the internet of sorts in order for developers to build a variety of projects for future internet users.
Foreseeing that blockchain technology has use cases far and wide beyond just peer-to-peer payments, Polkadot was created so that a variety of projects would be able to natively speak to one another, share security and become vastly more scalable than Ethereum, the dominant layer1 blockchain.
In this article, we will discuss how projects are hosted upon Dot-Sama (generally as parachains), discuss some innovative parachains that have been successfully deployed on-chain and finally discuss what we believe the future has in store for the Polkadot.
Parachains and Parathreads
Envisioned to be a host for other blockchains or ‘Parachains’, Polkadot came up with the idea to host parachains to share security and consensus together in order to become a more efficient system of blockchains. Polkadot is the layer0 that supports a multitude of various parachains on which countless protocols are built. There are a number of benefits for these protocols to be hosted as one of Polkadot’s or Kusama’s parachains. As Parity say themselves, there is a range of benefits for protocols, such as; security, scalability, interoperability, flexibility, specialization, low fees, upgradability and so on. We touched upon some of these points in a previous blog about the architecture of Polkadot and Kusama.
Use cases and a variety of chains
As highlighted above, blockchains may serve a variety of industries and therefore they ought to be able to serve a variety of use cases for many industries. In the Polkadot ecosystem, projects can be custom built with Substrate to be optimized for whatever purpose they serve. Parachains can have a host of projects with a single focus such as:
- Decentralized Finance (DeFi)
- Internet of Things
- Non-Fungible Tokens (NFTs)
- Oracles
- Digital Wallets
- Identity Verification
- Data Storage
- Gaming
- Credentials
By creating the networks that allow a variety of projects with different use cases to be deployed upon them, Polkadot is aiming to create the underlying infrastructure for its vision of Web3.
Parachains currently Dot-Sama
As of May 2022, Polkadot currently has 14 parachains and Kusama has 29 parachains live on their networks. In order for projects to host on Dot-Sama, a somewhat democratic method of voting has been implemented in their ecosystem — that of the Parachain Auctions. Parachains compete to lease slots on the Relay Chain via an auction by locking up DOT tokens for the duration of their lease. The Relay Chain is the central chain that is used by the Polkadot network that all the parachains are connected to. Using the analogy of a bicycle, the relay chain is the hub and the parachains are Polkadot’s spokes.
In enabling an auction system for parachain slots, Polkadot aims to ensure that projects on Dot-Sama are of high quality. Parachain teams can either bid with their own DOT tokens or source them from the community using the crowd loan functionality, whereby believers of the project can ‘vote’ and lock up their tokens for the duration of the loan. In their current state, both the Polkadot and Kusama relay chains can support up to 100 parachains, a number that is flexible and subject to change by governance vote over time. There are three ways to allocate projects to the network:
- Governance granted parachains which are seen as operating for the common good of the network such as bridges
- Parachains: granted in auctions
- Parathreads: pay-as-you-go basis
In this blog, we will focus on parachains as this is the most common method by which projects are allocated to the network.
Auctioning slots on Polkadot
The way this occurs is through a candle auction — an old style of the auction that dates back to the 16th century when people sold ships — a candle would be lit at the beginning of the bidding war and the person with the highest bid at the time the candle went out would win. This essentially stops people from bidding all at the last second which can often lead to unfair outcomes. So, in order to win a parachain auction, projects have an amount of time in which they can put forward their own tokens or tokens ‘loaned’ to them by supporters towards the auction and a winner is randomly decided upon at a random point during the auction period. By contributing DOT or KSM tokens towards a crowd loan, supporters are usually given a number of parachain deployed native tokens for free by the project if they win (in addition to their DOT or KSM tokens being returned at the end of the lease). If the project doesn’t win, they will get their DOT or KSM tokens back after a short amount of time. This is all verified, of course, by blockchain technology. As mentioned there are currently a host of live projects on both Polkadot and Kusama and we will explore some of these exciting projects in the following paragraphs.
Innovative projects in the Dot-Sama ecosystem
Parallel Finance
As discussed in a previous article that we wrote, Decentralized Finance, of DeFi, is slowly but surely taking some of the market shares of traditional finance by implementing more efficient and cost-effective processes. DeFi blew up massively in 2020 after the pandemic and remains one of the most inventive uses for blockchain which could ultimately revolutionize how everybody uses personal finance. There are many, various projects in the Dot-Sama ecosystem that are aiming to be the preeminent DeFi service under the Dot-Sama umbrella. One of them is Parallel Finance — a protocol that offers lending and staking services, whose tagline is to ‘bring web3 to 1 billion people.’
Although DeFi has taken enormous strides in the last few years, especially after 2020’s DeFi summer and ‘blow off the top’ with hot protocols such as Yearn Finance and Aave becoming mainstream, Parallel Finance still has a long way to go in order to reach a billion users. Parallel Finance is a Decentralized Money Market Protocol that offers lending, staking, and borrowing in the Polkadot ecosystem. Depositors can lend and stake simultaneously to potentially earn double the yield on their staked coins, and borrowers can collateralize to borrow.
Founded in April 2021 by Yubo Ruan who cites himself as a two-time Stanford dropout, the company is gradually chipping away at the market share of global DeFi TVL (Total Value Locked) and is creeping up the charts in this incredibly dynamic space. In December 2021, just months after it was founded, Parallel Finance won the fourth parachain slot auction on Polkadot, with 10.75 million DOT contributed.
Just in the last week Lido Finance, a liquid staking service, has become the top DeFi protocol in terms of TVL. Launched in December 2020, Lido provides staking across the Ethereum, Terra, Solana, Kusama and Polygon chains. Not to be outdone, Parallel Finance has since implemented liquid staking of DOT as one of its services. This feature allows users to earn interest by staking DOT, without lockups or long unlock periods which is standard on-chain. As users generally want to access their capital without being limited to the various network limitations of locking and unlocking periods, liquid staking overcomes this. It is essentially providing the benefits of staking and DeFi by tokenizing the stakes so that stakeholders can use them as collateral in other financial applications. These tokenized stakes, also known as staking derivatives, can be traded freely among users, locations, and even blockchains. Users will need to return the received amount of stake tokens to retrieve their original token deposit once they are done.
In the very dynamic cryptocurrency markets, products and services have to evolve quickly in order to compete for users. In March 2022, Parallel launched 6 products simultaneously to the market. This is a testament to Parallel’s aggressive approach to establishing a strong presence in DeFi and it is an exciting project to follow.
Phala
Phala is a network established in 2018 by former Google Software Engineer Hang Yin, former Tencent Product Manager Marvin Tong and their team. Phala bills itself as a ‘privacy-preserving cloud computing service’ and they aim to offer computational power comparable to existing cloud services and also protect users’ privacy through their programs and systems.
As blockchains are built to be transparent by nature, it has become apparent to many that not all information ought to be completely public and viewable by the public; however, Phala aims to allow for confidential or sensitive data to be handled on the blockchain. It does so by applying a TEE (Trusted Environment Execution) which allows confidential data to run in an isolated and private environment and outputs results alone with authorization. They hope to eventually rival cloud stalwarts such as Amazon AWS or Google Cloud and become the leading decentralized cloud computing protocol. Phala secured private funding in 2019 and again from Web3 Foundation in 2020 and in September of that year released its own ERC-20 token. In July 2021, they won an auction for Kusama parachain and have been deployed on the main net ever since.
Phala Network has a large community and support from Parity and the Web3 Foundation in order to realize its vision to become the premier cloud service in Web3. Cloud computing has become an awfully important factor in the global IT industry, with 2019 reports showing that the worldwide public cloud services market, including Infrastructure as a Service (IaaS), Platform as a Service (PaaS), and Software as a Service (SaaS), grew 26.0% year over year in 2019 with revenues totalling $233.4 billion, according to the International Data Corporation (IDC) Worldwide Semiannual Public Cloud Services Tracker. The reliance on cloud computing has only increased in 2020 with the advent of the global pandemic and more and more businesses have been getting on board, with higher use of cloud computing and less reliance on traditional data centers often yields higher company revenue.
Phala Network aims to build a platform for general-purpose privacy-preserving Turing-Complete smart contracts. In a cloud service with the ability to have parts of the code private, there are many problems that the network could solve and therefore potentially many use cases.
The future of the network
Currently, according to Parachains.info, there are 29 parachains live on Kusama and 14 parachains live on Polkadot. Parachain auctions on Polkadot are scheduled to take place every fortnight right up until February 2023 and there isn’t a lack of projects that are vying to get a slot on the network. As Kusama is a testnet for Polkadot itself, the barrier to entry is lower and projects started deployment on Kusama earlier than Polkadot, therefore there are more projects deployed on Kusama — more than double at the time of writing. However, parachain auctions continue to take place and auctions are scheduled all the way through until early 2023 according to their roadmap.
XCM: The Cross-Consensus Message Format
Built to be a fully interoperable network, XCM recently went live on 4 May 2020. XCM enables communication between parachains. Now with this functionality enabled, it will allow all of the parachains on Polkadot to natively interact with one another making for a much stronger and more vibrant network. It ensures that projects can collaborate with each other if they wish and opens it up for creating added functionality on existing protocols and much more.
“With XCM, we have a stable and reliable inter-chain messaging channel that is far superior to the fragmented bridges, ” Hoon Kim, said chief technical officer of Astar, a smart contract service on Polkadot.
Polkadot Decoded
In June 2022 Polkadot Decoded takes place. Polkadot Decoded is an annual event for the Polkadot community to link up together virtually and also in person in order to share, educate and collaborate. The event will host a variety of presentations, for both technical and non-technical audiences. They are aimed at both experienced Polkadot developers, as well as those who are new to blockchain. It is an event where people and teams collaborate, educate one another and share their projects. It is undoubtedly one of the highlights of the year for Polkadot and there will surely be some exciting announcements and news about the future direction of the network.
Conclusion
Despite the volatility of the price of both Polkadot and Kusama, the ecosystem is continuing to grow. Developers are not leaving the space and it is one of the fastest-growing amongst all of the cryptocurrency markets. Institutions are investing too and according to a report by crypto research firm Messari, Polkadot is the project that is most supported by venture capital firms in Q4 2021. In this report it is said that 42% of venture capital and hedge funds investing in crypto are betting on the success of Polkadot’s smart contracts platform.
In February 2022, Morgan Creek Capital co-founder and vocal cryptocurrency advocate stated:
“winter is the time when the weak things get killed off and allows the strong to really thrive when the spring comes.”
Among others, he believes that Polkadot will be among those strong blockchains that survive a crypto downturn.
There are dozens of projects vying for parachain slots on both Dot-Sama over the next year and new projects are regularly being on-boarded. The recent launch of XCM, a parachain-to-parachain messaging solution, allows for building solutions across different parachains and increased network effects. The project has continually been able to keep up with meeting its targets on its public road maps — this was one of the main reasons that Gavin Wood left Ethereum to create Polkadot as he was frustrated with the organization’s failure to innovate and meet deadlines. We believe that with continued developer growth and support, Polkadot is one of the most interesting projects in the cryptocurrency space. Due to parachains ability to share security with one another, scale and more, it seeks to solve many of the issues that current layer1 blockchains suffer from regarding the blockchain trilemma.
References
- The Parachain Advantage: Exploring Polkadot’s Next-Generation Model (December 16, 2021) https://polkadot.network/blog/the-parachain-advantage-exploring-polkadots-next-generation-model/#:~:text=Parachains explained&text=Parachains are next-generation layer,network of layer-1 parachains.
- Polkadot: The Foundation of a New Internet. https://medium.com/polkadot-network/polkadot-the-foundation-of-a-new-internet-e8800ec81c7
- Parachains. https://wiki.polkadot.network/docs/learn-parachains
- The Parachain Advantage: Exploring Polkadot’s Next-Generation Model. https://polkadot.network/blog/the-parachain-advantage-exploring-polkadots-next-generation-model/#:~:text=Parachains explained&text=Parachains are next-generation layer,network of layer-1 parachains.
- What Are Parachains? https://coinmarketcap.com/alexandria/article/what-are-parachains-2
- What Are Parachains? Complete Beginner’s Guide. https://www.coinbureau.com/education/what-are-parachains/
- Parachain Slot Auctions. https://www.kraken.com/learn/parachain-auctions
- See All Polkadot Parachain Slot Auctions In One Place https://coinmarketcap.com/polkadot-parachains/polkadot/
- Acala Wins First Polkadot Parachain Auction, With $1.3B in DOT Committed https://www.coindesk.com/tech/2021/11/18/acala-wins-first-polkadot-parachain-auction-with-13b-in-dot-committed/
- Winners in Second Round of Polkadot Parachains Poised to Add Mojo to Expanding DOT Ecosystem https://thedefiant.io/polkadot-parachains-second-group/
- What Are Polkadot’s Parachain Auctions? https://cryptobriefing.com/what-are-polkadots-parachain-auctions/
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- A brief summary of everything Substrate and Polkadot. https://medium.com/polkadot-network/a-brief-summary-of-everything-substrate-and-polkadot-f1f21071499d
- Lido Briefly Becomes Top DeFi Protocol by TVL With $20B Staked. https://www.coindesk.com/business/2022/05/04/lido-briefly-becomes-top-defi-protocol-by-tvl-with-20b-staked/
- 10 Questions About Phala You Should Know. https://medium.com/phala-network/phala-network-faq-5cd99bf1d152
- Gavin’s Tweet about Phala https://twitter.com/gavofyork/status/1341707757985120256?lang=en
- Phala Network, The Key To The World Of Privacy Which Will Be The First Confidential Smart Contract Network Built On Substrate. https://pedroporky.medium.com/phala-network-the-key-to-the-world-of-privacy-which-will-be-the-first-confidential-smart-contract-2b5437f76030
- Phala Wins Fourth Parachain Slot Auction on Kusama! | Phala Weekly Vol.43. https://medium.com/phala-network/khala-wins-fourth-parachain-slot-auction-on-kusama-phala-weekly-vol-43-55228f7b48ee#:~:text=Jul 13%2C 2021-,Khala Network Kusama Slot Auction Recap,of the previous slot auction.
- Number of unique addresses that either bought or sold a Decentralized Finance (DeFi) asset worldwide from December 2017 to March 21, 2022. https://www.statista.com/statistics/1297745/defi-user-number/
- Blockchain for 2018 and Beyond: A (growing) list of blockchain use cases. Blockchain for 2018 and Beyond: A (growing) list of blockchain use cases https://medium.com/fluree/blockchain-for-2018-and-beyond-a-growing-list-of-blockchain-use-cases-37db7c19fb99
- Parallel Finance Docs https://docs.parallel.fi/
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- DeFi Parachain, Parallel Finance Launches Six Major Products Simultaneously. https://www.investingcube.com/defi-parachain-parallel-finance-launches-six-major-products-simultaneously/
- Bifrost https://thebifrost.io/
- Polkawarriors Tweet about XCM https://twitter.com/PolkaWarriors_/status/1522144930650783744
- Polkadot now lets you natively send tokens across parachains https://www.theblockcrypto.com/post/144989/polkadot-now-lets-you-natively-send-tokens-across-parachains
- Polkadot now lets you natively send tokens across parachains https://www.theblockcrypto.com/post/144989/polkadot-now-lets-you-natively-send-tokens-across-parachains
- XCM: The Cross-Consensus Message Format https://polkadot.network/blog/xcm-the-cross-consensus-message-format/?utm_source=twitter&utm_medium=social&utm_campaign=xcmv2launch&utm_id=xcm&utm_content=GavBlog
- Introducing Rococo: Polkadot’s Parachain Testnet https://polkadot.network/blog/introducing-rococo-polkadots-parachain-testnet/
- Worldwide Public Cloud Services Market Totaled $233.4 Billion in 2019 with the Top 5 Providers Capturing More Than One Third of the Total, According to IDC. https://www.businesswire.com/news/home/20200818005110/en/Worldwide-Public-Cloud-Services-Market-Totaled-233.4-Billion-in-2019-with-the-Top-5-Providers-Capturing-More-Than-One-Third-of-the-Total-According-to-IDC
- Why lagging businesses should embrace cloud and digital transformation https://www.reseller.co.nz/article/688097/why-lagging-businesses-should-catch-cloud-digital-transformation-while-they-can/
- As More Parachains Go Live, Polkadot’s Vision Becomes Reality. https://cryptopotato.com/as-more-parachains-go-live-polkadots-vision-becomes-reality/
- Morgan Creek Capital Founder: Solana (SOL), Polkadot (DOT), Avalanche (AVAX) Will Survive Market Downturn. https://timestabloid.com/morgan-creek-capital-founder-solana-sol-polkadot-dot-avalanche-avax-will-survive-market-downturn/
- Messari Tweet. https://twitter.com/messaricrypto/status/1501943538325483525?lang=en
