Crowdloan

In the realm of cryptocurrency, numerous projects rely on Initial Coin Offerings (ICOs) as their main funding method in the early stages. However, ICOs do not guarantee success, as investors make decisions based on factors like the team’s credibility, whitepaper, and community support. To address this concern, Polkadot has introduced a solution called crowdloans.

Crowdloans play a crucial role in Polkadot’s substrate framework and facilitate the development of parachains. But what exactly are crowdloans? Let’s take a closer look.

Parachains are specialized blockchains that operate in parallel to the Polkadot relay chain. These parachains generate their own native tokens and compete in parachain auctions to secure a spot on the network. However, participating in these auctions requires a significant amount of capital, as winning bids often involve staking a large number of tokens.

Before the auction, there is a specific timeline dedicated to the crowdloan phase. During this phase, teams can borrow tokens from community members to participate in the auction. However, instead of directly giving their tokens to the team, users contribute them to the relay chain for the project.

Once the funds are gathered, the project submits a bid using the tokens received from the crowdloan. If the project wins the parachain slot, the investors’ tokens are locked for the duration of the parachain lease, which typically ranges from six months to two years. At the end of the lease, the tokens are returned to the investors.

It’s important to note that the team never gains possession of the investors’ tokens throughout this process. This ensures that investors’ funds are protected while providing them with an opportunity to earn additional tokens from potential projects.

Crowdloans have revolutionized the concept of ICOs by introducing a reward system for investors who bond tokens on behalf of the teams. The most common reward is the project’s native coin. For instance, investors can lock their tokens in a 2-year parachain lease on behalf of Acala and earn Acala (ACA) tokens.

Projects have a strong incentive to seek crowdloans only if they can generate an economic return, as the tokens used for crowdloaning parachain auctions are never in their possession. This ensures that investors’ funds are protected while providing them with an opportunity to earn additional tokens from potential projects.

Investors can always recover their tokens after the parachain lease expires, regardless of the project’s outcome. This gives investors confidence to participate in any crowdloan, knowing that their primary tokens are safe and not dependent on the project’s success.

Crowdloans are an exciting addition to the blockchain sector, as they help teams secure parachain spaces while safeguarding investors’ tokens. This measure also serves as a quality screening process for teams seeking crowdloans.

Overall, crowdloans are a win-win situation for both projects and investors. Projects can secure the necessary capital for parachain auctions without relying solely on ICOs, while investors have the opportunity to support promising projects and earn additional tokens. This new funding model promotes a more inclusive and decentralized approach to fundraising in the crypto world.