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What is a Crowdloan?

Published April 20, 2021 | Updated April 20, 2021

What is a Crowdloan?

Back in 2017, Blockchain was having the best of times. The value of cryptocurrencies was increasing exponentially, and many saw this as an opportunity to release their tokens. ICOs were everywhere, and people released tokens backed by a white paper and website with little to no real-world applications. By the time the year was over, over a thousand crypto projects had launched.

Many of these crypto projects didn’t live to see the light of the day. According to GreySpark partners, about 50 percent of ICOs launched between 2017 and 2018 didn’t raise a dollar. Only twelve of the 1400 ICOs raised up to $100 million, and of these, only two reached a $2 billion valuation. Several reasons have been blamed for the massive failure of ICOs; these include the lack of application to solve real-world problems for many of these coins, the poor technology some were based on, and poor marketing in some cases. It is also necessary to point out that many of these projects were plain scams disguised as ICOs. 

The downside of these failed projects was that many people lost the ETH and money that they invested into the projects. While some of  these projects were promising people new coins in exchange for their Ether or money, most of these projects failed to deliver with many of the coins not even materializing, and where they did, most were practically worthless. 

With all these problems which still exist with ICOs even till today, it has become necessary to have a system that will protect users who want to invest in new crypto projects. One way of achieving this would be through providing them with all of the necessary information that will guide their decision-making process and also better protect them from losing more money; this is where a solution like the Crowdloan comes in.

Understanding Crowdloans

This is a combination of Kusama and Polkadot Parachain Auctions. Crowdloan provides a unique model for users to support and fund the slots on the Kusama/Polkadot networks for projects. Thus, they are not essentially funding the projects by giving tokens to the project owners. Instead, the user will select a project from those that are conducting crowdloans. From the onset, they know how much they have to bond and for how long.

The user will keep the tokens locked in their KSM/DOT and lease them for the duration of the bond.  It is only if the project they picked passes the crowdloan test stage that they will be able to access the tokens, and the user will get their tokens and rewards on it after the duration of the bond has expired. With this model, users will get more rewards than if they just stake their tokens, and it is also more protective than ICOs.

What Makes Crowdloan Better

While the crowdloan feature that is part of the Crowdloan is similar to ICOs, it is totally different in the fact that the projects using crowdloans will first be tested on Rococo, which is the testnet for Kusama and Polkadot – thereby eliminating any risk of shabby technology, copycat projects, and scam. All of these are problems faced with ICOs. For a project to be tested on Rococo and pass, it means such a project can be vouched for.

However, Parachain Leasing Offering does not mean users are totally immune to risks, especially in the form of scams. In fact, Kusama specifically lists ways by which users can avoid falling prey to these scams.

How Does a Parachain Leasing Offering Work?

In order to understand how PLOs work, it is first important to understand the Polkadot and Kusama networks. Polkadot is a multichain network. Unlike Ethereum and the likes, which are made up of only one blockchain, it is made up of several blockchain networks that are connected to form one big network. Each of these blockchain networks is regarded as a parachain, and together, they form the Polkadot network.

Polkadot was created by Dr. Gavin Wood, one of the creators of Ethereum, to address the Ethereum scalability issue. Polkadot blockchains use a Substrate dev framework which allows developers to build their own blockchain for the special purpose that they have in mind, unlike Ethereum blockchain, which is a one size fits all. That is why we have the likes of Acala Network for DeFi, Chainlink for Oracles, Phala Network for Privacy, etc. Of course, it can also be used for building general-purpose blockchain networks such as Moonbeam Network or Plasm Network.

Kusama Network is also similar as they are built based on the same technology and architecture. But the difference between the two is that Kasuma’s risk tolerance is higher, and its governance parameters are faster. Also, the requirements for landing a slot on Kusama quite lower than that of Polkadot.

The lower entry barriers into Kusama means that it is usually the first mainnet all Polkadot codes go to after they have been tested on Rococo or Westend. Usually, developers like to launch on both networks so that they can serve the needs of both communities at least until both ecosystems are bridged.

Parachain Slot Auctions

In order to build on either Polkadot or Kusama, the developer or team will need to win an auction on either of the platforms which will give them access to a parachain slot that connects them to the rest of Kasuma or Polkadot ecosystem. There are two ways to own a slot. Either you win it through a Parachain slot auction or buy it from a secondary market where someone wins the slot and sells it off (this is yet to happen).

When it comes to using the slot auction method, it is in the form of a candle auction in which the auction will open at a stated time and last for a stipulated period that will be known to every bidder. Within the period that the bid will last, teams can see one another’s bid and can outbid each other. At the end of the period stipulated for the bid, the highest bidder wins the slot. The winner of the auction will get to own the parachain slot for a dedicated period of time, after which they will have to renew the lease.

For funding the bid, the teams can use a Polkadot or Kusama account to bid or do it through a crowdloan. Using the Polkadot or Kusama account will usually happen if the team has a whale backing them. In most cases, they have to rely on crowdloans, which allows them to source tokens from their community which they can use to bid.

Crowdloans

The crowdloan system is similar to ICOs as it allows teams to crowdsource KSM or DOT, in exchange, the users that contribute to the crowdfunding will expect to get rewards in the form of tokens.

What makes crowdloans totally different is that the tokens contributed will be locked for the entire period that the parachain slot will last, and in exchange for this contribution, a percentage of the native cryptocurrency of the parachain will be the reward of the contributors. After the parachain slot ends, the original contributions will be returned to the owners, and the team has multiple options of refinancing its access to the slot.

It must also be noted that crowdloan contributions continue till the end of the auction. Thus, if during the auction, the bid should exceed the amount contributed through the crowdloan, contributors can still make further contributions till the end of the auction.

The advantage of crowdloans is not just in protecting the users, but it also ensures that developers put in their best to create viable projects capable of real-life applications. An example of such is Acala which was the first to pass the Rococo testnet and win a parachain slot on Polkadot. Karura, which is also from the same team, is about to repeat the same feat on the Kusama network. 

It is a DeFi network compatible with Ethereum, and it comes with several financial applications, which include kUSD, a multi-collateralized stablecoin backed by cross-chain assets, an AMM DEX, and liquid KSM, which is a trustless staking derivative. The gas fees on the network are quite minimal, too, when compared with DeFi apps on Ethereum. 

With all these qualities and potential for growth, it looks set to be the first network to win a parachain slot.

At the moment, both Kusama and Polkadot are still in the early stages, with lots of room for development. For example, parachains are still limited, with Polkadot having only 100 parachains and the onboarding of the parachains on the network is not as seamless as it should be yet. Another challenge is the fact that although both networks are quite similar, they still exist separately with no link connecting them. This is expected to happen in the future.

Conclusion

PLOs provide a better and less risky alternative to ICOs, solving the challenges that users have faced in the past when it comes to contributing tokens for crypto projects. The rewards are also better, and developers have access to some of the best tools when it comes to developing a specialized or general-purpose blockchain network.

Disclaimer
The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.
About Author
I am an associate content producer for the news section of Coingape. I have previously worked as a freelancer for numerous sites and have covered a dynamic range of topics from sports, finance to economics and politics.
Casper Brown 370 Articles
I am an associate content producer for the news section of Coingape. I have previously worked as a freelancer for numerous sites and have covered a dynamic range of topics from sports, finance to economics and politics.
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