Chain dissection. Polkadot

Death of Parachain auctions

3 min readNov 15, 2023

The first-of-its-kind Layer 0 blockchain, known for its parachains. Let’s understand what it is and where it is going. You’ll know:

– Features of the Polkadot ecosystem

– DOT tokenomics

– Core rental in Polkadot 2.0

– Why it may succeed

Structure and specifics

Polkadot is a distributed blockchain platform, hosting sovereign blockchains called parachains. It’s built using Substrate and operates on a Nominated Proof-of-Stake (NPoS) consensus mechanism.

Relay Chain is the core of the Polkadot ecosystem, functioning as the main blockchain of the network. It validates and secures parachains.
Substrate is the underlying blockchain framework and software development kit (SDK) that is used to build the Polkadot Relay Chain and parachains.
Parachains are Layer 1 blockchains built on top of the Relay Chain. Parachains can be added through Parachain Slot Auctions, where DOT tokens are bid and locked for slot leases.
Cross-Consensus Mechanism (XCM) is an internal cross-chain bridge system that promotes interoperability within the Polkadot ecosystem. Parachains communicate with each other via the XCM.

DOT tokenomics

Standard: a native coin
Purpose: gas, governance, staking, parachain slot acquisition, core rental payments in the future;
Current supply: ~ 1.288 billion
Total supply: 1.378 billion
Maximum supply: ∞
Current Market Cap: ~ $7 billion
Current price: ~ $5,5
All-time low: $2.69 (Aug 20, 2020)
All-time high: $55 (Nov 04, 2021)
Current inflation: fixed rate of 10% per year;

Interesting facts:

– Polkadot uses a weight-based payment model rather than gas metering. Thus, the fee is charged before the transaction is executed; once the fee is paid, the nodes execute the transaction. The model has allowed to gain about $94,000 in Q3, a 3% decrease from the previous quarter.

– There was a 12% quarterly increase in DOT staking in Q3, reaching 49%.

Polkadot 2.0

Gavin Wood recently introduced Polkadot 2.0, which will use a new system for blockchain allocation. The system will be more flexible than the current parachain auction model, allowing developers to buy space on the block as needed, either in bulk or on demand. In doing so, he implicitly recognized the failure of the current parachain auction model.

The main concept driving the evolution of Polkadot 2.0 is centered on the introduction of flexible cores to serve adaptable computing capabilities. Currently, parachains function similarly to fixed CPU cores in the Polkadot supercomputer. The new system will flexibly allocate resources, such as Relay Chain security, responding to real-time needs. This innovation promises to significantly improve the efficiency of the entire ecosystem.

Another major change in Polkadot 2.0 revolves around the Coretime allocation strategy. Coretime refers to the time required for verification and consensus in the Relay Chain blockchain. In the new version, Coretime will be purchased as block time, using both an auction and pay-as-you-use models.

Output

If Polkadot 2.0 is well accepted and gains momentum, it will increase the value of DOT tokens, so it will provide a regular demand for DOT tokens to buy Coretime. Moreover, revenue from Coretime sales will flow to the Polkadot treasury, where DOT token holders will decide via OpenGov how to allocate treasury funds.

Polkadot’s new business direction with its pay-as-you-use policy is very similar to Amazon Web Service. AWS generated $80 billion in revenue in 2022, and that is the niche Polkadot is targeting. Time will tell how successfully it will be able to occupy part of this niche, but this business model is much more viable than a parachain auction.