PrimeXBT Lead Analyst Kim Chua: Dot and KSM Ready To Surge As Parachain Slot Auctions Nears
Polkadot (DOT), the blockchain much touted as the ETH-killer, will finally be on its way to hosting projects on its blockchain in the coming three months. While the exact timing has not been fixed, it is estimated to begin once its canary chain, Kusama (KSM), completes its fifth parachain deployment.
What exactly is DOT, KSM, the parachain slot auction and why will the slot auction be positive for the price of DOT and KSM?
DOT is the native token for the Polkadot blockchain with smart contract capability that uses a new proof-of-stake consensus mechanism that is vastly different from the other proof-of-stake blockchains out there. DOT comprises of many parallel-running individual chains called the parachains, which each supports a decentralized application (dApps). On other blockchains like ETH, all the dApps run on the ETH main blockchain. On DOT, however, each dApp is built and run on its own parachain, which is then connected to the main backbone relay chain. The idea of this is that each parachain will thus be carrying a lot less load and thus, will be able to move much faster and cost a lot less to interact with.
Kusama (KSM) is the canary or test-chain for Polkadot (DOT). The native token for Kusama blockchain is the KSM token. KSM blockchain is identical to DOT blockchain and its chief purpose is to be used as a practice chain for testing upgrades before those upgrades are deployed onto the DOT chain. KSM is an independent blockchain on its own that is able to host projects as well, with the only difference from DOT being that KSM’s code is not audited and all non-transaction-related processes are four times faster on KSM than on DOT. KSM however, may be less secure than DOT.
To be able to build and run their applications on DOT/KSM, project teams need to auction for a parachain slot from DOT/KSM. One cannot simply just build on top of DOT/KSM without getting a slot on a parachain. For now, there will only be a total of around 200 parachains available, with 100 on DOT and 100 on KSM. Competition is stiff since there are already around 440 projects looking to build on DOT alone and these projects will be required to bid for a slot. The higher the number of DOT/KSM tokens a contender bids, the greater his chance of winning the auction for a slot. Hence, 440 projects vying for 100 slots on DOT (200 slots including KSM) may result in a bidding war which could drive up the number of DOT/KSM required to win at the slot auctions.
In contrast to regular auctions, the winner of a parachain slot auction is determined based on a snapshot that is taken at a random time shortly before the auction ends. Whichever project put down the most DOT/KSM when the snapshot was taken wins the slot. This random timestamp is to prevent projects from bidding up the price shortly before the auction ends. One auction has a duration of two weeks. During an auction period, the DOT/KSM tokens projects put up for bidding will be locked.
As a result, the demand for DOT/KSM tokens will increase in the lead up to the slot auctions as projects prepare to buy up or borrow DOT/KSM tokens to win the bidding war. Once slot auction dates are announced, expect prices of DOT and KSM to soar. Both tokens are already outperforming the market with double digit gains as market participants start to acquire the tokens in preparation for the slot auctions.
The project that wins the slot auction will be required to lock up their DOT/KSM in a typical lease period of up to a few years depending on how long the project wants to lease it, and will be paid a staking yield for the lease period. The minimum lease period for DOT has not yet been revealed, but the minimum lease period for a parachain on KSM is 6 weeks. I expect the minimum lease period on DOT to be longer than that on KSM.
The DOT/KSM that a potential project uses to participate in a parachain slot auction can come from their own pocket or it can be crowdfunded from their communities using something called a parachain loan offering.
Parachain loan offerings or PLOs work similarly to initial coin offerings or ICOs. Basically, you give your DOT/KSM to the project for them to use in the parachain slot auction and they will give you some of their tokens in return.
Regardless of whether a project will borrow, crowdfund or use their own funds to acquire DOT/KSM in order to bid for a parachain slot, the end result will be a rise in demand for the tokens once an auction is near.
Since the tokens will be locked up during the two-week auction period and subsequently during leasing period, the supply of the tokens will be reduced as more auctions take place.
Hence, with an increase in demand and a reduction in supply, the parachain slot auctions become a powerful influence on the price of DOT/KSM tokens, being able to drive the price of the tokens up as more and more auction slots are being introduced and auctioned.
The KSM team has indicated that they are ready to roll and may announce their slot auction anytime from now. Keep a lookout for the announcement of the KSM slot auction, once that is announced, expect the price of both KSM and DOT to rally, and the rallies could intensify in the event of fierce bidding wars happening in the first few auctions for KSM since DOT slot auctions are anticipated to start within 10 weeks after KSM slot auctions begin.
About Kim Chua, PrimeXBT Market Analyst:
Kim Chua is an institutional trading specialist with a track record of success that extends across leading banks including Deutsche Bank, China Merchants Bank, and more. Chua later launched a hedge fund that consistently achieved triple-digit returns for seven years. Chua is also an educator at heart who developed her own proprietary trading curriculum to pass her knowledge down to a new generation of analysts. Kim Chua actively follows both traditional and cryptocurrency markets closely and is eager to find future investment and trading opportunities as the two vastly different asset classes begin to converge.