By Bill Laboon, Director of Education and Community at Web3 Foundation
Parachains are the diverse layer-1 blockchains that run in parallel on the Polkadot and Kusama networks. Parachains connect to Polkadot or Kusama by leasing a parachain slot on the Relay Chain. Apart from the slots for common good parachains, which are reserved for functionality that benefits the ecosystem as a whole, projects wishing to obtain a parachain slot need to participate in one or more parachain slot auctions. The design of Polkadot and Kusama allows supporters and potential users of the parachains to help parachain teams secure a slot by contributing their DOT or KSM (respectively) via the crowdloan mechanism.
Safe participation in crowdloans
The crowdloan is an on-chain way of helping parachain teams raise the token bond required to participate in a parachain slot auction. This mechanism ensures that tokens contributed to a crowdloan are used only for their intended purpose, namely, winning a parachain slot. The parachain project itself does not receive or have any control of these tokens and cannot transfer, stake, participate in governance, or perform any other functionality with them. The original token holder will always get back the tokens used to contribute to a crowdloan. Thus, there is no risk to the participating user that their KSM or DOT will be taken by the project, or used for any other purposes.
How the crowdloan process works
In a crowdloan, DOT or KSM contributed by supporters is managed using an automated process written into the code of the network. In technical terms, the DOT or KSM are allocated to the auction for the parachain by the runtime logic of the chain using the “crowdloan.contribute” extrinsic. This is a special type of transaction that allows token holders to contribute to a crowdloan without having to transfer or give up custody of their tokens to any third party.
After the parachain lease period is over, or the potential parachain fails to win a slot within a specified time period, the DOT or KSM are returned to their owners by the runtime. For most participants this will look like an automatic process. Behind the scenes, this refund process can be initiated by any user calling the “crowdloan.refund” extrinsic for that crowdloan and paying the transaction fee (although the parachain project owner is incentivized to do this themselves, in order to return their deposit as quickly as possible).
From a technical perspective, participating in crowdloans always involves using the “crowdloan.contribute” extrinsic. If you participate via Polkadot-JS, this will appear in the top right corner of the screen after you have entered the amount and selected “contribute”, and before you sign and submit the transaction. See here for a step-by-step guide to participating in a crowdloan using Polkadot-JS.
If using a different wallet or platform, it is important to do your own research and to ensure that you are participating in a legitimate crowdloan.
The risks of transferring DOT or KSM
Rather than simply using the crowdloan module, some parachain projects are using, or have already used, additional mechanisms to source their parachain bids that consist of directly sending KSM to accounts owned by the parachain project. Note that raising tokens in this way is not considered a crowdloan – a crowdloan by definition uses the crowdloan pallet and its associated functionality.
Although there are legitimate reasons to use these alternative ways of raising an auction bond, one should be aware that there are certain risks in participating in such a mechanism.
Using the transfer extrinsic, ie, transferring DOT or KSM to an address, means that the tokens have been irrevocably sent; whoever owns the receiving address can send the tokens back, keep them, or do anything else with those tokens, as they are now the owner of them. The decision is entirely in their hands. If you decide to take part in a mechanism that requires a transfer of DOT or KSM to an address (using the transfer extrinsic), you should deeply research and trust the project, and be aware of the risks involved.
At the time of writing, a first batch of five auctions have taken place on Kusama, followed by a pause to allow for network optimizations to take place. The next round of auctions is scheduled to begin on September 1st. You can follow the status of auctions and crowdloans on Kusama here and on Kusama’s Twitter page.
Auctions and crowdloans can begin on Polkadot once a full external audit has been completed.
Still have questions?
For further information about crowdloans on Polkadot and Kusama, please see the Polkadot Wiki page on the topic: https://wiki.polkadot.network/docs/mirror-learn-crowdloans