Making History: An Overview of the First Five Parachain Slot Auctions on Kusama
by Jonas Gehrlein, Web3 Foundation Research Scientist
The launch of the first rotation of parachain slot auctions on Kusama marks a major milestone in achieving a scalable, decentralized, and interoperable future, with several professional teams ready to compete for and launch on one of the first five ever available parachain slots. This post provides important background information on the candle auctions and crowdloan mechanisms for these slots and recaps what happened during the first five auctions. It uses data available from the Kusama blockchain as well as results from an anonymous survey that was conducted with fifteen parachain teams prior to the auctions (at the end of March / early April). Furthermore, the last section incorporates information gathered from oral interviews with parachain teams about their expectations of the parachain slot auctions, especially in the future when some parachains will be aiming to extend their leases while others are simultaneously seeking their first onboarding.
The Candle Auction: A refresher
Before proceeding with the analysis of the individual auctions, it is good to summarize the underlying mechanism. The candle auction is an old auction format from around the 16th century where bidding was allowed until an actual wax candle went out. The uncertainty about the actual ending time of the auction was used to reduce auction sniping, which was an issue even back then. In auction sniping, bidders squeeze their bid in at the last possible moment, so that other participants don’t have the chance to react with a higher bid. Many of us probably had similar experiences in the past with online auction formats such as eBay.
The candle auction format was long considered exotic and has not seen much application. However, it has proven beneficial properties when combined with blockchain technology, both for avoiding sniping and obtaining efficiency (see here for further details). It is therefore considered to be a suitable mechanism to allocate parachain slots on Polkadot and Kusama. In contrast to the ancient candle auction, the end is determined retrospectively. That means, the auction always has a fixed length of time for bidding, and the actual ending block (“termination block”) is randomly determined only after this. We can mark four important checkpoints to describe the temporal procedure of a candle auction, described in block heights. The following graph illustrates the structure.
The start and end blocks of the auction determine the fixed length of each auction and give participants certainty about the overall framework. The first phase of the auction, lasting exactly 27,000 blocks (around 45 hours), serves as a grace period where teams and users have time to get an overview of the situation, gather information, and set up their bidding/contributing strategies. Although bidding is enabled, the blocks in this phase are not yet considered by the mechanism, i.e., the termination block cannot fall inside that range. After that, the candle phase (or ending phase) marks the “real” beginning of the auction. Here, figuratively, the candle is lit and this phase lasts for 72,000 blocks (around 5 days). During this phase, the auction could end at any given block with equal probability (i.e., the candle phase has a uniform termination profile). Bidding is allowed until the end of the auction. After the official ending, the termination block is computed by using a combination of verified random functions (VRF). Calculating the termination block retrospectively ensures that nobody can predict it before or during the auction.
The winning bids that are contained in the termination block are then used to determine the outcome of the auction, while all later bids are discarded. This uncertainty and the possibility that bids are not relevant for the final outcome incentivizes early bidding and can thereby reduce sniping. To keep potential confusion of participants at a minimum, there can only ever be one active auction at any time.
Technically, a crowdloan is a simple module that enables projects to gain support for their parachain in a decentralized way. Specifically, tokens are gathered on behalf of the teams, and remain in the custody of and are secured by the Relay Chain. This means that participation in a crowdloan campaign is trustless for users and they can be certain to receive their contributions back at one of two predefined dates. The first date corresponds to the case where a project’s crowdloan successfully secured a parachain slot. In this case, tokens can be reclaimed by the users at the end of the lease that the crowdloan obtained. In the other case, tokens can be retrieved directly after the (generally short) duration of the crowdloan expires. As tokens are reclaimable, the actual costs of users’ contributions, economically speaking, are the opportunity costs that accrue from locking those tokens (e.g., forgone rewards from staking or from using the tokens differently). To provide clarity about when users can expect their tokens back in the event that the crowdloan wins a slot, the leasing period that it bids for is fixed. Additionally, as a contribution is made the crowdloan module automatically increases the bid by exactly that amount. If the crowdloan successfully wins an auction, tokens are automatically locked for the period of time and then released and can be reclaimed by the accounts that contributed. Contributions after the termination block (but before the end of the auction) are still locked, but naturally did not increase the winning bid. Any incentive structure for contributing to the crowdloans are completely organized by the respective crowdloan projects.
After having established the basic concepts, let us dive into the data. In total, the first rotation allocated five parachain slots during June and July 2021. The whole campaign lasted from June 15th and the last auction ended on July 20th. Each auction lasted seven days with a two-day starting and five-day candle phase. The following table provides the dates for the four important events of each auction (the same table with the events expressed in their block heights can be found in the Appendix).
All bids were cast by crowdloans. This was to be expected as in the survey, 86.7% of projects predicted that they would use crowdloans to support their bids. The rest either changed their strategy in the meantime or aim to bid from a user-controlled account in future sequences of auctions. Most projects claimed that their project requires a lease period of at least one year to fully operate, which is why all crowdloans were programmed to bid for the entirety of 8 leasing periods (labeled 13-20), which roughly corresponds to 48 weeks.
Already at the time they took the survey, the teams felt ready for the long-awaited start of the parachain slot auctions on Kusama. Ten out of 15 teams indicated that they were aiming to enter the race for the first available slots on Kusama. Most of the teams (80%) indicated that they also plan to launch on Polkadot (with 13.3% only on Kusama and 6.7% only on Polkadot). The survey shows that the strategies and preparation for the auctions were a high priority for the teams, as they gave it extensive thought (with an average score of 6.5 of 7). It is therefore not surprising that we saw fierce competition between teams in securing their spot on the Kusama Relay Chain. In total, 18 crowdloans registered to participate in the auctions and received contributions during the campaign from 19,017 unique accounts. A total number of 1,320,458 KSM was bonded for crowdloans. Of these, 1,114,629 KSM has been locked in slots until May 13th, 2022, while the rest can be reclaimed by users as their chosen crowdloans didn’t secure a parachain slot. At the time of the events, from all issued KSM tokens, 47% is locked in staking and 9.9% for crowdloans. Individual accounts contributed on average to 1.8 crowdloans (for more details, see Appendix).
The following table summarizes relevant metrics for the eight projects with the highest locked KSM for crowdloans (the full table is available in the Appendix).
The following graph shows the cumulative contributions of the eight highest-backed crowdloans for the whole campaign. This gives some visual insights about the contribution dynamic of the different projects. We can spot a clear hierarchy between the contribution levels for the first three auctions, while things get more dynamic for the fourth and fifth auctions. As all bids were made for the same leasing periods (full duration of the slot), contributions can be compared within a single graph. After a crowdloan successfully wins an auction contributions are no longer allowed and therefore the curve flattens out for the winners.
We’ll have a closer look at each auction in the following section.
From the very beginning, three strong teams crystallized and consequently it was no surprise that they occupied the first three slots on Kusama. Karura