Parachain – what is it and how do they work?

Each blockchain has its own characteristics, advantages and useful options. But they also have some disadvantages. For example, functional limitations, not flexible enough or too slow solutions.

As a result, participants cannot change the rules, use tools from different blockchains and interact as they see fit.

All these problems can be solved thanks to parachains, crowdloans, crosschains and other innovative technologies. Projects such as Polkadot, Cosmos and BTC Relay can be considered leaders in the development of such solutions.

Polkadot structure and parachains

The Polkadot project is a network protocol that has four main components:

  1. The main network (Relay Chain) is a kind of «core» that provides general security, consensus and cross-platform interaction. With this technology, other projects in the Polkadot ecosystem can focus as much as possible on developing their products.
  2. Parachains are full-fledged and independent blockchains that can have their own tokens and tools for solving specific problems. They will be created by third-party developers and connected to the general Polkadot network.
  3. Parathreads are parallel blockchains that are similar in technology to parachains. But they differ in that they can be rented instantly and for any period of time.
  4. Bridges are also similar to parachains. But their main (and in fact only) task is to connect the Polkadot ecosystem with third-party blockchains. For example, Bitcoin, Ethereum, Binance Chain and others.

Ethereum and Polkadot

The DOT token is used as the internal currency of the project, and the stability of the ecosystem is ensured by validators whose task is to add and check blocks in different parachains. The validators themselves are also under the control of reliable algorithms, thanks to which the security of the entire network is guaranteed.

What are parachain auctions?

The Polkadot network will have a limited number of parachain slots – only about 100 pieces over the next few years. At the same time, there are much more projects wishing to borrow them. Therefore, the team plans to conduct parachain auctions (crowdloans). That is, a company that wants to launch its own parachain will have to rent a slot through an auction.

Parachain auctions

But most of the developers launching their parachains are startups that do not always have enough resources to rent the required slot. This is where the Initial Parachain Offering comes in.

Anyone can participate in an IPO auction, and for this you need to follow just a few simple steps:

  • buy Polkadot on the Binance exchange;
  • choose a promising project that launches its own parachain and takes part in the auction;
  • send DOT tokens to a dedicated address as payment for the lease of a parachain slot.

If the project wins the auction, then all tokens of users who voted for it will be blocked for the entire lease term of the parachain slot.

Why are parachain auctions needed?

Thanks to parachain auctions, DOT token holders can vote on their favorite projects, and the development team, in turn, receives the necessary funds to rent a slot on the Relay Chain main network.

Upon completion of such auctions, one of two results can be obtained:

  • If the team cannot collect enough contributions, all tokens will be returned to the participants after the auction, and the parachain will not be launched in the Polkadot system.
  • If the project collects enough funds to win the auction, then the DOT tokens will be returned to the contributors only at the end of the parachain slot rental period.

Such an auction system provides maximum security for investors, since they will receive their tokens back anyway. And if the project for which they voted turns out to be quite successful, then along with their DOTs, investors will also receive valuable parachain tokens (as a reward for providing a temporary loan to developers).

Thus, it is a great option for those users who want to start investing in cryptocurrency, but are afraid of losing money. After all, each participant in the parachain auction is practically devoid of the risk of losing the invested assets.

This is also beneficial for the creators of parachains, because through the auction they get an effective and fair way to attract the community, as well as distribute their own tokens, even before they launch their project in the Polkadot system.

How to become a parachain and participate in the auction?

The development environment in the Polkadot project is called Substrate. It has a wide range of functions and makes it very easy to create blockchains for different purposes. Accordingly, the first step is the development of the parachain itself.

Next, the team and the community must choose one of two strategies for participating in the auction:

  • Using an individual account when only trusted persons place bids in the parachain auction.
  • Crowdloan (collective auction) – in this case, anyone can vote for the parachain.

In the second option, the team can stimulate the auction participants in various ways – for example, by distributing a native token or by granting special control rights in the parachain.

What happens if the project doesn’t win the parachain auction?

Of course, not every parachain developer will be able to raise enough funds to rent a slot. In this case, the team can follow one of the following paths:

  1. Return DOT tokens back to investors. This will happen automatically if parachain loses the auction.
  2. Take part in one of the following auctions for parachain. It is planned that they will be held on a regular basis.
  3. Start using parathread. This is the same as parachain, but on a paid basis. That is, instead of blocking DOT tokens for the lease period, the team pays for access to the Polkadot system functions with them.

In general, the third option can be considered optimal, because the developers will be able to show all the advantages of their project, and if they receive a sufficient response from the community, they will re-participate in the parachain auction.

Other solutions

In addition to parachains and auctions from Polkadot, there are other projects on the market that solve certain problems of decentralized technologies.

Cosmos network

First of all, this project is designed to bring different blockchains together. The Cosmos network itself was originally created to address scalability and usability issues (that is, usability). In addition, the system removes restrictions for developers that are associated with the use of one network.

Cosmos cryptocurrency (ATOM)

Cosmos Network has a number of unique products that allow you to solve these problems:

  1. Tendermint. It is a technology that is responsible for networking and consensus. It allows developers to focus on building their own applications without worrying about security.
  2. Application BlockChain Interface (ABCI). A special interface that allows you to create applications in any language in conjunction with Tendermint.
  3. SDK. It is a framework that allows you to develop decentralized applications using built-in modules, that is, ready-made sets of tools for specific tasks.

Here’s what the Cosmos Network team said:

«By combining these technologies, application development can be reduced from a few years to several weeks.»

The products created in this way can be considered a kind of analogue of Polkadot parachains.

And in the future, it is planned to implement the ability to create applications not only within the Cosmos ecosystem, but also based on other consensus that use ABCI. Basically, the team creates a one-stop solution that serves to facilitate the development and launch of new decentralized applications.

Another important technology that differentiates Cosmos from other projects is the interblock communication (IBC) protocol. It allows different blockchains within the Cosmos ecosystem to interact with each other, as well as with external networks. It uses a hub and zone model where independent chains can send coins to other applications by routing through the hub.

In practice, it looks like this:

  1. The user wants to send a token from the «A» blockchain to the «B» blockchain.
  2. At the moment of creating a transaction, the token from the «A» blockchain is blocked in the hub.
  3. In the B blockchain, a mirror of the token from the A blockchain is created, which can freely move in it.
  4. When any user wants to send these tokens back to block A, the mirror will be destroyed. In this case, the tokens that were frozen in the second step will go to the account specified by the user.

Unlike Polkadot, where a parachain solution is just being developed, the Cosmos Network platform is already up and running. It has its own ATOM token, and its infrastructure is used by such well-known projects as Binance Coin, Crypto.com, Terra, Kava.io and others. More than 250 decentralized applications are already running on the basis of this system, including Binance Chain and Binance Smart Chain.

ATOM and other tokens are already traded on exchanges, and you can open deals with them. Those who have a desire to purchase these assets should read the instructions on how to buy cryptocurrency on Binance.

BTC Relay

BTC Relay is a joint product from two professional development teams – ConsenSys and the Ethereum Foundation. This decision was the first major step towards «linking» blockchains.

The project itself appeared several years before the idea of ​​parachain auctions from Polkadot – in 2016. That is, even then, the community felt the problems associated with the scalability and interaction of different blockchains.

From a technical point of view, BTC Relay is a smart contract through which Ethereum users can make transactions in bitcoins. That is, it is a cross-chain bridge that is used to confirm BTC payments on the Ethereum blockchain.

One thought on “Parachain – what is it and how do they work?

  1. Bridges are also similar to parachains. But their main (and in fact only) task is to connect the Polkadot ecosystem with third-party blockchains. For example, Bitcoin, Ethereum, Binance Chain and others.

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