A parachain, formally a parallelizable chain, is an individual layer-one blockchain that functions in the Polkadot and Kusama multichain networks, alongside others. Parachains attach to the security provided by a Relay Chain — the central chain of Polkadot — which coordinates the system as a whole. At the same time, the computations a parachain performs are basically autonomous. A parachain can have different implementations and features and can be public or private, with its own functions, tokens and governance.
Within the ecosystem, parachains run in parallel, and any type of data may be sent between them due to Polkadot’s cross-chain composability, opening up possibilities for new use cases. Thanks to cross-network bridges, parachains can also be connected to external networks such as Bitcoin (BTC), Ethereum (ETH) and others.
Polkadot, which was founded in 2016 by Ethereum’s co-founder and former chief technology officer, Gavin Wood, is a layer-one heterogeneous scalable multi-chain network with shared security and interoperability. This means that the central Relay Chain provides layer-zero scalability and interoperability, and guarantees a secure message-passing between hundreds of simpler layer-one blockchains connected as parachains.
But why is it important for the cryptocurrency industry and what is the novelty of this blockchain technology?
It is known that most of the existing blockchains consist of several interlinked cogs. The main part is a consensus algorithm that is designed to achieve reliability in a network involving multiple, unreliable nodes. The primary task of the consensus mechanism is to ensure security.
Another item that makes up the blockchain is the state machine which changes the network’s state to a new one in response to an external event. The state machine provides the aspects of the chain to be secured over.
For example, proof-of-work (PoW) networks are protected by PoW consensus options, just like others are protected by proof-of-stake (PoS) options. All these networks handle diverse types of transactions and accounts that, in turn, makes their state machines unique.
When a team decides to create a new blockchain, they need to work on the implementation of a unique state machine as well as some kind of a consensus algorithm, which is not easy and often leads to some insecurity and overhead issues, and takes a lot of effort and time. This is where Polkadot’s initial architecture comes to the rescue, as it eliminates the need to build blockchains from scratch.
Polkadot claims to be a protocol for protocols. In this type of network, blockchains share a common environment in which they can have a trustless interaction and focus on their specific tasks. Moreover, for developers who want to quickly bring their ideas to life, the Polkadot co-founders created a special experimental environment called Kusama.
What is Kusama?
Kusama is Polkadot's sister chain for experimental development and early-stage deployments. In a nutshell, it functions as the ecosystem for innovations while delivering testnet conditions. Kusama’s primary use case is to facilitate testing, therefore it is branded as a “canary network,” meaning that it provides early unaudited code releases before it appears on the main Polkadot network. Many decentralized applications (DApps) are launching on Kusama before stabilizing their product for the main network.
Built as a sister chain, Kusama mimics most of Polkadot’s major design features. However, it serves a different purpose. Kusama gives developers and engineers an opportunity for flexibility in the architectural finalization of their blockchains. What’s more, by enabling rapid progress and growth, Kusama operates much faster as it takes only seven days to vote on a decision and eight to implement changes after the vote, compared with a month for each on Polkadot.
Also, Kusama has lower economic barriers for entry than Polkadot, thus launching a custom parachain is much easier, as well as becoming a validator due to the low minimum staking requirements. To increase the speed of the network, however, it has to provide less stringent governance parameters and partially give up stability and security.
The Polkadot pliant architecture was created to facilitate interoperability between different blockchains. This would allow many independent layer-one blockchains to work together despite differences in their specialization, goals and internal structure, thereby forming a diverse environment. For this reason, Polkadot sets only one criterion for the design of a parachain which is proof that every block follows the agreed-upon protocol.
The ability of different decentralized networks to communicate with one another without any intermediaries goes a long way in giving rise to fully decentralized systems, and opens up new opportunities for interaction for the creation of new use cases and variations of collaboration.
Parachains like Kusama and Polkadot can see and access information across the ecosystem, engaging with one another and with external networks. The protocol’s cross-chain composability allows them to exchange tokens and other types of data, including, for example, smart contracts and off-chain information from oracles.
The blockchain scalability problem is one of the hottest and most widely discussed topics these days. It refers to the limited capability of the network to handle large amounts of transaction data in a short span of time since blocks are limited in size and frequency. Polkadot design offers a decentralized way to achieve blockchain scalability, as it enables parallel transaction processing. Each parachain belonging to the ecosystem spreads out and processes transactions simultaneously with others, improving general throughput.
As a mechanism of managing and implementing changes to blockchains, governance provides a means of accountable transparency and democracy for their communities. Unlike Kusama, Polkadot parachains are free to adopt any governance models they see fit, significantly reducing the probability of hard forks. Moreover, if a parachain doesn't want to create its own governance model, it can implement one of the existing, as it has access to a number of pre-built Polkadot on-chain governance models.
The variety of the parachain’s potential use cases are just as wide as the range of possibilities Polkadot design provides.
One of the main use cases for parachain technology is decentralized finance (DeFi). Many parachains aim to recreate traditional financial systems such as banks and exchanges with cryptocurrency. They may offer solutions that allow users to manage their digital assets, including buying, selling and transferring. It may be a cross-chain DeFi hub, a project with its own stablecoin or decentralized application (DEX) capabilities, or a cross-chain money market, as well as a project which provides a multi-chain DeFi solution.
Another use case for parachains is smart contracts, represented by projects that enable Ethereum developers to migrate their contracts onto Polkadot, thus opening up the Polkadot ecosystem for a variety of popular DApps and a large number of developers. The Polkadot ecosystem already includes a self-upgrading WebAssembly (WASM) smart contract platform and a community-led platform that mirrors Ethereum’s accounts, keys, subscriptions and logs.
A bunch of interoperability bridges is being built in the Polkadot ecosystem. There is a trustless bridge from Bitcoin to Polkadot, a decentralized cross-chain bridge that connects Polkadot and Ethereum, and ones for other heterogeneous chains. It also includes a bridge between Substrate-based blockchains and Ethereum and others.
The Polkadot design also provides opportunities for privacy protocols that guarantee reliable operations with data while staying private.
Some ecosystem projects deliver decentralized data storage. With these types of protocols, files aren’t stored in a centralized way and they may be encrypted or split into pieces, all while being distributed on a decentralized network.
Data infrastructure protocols aim to build cross-chain platform parachains, powering the data economy on Polkadot by providing reliable and easily coordinated data sourcing and analytics.
On top of that, the Polkadot ecosystem has a place for projects which utilize niche use cases. For example, there is a parachain platform for decentralized censorship-resistant social networks and an open-source futuristic Internet of Things (IoT) and robotics solution, which connects robots as a service for end-users with a decentralized system that globally monitors their activities.
Parachain types & ways to allocate slots
A parachain must inhabit one of the available slots to be added to the system, and any project that provides a high-demand service can be a good fit for a parachain slot. Polkadot supports a limited number of slots estimated at around 100, which are likely to be added to the system slowly over time. Potential optimizations intend to increase this number in the future.
There are several ways by which those slots will be allocated.
What are Common Good parachains?
First of all, the system reserves slots for functionality that benefit the whole Polkadot ecosystem. Thus, it presupposes the presence of common-good parachains. The purpose of common-good parachains falls into one of two categories: system-level chains and public utility chains.
These valuable parachains are governance-granted, which means they are not allocated via the parachain auctions, but by the on-chain governance system. Their lease could only be removed via governance.
What are parachain auctions?
Second, there are auction-granted parachains. Choosing this option, parachain teams can either bid with the respective native tokens of Polkadot (DOT) or Kusama (KSM), or source them from the community using crowdloans, which is when contributions are solicited from DOT holders in exchange for some type of reward.
Blockchains that don't fit for the common-good parameters and want to continuously participate in the system can lease a slot on the Relay Chain by winning a parachain slot auction. This lease requires the teams to bond a significant amount of DOT or KSM for the duration of the lease.
The duration is limited to two years and is divided into three-month periods. This interval mechanism was dedicated from the desire to allow for a greater amount of the ecosystem’s diversity. It aims to prevent large and well-funded blockchains from hoarding slots, slowly allowing smaller blockchains to occupy the durations that are not yet filled. Furthermore, parachains may lease a slot for any combination of periods of the duration, and lease more than one slot at a time.
By participating in a parachain slot auction, projects agree to lock up the amount of DOT or KSM they bid for the duration of the chosen lease period, after which the full amount is unlocked. The project may then choose to bid again for another slot or run as a parathread. During the lease period, tokens are reserved in the original account but are not available for staking, transferring, or other uses.
To gather the stake for the auction bid, some projects in the Polkadot ecosystem have organized crowdloans. In this way, holders of DOT or KSM can choose to back their favorite projects. Compensation for the loss of staking rewards for the duration of the lease depends here on the individual project.
Notably, crowdloans is arguably a fairer and safer token distribution model than ones seen in the past. Previously, users had to send their tokens to the projects’ teams in the hope that they would receive valuable tokens in return, as StakeDrops and DeFi airdrops rewarded participants with the tokens of a new project.
When taking part in crowdloans, users do not permanently give up their tokens, but rather allow them to be temporarily held in a reserve. This puts the onus on the projects’ teams to deliver a product without exposing the user to many risks. On the other hand, crowdloans grant the projects special privileges in form of a limited number of desired parachain slots as well as the access to the security and interoperability provided by the system.
What are Parathreads?
Last but not least, the system states that parathreads are similar with parachains from the developmental side and different from the economic perspective. Parathreads connect to Polkadot using a pay-as-you-go model with an auction for each block. The parathread template is particularly advisable for projects that participate in the Polkadot system only temporarily and do not require continuous connectivity to the network, or are unable to acquire a full parachain slot.
Parathreads will have a slower block time than parachains, but have the exact same security level and interoperability features as parachains. Also, depending on the needs and availability of slots on the Relay Chain, any blockchain can switch between being a parachain or a parathread.
The current state & beyond
At the end of 2020, the Rococo parachain testnet and the teams began deploying test parachains. The first successful cross-chain messages were sent between parachains on Rococo in February 2021.
At the beginning of June 2021, the first parachain auction took place on Kusama via on-chain governance. Five Kusama parachain slots in total were auctioned off one by one, with a new auction taking place roughly every two weeks. Karura has won the first parachain auction and was onboarded as Kusama's first non-common-good parachain and with over 200,000 KSM in the crowdloan. Moreover, Moonriver and Shiden managed to secure some of the subsequent slots.
Polkadot’s auctions are expected to commence soon after the successful end of Kusama’s auctions. After that, the system’s launch will officially be completed in accordance with its original vision and design with parachains live on the main network.
Future upgrades, including parathreads, will be enabled via governance after the code has been fully developed and audited. What will be the future of the Polkadot ecosystem from that point on will be up to its community.