Polkadot has brought a breath of fresh air to the cryptocurrency scene with its parachain auctions model. On Polkadot, users can support upcoming blockchain projects and earn some tokens in return. The best part of this model is that users don’t have to spend their crypto to earn token rewards – instead, the crypto is loaned out for a set time period, and then automatically returned to the user.
Help Enjin bring NFTs to Polkadot and support the Metaverse: Stake DOT in the Efinity Crowdloan and get rewarded with EFI. Contribute Now ?
Parachain auctions and crowdloans on Polkadot
Here’s a quick overview of how the process works. The Polkadot network revolves around a Relay Chain, which coordinates security, the consensus process, and interoperability with other blockchains. Users stake their DOT tokens to help secure the Relay Chain.
This is where parachains come in - parachains are customizable blockchains that connect to the Relay Chain, and benefit from its security and interoperability. Developers can create custom blockchains that are specialized for particular use cases, and connect them to Polkadot’s Relay Chain to achieve a high degree of decentralization and security.
Polkadot cannot support an unlimited number of parachains. Projects that want to connect their blockchains as parachains on the Polkadot network have to earn their spot by winning a parachain slot auction. To do so, they must submit a bid in the form of DOT, the native asset of the Polkadot network.
In order to level the playing field and give projects that might not have huge amounts of capital on hand a chance to win a slot, Polkadot implements “crowdloans”. Through crowdloans, supporters of a project can temporarily loan out their DOT tokens, which the project then uses to compete in a parachain slot auction. In exchange for the support, projects will typically give some of their own tokens to users that contribute DOT to the crowdloan. For example, if you contribute DOT to Efinity’s crowdloan and they win a parachain slot auction, you would receive some of Efinity’s EFI tokens in return.
Parachain auctions and crowdloans are used by two blockchain platforms: Polkadot and Kusama. The two have a lot of things in common, and this is also evident in how parachain auctions and crowdloans are conducted on them. In this article, we’ll be focusing on Polkadot, and showing you a few different ways you can participate in parachain auctions on the platform. We will be using the Efinity project as an example.
Before we get started, we should highlight a few important things you have to know before you participate in parachain auctions on Polkadot:
- If the project you’re backing wins a parachain auction, your DOT will be locked for a long period of time (96 weeks). Your DOT will be returned to you automatically after the project’s parachain lease expires.
- If the project you’re backing wins a parachain auction, you will receive some of their tokens in return. Check with the project’s official resources to see how many tokens you can get for each DOT you contribute to the crowdloan.
- There is no guarantee that the tokens you receive as a reward will perform well in the market.
- If the project doesn’t win a parachain auction, you will receive your DOT back after the auction concludes.
Option 1: Use a cryptocurrency exchange that supports parachain auctions
One of the simpler ways you can participate in a parachain auction is by using a cryptocurrency exchange that supports this functionality. This includes some major exchanges like Binance, Kraken, OKEx, Huobi, KuCoin and others.
In our example, we’ll be taking a quick look at how you can participate in a Polkadot parachain auction on Binance. If you’re from the United States, there’s alternative exchanges that you can use such as KuCoin and Kraken.
If you don’t already have a Binance account, you’ll have to create one before you can participate in a parachain auction on the exchange. You will also need to deposit some DOT to Binance or buy some DOT on the exchange.
Head over to the “Finance” section on Binance’s navigation bar and select Binance Earn.
Then, select the “DOT Slot Auction” option on the Binance Earn page.
Here, you will be able to see all of the Polkadot crowdloans that you can join via Binance. Please note that the list of projects you see might be different than what you see on our screenshot. This will depend on when you’re viewing this article.
Find the project that you’re interested in backing and select “Vote”. In our example, this will be Efinity.
Now, you can enter the amount of DOT that you want to contribute to the chosen project’s crowdloan. Under “Lockup Reward”, you can see how many days your DOT will be locked for if the chosen project wins the auction. If you’re not comfortable with having your DOT locked for this period of time, don’t participate in the auction!
If the project you’re backing doesn’t win an auction, you will receive your DOT back to your Spot Wallet on Binance.
Option 2: Use the Polkadot{.js} wallet
Polkadot.js.org is an online platform that hosts useful tools for the Polkadot ecosystem. This includes a wallet that makes it easy to manage and stake your tokens on the Polkadot blockchain. If you go to polkadot.js.org/apps, you can create your own Polkadot wallet.
For this guide, we’ll assume that you already have a Polkadot wallet. If you don’t have one yet, you can check out this helpful video from Polkadot’s YouTube channel.
Once you have your Polkadot wallet set up, go to the polkadot.js.org/apps/ platform. Then, head over to the “Network” section in the navigation bar and select “Parachains”.
Go to the “Crowdloan” sub-section and you will see the different projects that are raising crowdloans for parachain auctions on Polkadot.
Find the project that you want to back with your DOT, and select the “Contribute” option.
Here, you will be able to select the wallet that you want to use for your contribution. Choose the appropriate wallet and the amount of DOT that you want to contribute to the crowdloan. The amount of DOT has to be higher than the minimum contribution allowed (5 DOT in our example). After you’re done, click the “Contribute” button.
Now, you will have to authorize your transaction. Double-check that all the parameters are correct. If everything looks good to go, click “Sign and Submit”.
Option 3: Use the Parallel Finance platform
You can also use the Parallel Finance platform to back your favorite Polkadot parachain project. For this method, you will need to have the Polkadot{.js} extension installed in your web browser. If you want to learn how to get started with this extension, check out the video that we’ve already featured above. The extension will help you manage your Polkadot accounts and connect to applications that use the Polkadot network.
After you have your Polkadot{.js} extension set up, go to Parallel Finance’s crowdloans section. You will be presented with a list of projects that you can contribute to via the Parallel Finance platform. Find the project that you want to contribute to and click on it.
Now, we can choose how much DOT we want to contribute to the project. The platform will give us an estimate of the rewards we will receive for contributing the amount we selected. Contributing via Parallel Finance can be a good option because you can also earn some PARA tokens in addition to the standard tokens that you would receive through the crowdloan (Efinity’s EFI tokens in our example).
Once that’s done, click “Connect Wallet to Contribute”. You will then be prompted by your Polkadot{.js} browser extension to authorize the transaction.
Please note that when you’re contributing DOT through Parallel Finance, you will have to claim your token rewards through the Parallel Finance platform. We recommend that you read through Parallel Finance’s FAQ for their Auction Loan platform if you have any questions about how their system functions.
The bottom line
Parachain auctions on Polkadot offer an exciting opportunity to earn tokens from emerging blockchain projects without having to spend your crypto. Still, the lockup periods are quite long, so you should definitely consider whether you’re OK with having your DOT locked for an extended period of time. If that is not a problem for you, parachain auctions can be a lot more attractive than traditional ways of investing in projects like ICOs and IEOs. Hopefully, this article helped you select the best method for participating in parachain auctions on Polkadot!
