This is an updated version of the article that was originally published on May 18, 2021. This is designed to be an educational resource and does not discuss the Moonbeam crowdloan or the Moonriver crowdloan. Please refer to the Moonbeam Foundation for this information. For more general information about crowdloans, refer to the Kusama website and the Polkadot wiki.
Let’s dive into what a crowdloan is, why you should care, and what you can expect if you plan to participate in a crowdloan.
What is a Crowdloan?
For Polkadot and Kusama, a crowdloan is a way for new projects to garner the support they need to connect to the Kusama or Polkadot network as a parachain.
The term itself can be misleading, since you’re not actually “loaning” funds to the parachain; rather, your crowdloan contributions (KSM tokens for Kusama project crowdloans and DOT tokens for Polkadot project crowdloans) are locked into either a Kusama or Polkadot sponsored account for a designated period of time (a “lock period”). Typically, during this lock period (or after), you are eligible to receive a reward. This reward is usually in the form of a native token from the project.
While locked, the contributed KSM/DOT tokens can be used to cover the cost of parachain lease (the amount needed to secure a parachain slot on the Kusama or Polkadot networks), but are never directly accessible by the project parachain. If the project is unable to win an auction, the funds are returned to their owner and unlocked.
Crowdloans are just one way for a project to raise KSM/DOT to bid. There are numerous other ways that a project can raise these tokens to bid in the parachain auction including private and public sales, ICOs, IDOs, and more.
In addition, running a crowdloan does not prohibit a project from bidding above the crowdloan cap. In other words, projects may also contribute their own KSM/DOT to a bid in addition to the crowdloan’s KSM/DOT.
The Benefits of a Crowdloan
Crowdloans are an excellent opportunity for people to support a project they are passionate about and earn tokens in that network.
Not every parachain project will complete a crowdloan, and every crowdloan will have slightly different conditions and rewards. No matter the variances in different projects’ crowdloans, all crowdloans must specify the following two things:
- the duration of the crowdloan campaign i.e., how many auctions the crowdloan will have to bid; and
- the rewards cap.
You’ll need to find details about individual crowdloan terms from the teams that are running them. For projects, a crowdloan can be an important mechanism to jump-start their network on either Kusama or Polkadot. Some of the many perks for a parachain project using a crowdloan include:
- An efficient way to distribute tokens to community members who are enthusiastic supporters of your project.
- Ability to cover the cost of a parachain slot without a time- and resource-intensive fundraising process.
- A way to gauge support for a new project or parachain and demonstrating market demand.
Now, with this context, let’s dive into how we expect crowdloans to work for KSM/DOT holders who want to participate.
Where Will I Be Able to Access a Crowdloan?
Based on the projects that have organized crowdloans so far, there are three ways that individuals may access a crowdloan.
- Directly through the Polkadot.js GUI (On-Chain)
Contribute directly on-chain using Polkadot’s GUI (on their website)
- Through a Custom Dashboard (On-Chain)
Contribute through a custom dashboard created by the parachain project.
- Through a Custodian (Off-Chain)
Contribute through a custodian, like Binance or Coinlist. To participate, an individual would simply go to the custodian’s platform and follow their instructions. This type of crowdloan happens off-chain.
Many projects have pursued a combination of these methods, giving individuals the option of using whichever method is easiest for them. Be suspicious of any mechanisms that do not directly contribute to the crowdloan module.
How Long Crowdloan Campaigns Will Last
When a crowdloan is registered, the project will define how long the crowdloan campaign will last. This is done by specifying a “Campaign End Date,” which is tied to a specific block. A “Campaign” just describes how long the crowdloan may keep contributions locked in order to bid in auctions. A Campaign End Date is the date where the crowdloan can no longer be used in bidding. If the project was not able to win a slot by the Campaign End Date, the crowdloan Campaign is over and the contributed crowdloan KSM/DOT will be unlocked and returned to their owners.
There are a limited number of parachain slots available on the Kusama and Polkadot networks and auctions for these slots may be incredibly competitive. A Campaign End Date accounts for the possibility of losing one or more of the initial auctions which allow projects the flexibility to compete in several consecutive auctions. It also sets expectations for crowdloan participants who likely do not want their tokens locked up indefinitely while the project attempts to win an auction over a series of weeks.
The crowdloan must be open/active in order to acquire a parachain slot during an auction, and securing these slots is extremely competitive. It must occur in parallel with the auction(s).
Parachains will want to cover as many of these opportunities as possible, particularly if they expect stiff competition. Information on the cadence of auctions is still being released, but it is anticipated that auctions will last one week each.
Since all participants are agreeing to lock up their tokens until the crowdloan campaign ends, long campaigns come with an additional opportunity cost to KSM/DOT token holders: the longer the campaign, the longer KSM/DOT tokens are locked and cannot earn staking rewards. In these cases, projects may choose to offer some reward (which may be non-monetary) to these participants, but it is entirely elective.
What Type of Rewards are Offered
Projects bidding on parachain slots and sourcing the required DOT/KSM from their community in a crowdloan may choose the type of reward, if any, offered to participants to compensate them.
Kusama and Polkadot instruct projects to place a cap on the rewards being offered. This cap could be in KSM/DOT, native tokens to the project, or something completely off-chain. Projects may provide more detailed information on the rewards an individual may expect to receive. For example, the ratio between tokens contributed and native tokens received may be fixed or dynamic, changing as the level of participation in the crowdloan changes.
In addition, projects may offer bonus rewards for pre-registering for the crowdloan, contributing early, referring to other addresses, etc. Rewards can also be delivered even if the crowdloan campaign is unsuccessful and the project does not win a parachain slot. Ostensibly, there could also be a surprise or bonus rewards announced after a project has won a slot. Lastly, while many projects are offering token rewards, it is important to note that rewards could also be off-chain, such as project “swag.”
In all, what is important to remember is that a project’s reward plan and distribution are left entirely up to the project team.
How the Process Will Look
Step 1. Prepare to Contribute to the Crowdloan
In lead-up to a crowdloan, users must “unlock” and “unbond” their DOT or KSM to contribute to them. Unlocking simply means the funds are not being used for any other purpose, such as staking, vesting, or governance. Unlocking tokens can take some time (7 days on Kusama and 28 days on Polkadot), so if you want to participate in a crowdloan, prepare to start the unlocking process approximately a few weeks in advance.
Step 2. Contributing to the Crowdloan
Each crowdloan campaign is given a unique official Index number that references its module-controlled account where the crowdloan funds are stored. In other words, a secure account is generated uniquely for the campaign, is held by the Kusama/Polkadot network, and is not accessible to the individual projects (or the project’s team) at any point during the campaign and lease. Note that this Index number is not an address.
To contribute to a campaign on-chain, a user must send a special transaction designed for crowdloans that references the parachain’s specific index. This ensures that you are contributing to an official crowdloan campaign. You will never contribute to a campaign by transferring DOT or KSM to an address. The user’s DOT or KSM is then moved into the module-controlled account.
For projects that choose to develop Web3-enabled applications for their crowdloans, this part of this process will likely be automated for you.
To contribute to a campaign via an off-chain exchange, you will need to carefully follow the instructions on the custodian’s website. The custodian will then send the funds to the crowdloan module on your behalf.
Projects may set a maximum or minimum contribution level per address for their crowdloan, but by default, there is only a small minimum contribution limit per address set by Kusama (0.1 KSM) and Polkadot (5 DOT). In addition, individuals can increase their contributions throughout the auction process.
Step 3. If the Crowdloan is Won, the Module is Locked
If a crowdloan campaign is successful, the parachain is on-boarded to Polkadot or Kusama and any collected DOT/KSM in the crowdloan’s module is locked in the crowdloan module for the entire duration of the lease it won. Users cannot remove any of their contributions.
If the project does not win an auction before the Campaign End Date and the campaign ends, then the tokens are returned. When the campaign ends, any contributor can trigger the refund of all the crowdloan contributions. The unsuccessful crowdloan will not be deleted from the system until all contributions are returned.
Step 4. Users Accrue Rewards (for Most Campaigns)
Projects will likely offer crowdloan contributors rewards. How and at what pace these rewards are distributed is at the discretion of the project. Some projects may choose to distribute a portion of the reward immediately upon successful launch to the network with the remaining portion of the reward vesting over a specified period of time.
The mechanics for how rewards are claimed or paid out can also vary. If the rewards accrue on-chain, they can be paid out at any time, in intervals or accrue over time with a manual redemption at the contributor’s discretion. Again, these are decisions made independently by the teams and should be disclosed prior to the crowdloan start.
Crowdloan Start Dates and What to Expect
The Polkadot and Kusama auction timelines are determined and announced by Parity. The first Kusama auctions happened in June 2021, and next the Polkadot auctions were announced to start in November 2021.
Gavin Wood instructs us to “expect a lot of chaos (and a little fun).” Crowdloans just may be part of this chaos, but the potential value they bring to this ecosystem is undeniable. Crowdloans offer individuals the historic opportunity to be a part of a new project’s launch. By rewarding crowdloan contributors with native tokens, crowdloans may promote a more fair and sustainable approach to token distributions. Broad participation in a crowdloan may not only offer increased network security but also create a more enthusiastic, fair, and committed community from the start.