Everything you need to know about Parachain Auctions

In the whitepaper for the Polkadot network, parachains were stated as the very final piece of core functionality to be added to the platform, so it can achieve the promised scalable multi-chain architecture. Now as Polkadot founder Gavin Wood has recently announced in a blog post, parachain slot auctions are to begin on Kusama, Polkadot’s canary network. Projects willing to join Polkadot’s scalable network of interconnected parachains can participate in the bidding process, and thus secure a lease for themselves to build on Kusama for now.

Now, you might be asking how exactly this whole bidding thing for the parachain slot auction will work, or even what these parachains are and why the need for parachain slot auctions. In this post, we try to answer all these pressing questions for you. So to find out more about Polkadot and Kusama’s parachain auctions, do read on. 

Firstly, What Is the Kusama Network?

Kusama was also founded by Dr. Gavin Wood in 2019, and it’s based upon the same codebase as that of the Polkadot blockchain. The two platforms are almost exactly the same, with the same underlying architecture and governance structure. However, Kusama was an earlier, unaudited release. It’s now like a test-bed for any new features or upgrades planned to be integrated with the actual Polkadot network. If these additions work as planned on Kusama, they are then planted on Polkadot.

Parachains on Kusama:

After being tested on Kusama, parachains will be ready to be launched on Polkadot. As a network with real economic incentives in its own right, Kusama is supposed to act as an additional proving ground for these parachains, which would allow the community to observe the various network effects and also conduct further tests if needed. 

Once all parachains are running smoothly on Kusama and the audits are completed, the Polkadot community will be enabling parachain functionality on Polkadot and start parachain slot auctions via on-chain governance.

The First Live Parachain: Shell and Statemine

Very recently, the Kusama network became the very first fully-decentralized, secure heterogeneously-sharded blockchain; Kusama essentially deployed tech originally developed for Polkadot to achieve this, for testing purposes. 

Shell was the first parachain to go live and it ran smoothly. Shell was soon upgraded to Statemine, which is actually Kusama’s version of the Polkadot ecosystem’s Statemint common-good parachain. The many functionalities of Statemine include providing a cost-effective place for holding and transferring KSM (Kusama’s native coin), the transferral of permissioned fungible assets like non-algorithmic stablecoins, and the permissionless development, issuance, and transferral of both fungible and non-fungible assets (NFTs).

Now that Statemine has proven to be running effectively and efficiently, the community is moving on to the next phase, which is rolling up parachain auctions.

Why Conduct Parachain Slot Auctions?

Statemine as an individual chain surely has significant utility, but it’s undeniable that its utility will be magnified once it’s a part and resource of a whole community of blockchains. That is the very reason Kusama initiated the parachain slot auctions, to create a community of chains. Parachain auctions are a super efficient way of deciding which parachains to add to the Kusama Relay-chain so their functionality can be a part of the Kusama ecosystem. However, it’s to be noted that the Kusama council and the KSM stakeholders get to make the ultimate decision regarding any occurrence on the Kusama network, and that includes the timing of these slated parachain slot auctions. 

Now, if a project wants to be added to Polkadot, it will need to take up one of the parachain slots to be opened during the auction. It’s important to remember that a parachain slot is a scarce resource, and only a fixed number of these slots will be available for bidding in the parachain auctions. So far, the Polkadot team expects to have around 100 parachain slots available on Polkadot that will gradually get unlocked.

The Polkadot team has further stated that potential future optimizations such as nested relay chains might let them further increase the number of parachain slots up for auctioning. That being said, it is going to take some time for the Polkadot network mainnet to fully support the 100 parachain slots scheduled to be made available, hence they are to be added to the Polkadot ecosystem slowly, over a sizable period of time. Plus, not all the parachain slots will be distributed via the parachain auctions. Some of them are also to be allocated to governance-enabled common goods parachains- or the system chains, and parathreads.

How to Acquire a Parachain Slot?

The aforementioned parachain slot leases will be sold through non-permissioned candle auctions, which have been slightly modified for security purposes. 

After the first auction has happened on the Kusama network, a new auction is supposed to be taking place roughly once in every two weeks. After every one of these auctions, the parachain to win is to be integrated with the network at the beginning of its particular lease period. 

Parachain slot auctions will continue on a rolling basis as, over time, more parachain slots are opened up and the previous leases expire.

The parachain slot durations are capped at 2 years, and they are split into 3-month time periods. Parachains can lease one of these slots for any combination of periods of the duration of the slot. Parachains can also lease more than one of the parachain slots over time, which means that they can lengthen their lease to the Polkadot network past the limit of the actual slot duration by leasing an adjacent slot.  

Parachain slots at genesis:

       –3 months–

       v          v

Slot A |     1    |     2     |     3     |     4     |     5     |     6    |     7     |     8     |     9     |…

Slot B |     1    |     2     |     3     |     4     |     5     |     6    |     7     |     8     |     9     |…

Slot C |__________|     1     |     2     |     3     |     4     |     5    |     6     |     7     |     8     |     9     |…

Slot D |__________|     1     |     2     |     3     |     4     |     5    |     6     |     7     |     8     |     9     |…

Slot E |__________|___________|     1     |     2     |     3     |     4    |     5     |     6     |     7     |     8     |     9     |…

       ^                                                                                             ^

       ———————————————max lease—————————————–

(Source: https://wiki.polkadot.network/docs/en/learn-auction)

Each period of the range between 1 and 4 represents a 3 month duration for a total of 2 years.

What Is a Candle Auction? How Does It Work?

A candle auction is a kind of open auction where bidders keep submitting bids that become increasingly higher. In the end, the highest bidder at the end of the auction is declared the winner. The origin of candle auctions can be traced all the way back to the sixteenth century, when they were used in the selling of ships. 

The name ‘candle’ auctions is derived from the “inch of a candle” that keeps track of the open period of an auction. Back in time, once the flame of the candle got extinguished and it went out, the auction would come to an end and whatever the standing bid at that point in time is would be the winner. For the online candle auctions in today’s time, a random number is needed to decide upon the moment when to end the candle auction.

Where the parachain slot auctions will be different from your average candle auctions is that it will not need a random number to decide upon the duration of its opening phase. What it has instead is a known open phase, and at the normal closure, it will be determined retroactively to have finished at a point of time in the past during the ending phase. Therefore, in the opening phase, all bids will continue to be taken in, but the more later a bid comes in, the more likely it would be to lose out, since the retroactively determined closing moment might just turn out to be a time before that bid had been submitted. 

There’s the issue of auction sniping also, which would be even worse on blockchain-based auctions. However, Polkadot has a way of combating that too. Auction sniping, in case you weren’t aware, is what happens when the end of an auction is known, and the bidders skip out on putting out their actual bid early, so that they might have a chance of paying less than their real value of the item.

Why this problem is even worse on the blockchain? Well, on blockchains it potentially provides the producer of the block with an opportunity to snipe an auction at the final, deciding block by adding it to the chain themselves or even ignoring bids from other participants. 

However, candle auctions allow all bidders to be aware of the states of the bid throughout the auction, but not when the auction will be determined to have been concluded. This way, bidders would be willing to put forth their actual prices early on in the auction for fear of losing out. 

Further, randomness is quite problematic for a blockchain system. Getting a random number generated trustlessly on top of an open and transparent network where other participants would be able to verify it brings the possibility for various entities to attempt to manipulate the randomness of the number generated. VRFs or verifiable random functions is a solution that has been put out to do away with this particular issue, and that is what Polkadot uses as the basis for its randomness. In fact, the random beacon based on the VRF used by Polkadot for the auctions is also used in other utilities of the blockchain platform. The VRF, by providing the basis of the parachain slot auctions’ randomness, will retroactively determine the closing time of the auction.

How Does Bidding in the Candle Auction Work?

Parachains, or parachain teams, can bid in a parachain slot auction by first specifying the slot range they wish to lease, as well as the total number of tokens the team is willing to reserve. Bidders can use either ordinary accounts, or they can even make use of the crowdloan functionality to source the required tokens from the Polkadot community.

All bidders would have to submit an outline of their bids, mentioning the amount of tokens they are ready to bond and for what durations. The slot ranges can be any of the periods (1 – n), where n stands for the number of periods available for a parachain slot. For both the blockchain platforms Polkadot and Kusama, n is the number 8. While bidders can submit different configurations for a range of bond amounts, it’s important to remember that only one of these bids would be picked as the winner, regardless of the other bids.  

The winner selection algorithm used for the parachain slot auctions will be picking bids that might be non-overlapping so as to maximize the total amount of the tokens held during the entire lease period of the parachain slot being auctioned. What this means is that the highest bidder for any specific lease period might not win every time.

This is how the random number generated by the VRF utilized by the Polkadot network is involved in the bidding process: the random number is determined at each block. Plus, every parachain slot auction is to have a threshold beginning at 0 and increasing up to 1. The random number produced by the VRF is scrutinized next to this threshold to decide if the block in question is the end of the auction within the ending period. What’s more, the VRF also picks a block from the last epoch to acquire the state of bids from, so as to lessen the chances of attacks from any malicious validators.   

Is It Possible to Acquire a Parachain Slot Without Getting Involved in the Candle Auction?

Yes, there is one more way to get a parachain slot if you want to avoid the parachain auction. You can buy it in the secondary market where a party who has won one of those slots would be willing to resell it, alongside the associated deposit of tokens locked up to another buyer. This way, the seller can get liquid tokens in exchange for the parachain slot in question.

And that was everything you needed to know about the parachain auctions of Kusama and Polkadot. To find out more about the projects, you can visit Polkadot’s Twitter, Reddit, Github, YouTube, and Discord, and the Kusama homepage for further details regarding the parachain auctions.