The practice of new projects to raise funds through DOT or KSM tokens for slots on Kusama or Polkadot network.
In the crypto world, most projects use Initial Coin Offering (ICO) as their funding method during their initial stages. In this scenario, investors make decisions based on the credibility of the team, whitepaper, and the community. The problem with the ICOs model is that it does not offer any guarantee of success. Polkadot has fixed this issue by offering the feature of crowdloans.
Crowdloans are a part of Polkadot's substrate framework and allow the development of parachains to generate $DOT and earn a spot in the parachain auctions.
Before any parachain slot auction takes place, there is a specific timeline dedicated to the crowdloan. This is where teams can borrow $DOT from members of the community for auctions. As a user, you do not give your $DOT to the team, instead, you give them to the relay chain for the project.
After gathering funds, the project submits a bid that uses the $DOT received from the crowdloan. The investors' $DOT are locked for the term determined by the parachain lease (usually six months to a maximum of two years) if the project gets the parachain slot. The $DOTs are returned to the investors at the conclusion of the lease. The team never gets possession of the investors' $DOTs/$KSMs in this process.
For ICOs, the concept of crowdloan is a game-changer. Investors must be rewarded for bonding tokens on behalf of the teams. The project's native coin has proven to be the most popular reward so far. As a result, investors can lock their $DOT in a 2-year parachain lease on behalf of Acala and earn $ACA tokens.
Projects usually have no motivation to seek a crowdloan unless they are certain that they can harness it to generate an economic return because the tokens used for crowdloaning parachain auctions are never in their possession.
Unlike the traditional way of exchanging tokens for new project tokens, the crowdloan technique protects investors’ money while providing them an opportunity to earn additional tokens on a potential project.
No matter what happens to the project, investors can always recover the $DOTs after the parachain lease expires. As a result, investors may join in any crowdloan with confidence, knowing that their primary tokens are safe and not dependent on the success of the project.
Crowdloans are a fascinating new addition to the blockchain sector that assists teams in securing parachain spaces. Also, the platform ensures that the invested tokens are protected as the projects never get access to them. This measure also helps to screen the quality of teams seeking crowdloans.
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