Polkadot has now clocked up a year of live mainnet operations, but this summer will mark one of the most significant milestones on its roadmap to date. The Polkadot parachain slot auctions will mark the first time that projects will be able to connect to Polkadot’s central Relay chain, completing its journey to a live mainnet hosting chains that support decentralized applications.
Before that happens, Polkadot will set a precedent for what’s to come as its experimental sibling network, Kusama, tests out the process in a live production environment.
So, this means that the full token utility of the DOT and KSM tokens will finally be live, enabling the economic model underpinning the tokens to play out. So whether you’re a long-time DOT holder or a relative newcomer seeking to learn more, this guide explains everything you need to know about DOT tokenomics.
Within the Polkadot ecosystem, DOT holders can do the following with their tokens:
- Participate in the governance of the Polkadot network
- Participate in staking either to become a validator or to nominate validators
- Bond tokens to connect a chain to the Polkadot Relay chain as a parachain
DOT token holders have certain voting entitlements within the governance framework of the platform, similar to how shareholders can vote on matters regarding a listed company. Decisions that fall under governance may involve fees, the addition or removal of parachains, or technical issues, such as upgrades or improvements.
Token holders may also use their DOT tokens to make proposals on which the rest of the network participants can vote. Submissions are then entered into the standard Polkadot governance mechanism, which is designed to ensure that only proposals with a majority of the stake behind them can pass successfully.
Polkadot operates under a variation of proof-of-stake called Nominated Proof of Stake (NPoS.) Under the NPoS consensus rules, a large but fixed number of validators will participate in block production, while token holders can stake their tokens to nominate a validator.
Polkadot is one of the largest networks by staked value and offers some of the highest rewards, averaging around 13%, which is generous considering that participation is a relatively passive activity.
Bonding for Parachains
Polkadot and Kusama can support a limited number of parachains, at least while the platforms are still relatively young. Parachain slots are awarded based on a project successfully bidding for one at a parachain slot auction. Slot winners only lease their slots for a fixed period; they will have to rebid at the time of renewal. The value of the successful bid in DOT is bonded for the duration of the lease.
To give themselves the best chance of succeeding in a parachain slot auction and leverage their community’s support, projects can engage in parachain crowd loans.
Crowdloans are a new feature offering an interesting proposition for token investors, as they create a competitive environment in which projects have to offer incentives for participation. In general, projects will offer rewards in their own tokens, perhaps on a vesting schedule, to those willing to bond their DOT tokens in a crowd loan for the duration of the lease.
Bonding DOT in crowd loans also offers a high-security guarantee, as the funds are held transparently on the Polkadot Relay chain, meaning that there’s no opportunity for founders to execute any exit scams with the funds. If the project successfully gains a slot at a parachain auction, the DOTs are bonded until the end of the lease. If the bid at auction fails, the DOTs are returned to the originator’s wallet.
For the projects themselves, crowd loans also offer several advantages, the most obvious one being the increased likelihood of winning a slot at auction due to a higher bid. However, they also offer the opportunity to…