Polkadot (DOT), the much touted blockchain as the ETH-killer, will finally be on track to host projects on its blockchain in the next three months. Although the exact timing has not been set, it is estimated to start as soon as its canary chain, Kusama (KSM), completes its fifth parachain release.
DOT is the native token for the Polkadot blockchain with smart contract capability that uses a new test betting consensus engine that is very different from the other test betting blockchains available. DOT is made up of many individual running parallel chains called parachains, each of which supports a decentralized application (dApp). On other blockchains such as ETH, all dApps run on the main blockchain of ETH. However, in DOT, each dApp is built and run on its own parachain, which is then connected to the main backbone relay chain. The idea is that each chain guard will carry a lot less charge and therefore will be able to move much faster and cost a lot less to interact.
Kusama (KSM) is the canary or test chain for Polkadot (DOT). The native token for the Kusama blockchain is the KSM token. The KSM blockchain is identical to the DOT blockchain and its main purpose is to be used as a chain of practice to test updates before those updates are deployed to the DOT chain. KSM is a standalone blockchain that can also host projects, with the only difference from DOT that the KSM code is unverified and all non-transaction related processes are four times faster in KSM than in DOT. KSM, however, may be less secure than DOT.
To build and run their applications in DOT / KSM, project teams must auction a DOT / KSM parachain slot. You can't just build on DOT / KSM without getting a slot in a chain guard. For now, there will only be a total of around 200 chain guards available, 100 of them in DOT and 100 in KSM. Competition is fierce as there are already around 440 projects looking to build on DOT alone and these projects will be needed to compete for a slot. The greater the number of DOT / KSM tokens offered by a competitor, the greater the chance of winning the auction for a slot. Therefore, 440 projects competing for 100 DOT slots (200 slots including KSM) could lead to a bidding war that could increase the number of DOT / KSMs needed to win slot auctions.
Unlike regular auctions, the winner of a parachain slot auction is determined based on a snapshot taken at a random moment just before the auction ends. Any project that inserts multiple DOTs / KSMs when the snapshot was taken gains space. This random timestamp prevents projects from raising the price just before the auction ends. An auction lasts two weeks. During an auction period, DOT / KSM token projects placed for bidding will be blocked. As a result, demand for DOT / KSM tokens will increase at the start of slot auctions as projects prepare to buy or borrow DOT / KSM tokens to win the bidding war.
Once slot auction dates are announced, DOT and KSM prices are expected to skyrocket. Both tokens are already outpacing the market with double-digit gains as market participants start buying the tokens in preparation for the slot auctions. The project that wins the slot auction must lock its DOT / KSM into a typical lease period of up to a few years, depending on how long the project wants to lease it, and will receive a share income for the lease period.
The minimum rental period for DOT has not yet been revealed, but the minimum rental period for a parachain in KSM is 6 weeks. I expect the minimum rental period in DOT to be longer than in KSM. DOT / KSM, which is a potential project used to participate in a parachain slot auction, can go out of your pocket or can be funded by your communities using something called a parachain loan offer. Parachain or PLO loan offers work similarly to initial currency offers or ICOs.
Basically, you give your DOT / KSM to the project for them to use in the parachain slot auction and they will give some of their tokens in exchange. Whether a project borrows, finances collectively, or uses its own funds to acquire DOT / KSM in order to bid for a parachain slot, the end result will be an increase in token demand as an auction approaches. As the tokens will be blocked during the two-week auction period and thereafter during the lease period, the supply of tokens will be reduced as more auctions take place.
Therefore, with increased demand and reduced supply, parachain slot auctions become a powerful influence on the price of DOT / KSM tokens and can increase the price of tokens as more and more slots are auctioned. The KSM team has indicated that they are ready to go and can announce their slot auction anytime from now on. Keep an eye out for the announcement of the KSM Slots auction, once it is announced, expect the price of KSM and DOT to go up and the rallies could escalate in the event of wars at the first KSM auctions, once the DOT Slots auctions are due within 10 weeks of the start of the KSM slot auctions.
About Kim Chua, Principal Market Analyst at PrimeXBT:
Kim Chua is an institutional trading specialist with a successful track record spanning major banks including Deutsche Bank, China Merchants Bank, and others. Over time, Chua has launched a hedge fund that has consistently produced triple-digit returns for seven years.
Chua is also an educator at heart who has developed her trading curriculum to pass her knowledge on to a new generation of analysts.
Kim Chua closely follows traditional and cryptocurrency markets and is eager to find future investment and trading opportunities as the two very different asset classes begin to converge.