Parachains — we believe this is the killer app of Polkadot.
In this article, we walk through why it’s a good idea, how you can become one, and go deep into how you can prepare to become a parachain. It may sound daunting, but every step of the way, we at LongHash are here to help!
Many great posts on parachains (links included) have explained the concept and technical details. Here, we focus on the strategy and steps required to really make it work.
Here’s a quick summary:
Now let’s dive into it.
Parachains are a core proposition of the Polkadot network. Put simply parachains are self-sovereign native blockchains that rely on Polkadot’s relay chain for security and communication with other relay chains. Multiple resources explain this in depth.
*Source: *Parity
A parachain is a native blockchain with:
Read more on the basics of parachains: 1, 2
Before we trigger another ICO rush where every other project bids for a parachain slot, let’s first examine why you would consider becoming one. Given the costs of preparing for a parachain, it must be justified with projected future volume and revenue. That being said, the benefits are much greater compared to smart contracts only:
Preliminary modeling by the Web3 Foundation estimates the annual cost of securing major chains (e.g. Cosmos, Tezos and EOS) is in the tens of millions of USD per year, with Ethereum and Bitcoin in the billions, while the estimated opportunity cost to lease a parachain is $100–200k for 12 months.
To use an analogy:
But what about Parathreads? For those who are not/ do not expect to become a scalable use case, consider being a parathread instead, which is a “pay as you go” model by block.
So you have evaluated your project, and have come to realize that the best way to enable or jumpstart your growth is by becoming a parachain. Now actually, parachain slots are limited, and are distributed by candle auctions or governance. Here’s how it works:
It is estimated that 50–100 parachain slots will be up for bidding in the first auction. The full or maximum duration of a parachain slot is 2 years, broken into four “lease periods” of 6 months, bidders may bid for selected lease periods. Exact date for the first auction is still unknown, to be decided by governance.
The winners will be determined by candle auction mechanism. In brief, in a candle auction, bidders can submit increasingly higher bids during the open phase; The close moment of the auction will be randomly generated and retroactively applied; The bidder with the highest amount at the closing wins. This mechanism prevents “sniping” whereby bidders only put in a winning bid slightly higher than the highest bid right before the closing moment.
Working backwards from being able to bid in the parachain auction, we foresee 3 key steps everyone needs to take in order to win a parachain slot:
Most of the value in technology companies are projected in the future, which is why the valuations are sky-high while cash flows are nowhere near traditional industries.
Accordingly, parachains, as part of this technology ecosystem, will likely start with a current problem or context to justify their existence, a promise of future value, and indications of success or clear plans to build confidence in that belief.
As a parachain, there needs to be additional considerations regarding governance, which will eventually solidify the community and direction of the parachain.
Lastly, there needs to be a clear details around the fundraising itself, which strives to be of fair value and risk/reward to all parties involved.
These components make up the Parachain Strategy:
Ecosystem Strategy
First, explain the problem/ context to justify the need for the parachain.
Then, craft your value proposition of how the parachain will address this problem.
Elaborate further on the business model and mechanism design for the players to act as intended.
Lay out a roadmap on the steps to realize that solution and scale up.
Keep in mind comparisons to existing solutions or substitutes (“how do people deal with this today?”)
And finally, introduce the team with relevant details to inspire confidence.
**Most importantly, investors will look for tokenomics describing the use case of the token, its economics (e.g. minting/ burning/ staking mechanisms) and its role in the mechanism design to incentivize intended behavior in the ecosystem.
A parachain also has the flexibility and therefore the responsibility to implement on-chain governance which includes the end-state of decentralization once the ecosystem is mature, and the mechanisms to implement and maintain that system.
Alternatively or in combination, there could be a plan for off-chain governance to provide transparency in how the parachain will be run before decentralized on-chain governance is fully implemented, or if no such plans exist (for example, a private enterprise parachain).
This part should cover the total valuation and its justification (note: if there is insufficient volume or revenue to justify the auction bid, it may not make sense to even obtain a parachain slot, see parathreads instead).
There should also be financial projections for the ecosystem (taking into consideration assets or liabilities in fiat and other tokens). Of course, investors will be looking out for the rewards and incentives for investors (e.g. tokens, time lock, council seat). And finally, there needs to be clear steps for investors to participate in the fundraising process
Of all the ways of fundraising, as long as external funding is required for your bid, it is important to engage DOT holders or new investors. Hence, publicity and marketing are a key component to a successful auction. There is a wealth of accessible online content for effective marketing, which we hope to summarize in a few points:
Foremost is the content, where the message should be simple, personal, and tailored to the target audience. In terms of structure, a compelling format is often a journey from context to complication and resolution. Finally, use a visual format whenever you can (e.g. pitch deck, tweets, short videos) to capture attention, and then build confidence with detail (e.g. whitepaper, articles, video explainers).
Read more on how to tell a great story: 1, 2
2. Engage your target audience
Before engaging them, you must first know your target audience. For example:
• Individuals — From Polkadot’s ICO of 10M DOTs, it is estimated that ~60% or 1801 of 3050 are probably individuals who hold <100 DOTs.
Read more on Polkadot’s ICO DOT holders
• Venture Capital — From the Polkadot’s private sale of 500k DOTs and the ICO, more than 20 VCs participated in Polkadot’s ICO and subsequent private sale, distributed across Asia, America, and Europe.
• Council/ Committees — While the exact members and mechanism are currently unconfirmed, members on the governance council and committees may have the power to propose referenda, e.g. public good parachains
Once we have identified the target audience, use effective channels to reach each group:
• Physical — Meetups for large groups, 1–1 meetings for focused discussions with VCs, included on a tour to strategic locations
• Digital — Company website, social media/ messaging/ fora, and mailing lists for your general community
• Proxies — News and media, institutions (e.g. VCs, accelerators), word of mouth/ introductions, to keep building awareness and goodwill
After contact is made, be sure to continue engaging your audience with
• Regular **updates
**• Answering questions and comments
• Expectations for future communications
**To get off a strong start, first build a strong initial support base by inspiring confidence through progress and familiarity (e.g., getting commitment from VCs). Then, drive engagement by creating content which tap into cultural cartography, e.g. “this is me”, inspire emotion, practical knowledge.
To close the loop, reward positive outcomes. This can be financial rewards for top priorities e.g. commission/ placement fee for bringing in an investor. There can also be non-financial rewards for strategic priorities e.g. recognition or in-kind reciprocation for sharing your content
Read more on virality in Buzzfeed’s formula
The main constraint is usually gathering capital for the parachain auction and operations/ development. To obtain sufficient external capital, there are 3 potential mechanisms:
In the traditional ICO paradigm, investors can only be rewarded with tokens. In a parachain, the project team also has the option to reward investors with roles/ benefits in governance or block production too.
These fundraising methods can also be used in combination, e.g.
Read more on the parachain crowdfunding module
Here at LongHash, we are excited to support projects in all 3 steps required in securing parachain slots!
LongHash Ventures:** Consulting in ecosystem, governance, and financial strategy — which covers business strategy, tokenomics, and financial projections.
LongHash Ventures: Storylining; PR/ marketing leveraging our influencer network and deep cultural immersion in Asia; Introductions to major DOT holders across Asia.
LongHash Ventures: Deploy capital from staking pool for direct deposit; Treasury management before and after auction; Campaigning for governance voting.
LongHash Ventures is a Web 3 investment fund and accelerator collaborating with founders to build their Web 3 model and tap into the vast potential of Asia. In January 2021, we launched a DeFi-focused fund and invested in projects such as Balancer, Acala, Instadapp, and Zapper. We collaborated with their founders to develop their tokenomics, governance, and communities through Asia DeFi Network.
With our LongHashX Accelerator, we have partnered with Polkadot and Filecoin to build more than 40 global Web 3 projects which have raised more than $100m in the past 3 years. Through such investments and active collaboration, we are committed to realising our mission of catalyzing growth for the next generation of the Web.
If you’re interested to work with us for your first parachain auction, please drop a mail to pranav.pandya@longhash.vc.
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