What is a Parachain? Parachains Explained

Parachains are L1 Chains in the Polkadot and Kusama Networks

Parachains are Layer-1 (L1) blockchains within the Polkadot or Kusama networks. These chains can be easily customized and feed into the core blockchain, known as the Relay Chain. The Relay Chain provides shared security consensus and settles transactions for each parachain. Parachains can be public or private and have their tokens and governance. Therefore, each parachain can have different block times, transaction fees, staking rewards, and other individualized features. Sometimes, these chains are utilized for multiple dApps, but other times, they’re used only for a single dApp, making them a form of “appchain.”

Since parachains utilize the Relay Chain for consensus, they do not need their own validator nodes. Instead, shared notes called collator nodes are used. These collator nodes store a full history for each parachain and aggregate parachain transaction data into blocks. This data is then added to the Relay Chain. 

Parachain users are selected through an auction process. Currently, there is a limit of 100 parachains on Polkadot and Kusama, so projects or groups that want to utilize a parachain must first win an auction to “lease” the parachain for a specified period. 

What are Polkadot and Kusama? 

Polkadot was founded in 2016 by Ethereum’s former CTO, Gavin Wood. It is a blockchain protocol intended to facilitate communication between blockchains. As previously discussed, Polkadot consists of a main Relay Chain and multiple parachains. Polkadot utilizes the Polkadot (DOT) token for both governance and staking. 

In contrast, Kusama is a “sister chain” of Polkadot, utilized for testing and experimentation. Many dApps launch on Kusama, using it as a testnet, before launching on Polkadot. While Kusama shares most of the design features of Polkadot, it gives developers more flexibility and operates much faster than Polkadot. It’s also easier and less expensive to win a parachain auction on Kusama, giving it a lower barrier to entry. Kusama also has lower staking requirements for validators, making it easier for individuals and smaller groups to participate in Kusama’s governance. 

Parachain Interoperability, Explained 

One of the main benefits of parachains is their high level of interoperability. Unlike moving assets from two distinct blockchains, such as moving an asset like Bitcoin to the Ethereum blockchain, which would require a bridge, Polkadot allows relatively seamless movement of assets between parachains. Any parachain on Polkadot or Kusama can move assets to another parachain using the blockchain’s native Cross-Consensus Communication (XCM) language. 

However, bridges are still required when moving assets from a Polkadot or Kusama parachain to an external blockchain, like Bitcoin, Ethereum, or Solana. 

In addition, another protocol called Cross-Chain Message Passing (XCMP) also allows for easy communication between parachains. This can allow for hybrid DApp scenarios where projects build smart contracts on one parachain, reference storage on another parachain, and reference assets on yet another parachain.

Parachain Auctions, Explained

As we just mentioned, parachains on Polkadot and Kusama are selected for “lease” via auction, which is intended to ensure that only the best projects can utilize the scarce resources on these networks. On Polkadot, these leases last 96 weeks, while Kusama leases only last 48 weeks. 

After the lease period, the chain operators must bid again to re-win the lease; if they don’t, the chain will go to another project. In general, this means that the parachains with the most active users and most functional tokenomics will retain their parachain. In contrast, chains with fewer users and less viable tokenomics will see their slots go to another project. 

Crowdloans for Parachain Auctions, Explained

Before diving further into how parachain auction works, it’s essential to realize that, since many projects can’t afford the cost of leasing a parachain upfront, they use a crowdfunding method called crowdloans. 

Crowdloans allow members of a community that wants to bid for a parachain to temporarily lock their tokens (DOT tokens for Polkadot or KSM tokens for Kusama) into a separate crowdloan module hosted on the Relay Chain. This module is not controlled by the project to ensure that the project’s founders don’t simply run away with the tokens (i.e., engage in a “rug pull.”)

Before the auction starts, each aspiring parachain is given a campaign ID, and the tokens locked in the crowdloan module will bid for the parachain slot during the auction. This bidding continues until one of the aspiring parachains wins the auctions. The DOT or KSM tokens are returned to their original owners if the slot isn’t won.

If a project wins a parachain auction, the DOT or KSM tokens stay locked on the Relay Chain until the lease ends, after which the tokens are returned to the original contributors. In many cases, parachains do reward their DOT or KSM contributors with project tokens. Still, these are at the discretion of the project itself and are not directly related to the crowdloan and/or auction process. 

At the end of the leasing period, the parachain must run another successful crowdloan or fund the auction themselves. 

More About The Parachain Auction Process 

Parachain auctions utilize a “candle auction” format. This is an open auction process with no set end time. This prevents “sniping” or bidding at the last minute to slightly overbid competitors and win an auction. Since the “candle” can go out at any time, this encourages projects to put their best bids first instead of waiting until the last minute. This entire process is permissionless and automated via the Relay Chainl. 

Private Bids vs. Crowdloans 

While we’ve discussed crowdloans as a popular option for many projects seeking to win a parachain auction, private bids are another method to win a parachain auction. In a private bid, contributors need to trust the project’s founders to raise enough tokens and, more importantly, to remain honest and return the tokens to the contributors if the auction is unsuccessful or the leasing period is over. 

The other main difference between private bids and crowdloans is that private bids are typically offered at a set amount. In contrast, crowdloan bid amounts are updated regularly as more community members contribute tokens to the project’s crowdloan module. Also, crowdloan module bids occur automatically with the entirety of tokens in the project’s crowdloan module, while pirate bidders can bid at any time for any amount. 

While private bids and crowdloans cannot technically be combined, a project’s founder or a large investor can contribute a significant amount of their tokens to a crowdloan to give them a higher chance of winning the auction. 

Private Bids vs. Crowdloans for Lease Renewal 

One benefit of private bids compared to crowdloans is that, for crowdloans, all tokens in a crowdloan module are automatically returned after the parachain lease ends  96 weeks on Polkadot and 48 weeks maximum on Kusama). Since the crowd-loaned tokens can’t be rolled over, the project must raise new funds. They can do this through self-financing from the project’s Treasury, running another crowdloan, or finding other sources of tokens to pay for the lease. 

In contrast, projects that use a private bid to obtain their slot can use their existing deposit to renew their lease. However, they may need to add additional funds to their bid if the market price of the parachain slot is now higher due to increased demand. 

Parachain Alternatives for dApp Developers 

Parachains can be great for deploying and developing a single dApp, but there are various other appchain options out there. Some of these options include: 

• Ethereum L3s: Ethereum L3s can be built on top of existing Ethereum L2s, like Arbitrum or Optimism. These chains benefit from Ethereum’s security, but that security is watered down somewhat since they also need to rely on the security of the L2 chain (meaning there are two potential points of failure).
• Polygon Supernets: Polygon is a popular Layer-2 blockchain. However, it’s technically a “sidechain” rather than a true Layer-2. The core difference between sidechains and L2s is that L2s inherit the security of the main Ethereum itself, while sidechains rely on their security. Polygon developers can create appchains, known as Supernets, but these chains still use Ethereum to process transactions.
• Cosmos Zones: The Cosmos blockchain consists of multiple independent blockchains called “zones,” each of which can host one or more dApps. Since they are interconnected via a hub-and-spoke model and use Cosmos’s Interblockchain Communication (IBC) protocol, each zone can transfer tokens and data to other zones. 

Supra Containers as an Alternative to Parachains and Appchains 

While parachains and other appchains can effectively give developers more flexibility and scalability when developing their dApps, they’re not the only solution. Specifically, Supra, a new Layer-1 blockchain, has developed Containers, a way for developers to have their own isolated blockspace on Supra’s L1. 

Supra Containers allow for the use of any gas token, allow customizable fees, complete governance control, require no new validators, and have zero network congestion, making them a potentially superior alternative for all kinds of dApp developers. 

To learn more about Supra Containers, click here to read our whitepaper or watch an in-depth video that explains the core elements of Containers and their benefits for next-gen dApp developers who want lower fees, higher speed, and, most importantly, the flexibility and independence to do things their way.