What is Polkadot
Blockchain is called the relay chain while if you want to become an interoperable subchain within the Polkadot ecosystem, then you become what's called a chain. Here is a diagram showcasing this: in the middle, the relay chain, this is the Polkadot main network. Each of these little hubs is essentially a relay chain, which represents projects like Acala, Moonbeam, and Centrifuge, among others. These are projects you're probably familiar with. In order for Polkadot parachains to talk to other layer one networks like Ethereum or Solana, they have to build their own bridges. This is why Polkadot has long been called a kind of closed ecosystem, even though it is interoperable at its core. Polkadot still sits right in the middle, and in order for its ecosystem projects to talk to other native blockchains, they have to build their own bridges. So, these parachains are, at the end of the day, still individual blockchains running in parallel with the Polkadot ecosystem.
Today, the Polkadot architecture consists of up to 100 parachains, all connected to this middle relay chain. These parachains can interact and exchange data and assets within the system. Parachains attached to the Polkadot relay chain can be similar to ERC-20 tokens or other more advanced smart contracts on Ethereum. They can have their own consensus mechanisms and tokens. Think of them more like app chains that sit on top of Ethereum. Instead of purely token-based projects on Ethereum, think of them like the Chainlink network, where the main token started as an ERC-20 token but later extended its functionality with its own nodes and validators.
Parachain Auctions
The parachain idea came about because of the parachain slot auctions that took place in 2021. Polkadot connects to these parachains by leasing a slot on the main relay chain for up to 96 weeks at a time, with the option to renew. These parachain slots are assigned through an on-chain auction where the winners have to purchase a certain amount of DOT tokens and lock them up for the entire 96-week duration of the lease.
This is why many projects had to raise a significant amount of funds in order to participate in the Polkadot ecosystem. This concept brought about the idea
What is Crowdloan
The concept of a parachain crowdloan emerged as a solution. A crowdloan means that top projects like Moonbeam, Acala, Parallel, Asar, etc., didn't need to front all the money, often millions of dollars, to join the Polkadot ecosystem. Instead, they could conduct a crowdloan where they collected DOT tokens from their early community members. In exchange, these contributors lent them their DOT tokens, and, for instance, Moonbeam would give back their Glimmer tokens to the crowdloan participants. It's somewhat akin to a crowdfunding fundraiser or even an ICO (Initial Coin Offering), but with a unique twist.In the case of a crowdloan, what made it interesting was that, for instance, with Moonbeam, they gave a significant portion of their Glimmer tokens to those who lent them DOT. However, these contributors would get their DOT tokens back after a two-year bonding period, making it a win-win. So, this is essentially how crowdloans work.At the end of a specific crowdloan auction period, the projects with the highest amount of DOT contributed would win the parachain slot and become a Polkadot parachain. On the provided list, you can see all the past auctions that took place on Polkadot. For instance, there were five winners in an auction that took place in December 2021, and many more auctions have continued since then.When a project wins an auction, the entire project's DOT tokens are bonded on the main Polkadot relay chain, essentially becoming locked and staked. After 48 to 96 weeks, the DOT tokens become available in the market again. So, if you contributed to the Moonbeam crowdloan, you'll soon get your DOT tokens back, which you can sell on the market. Similarly, Moonbeam will also get the amount they contributed for their parachain slot back. This process introduces a significant sell pressure into the market.
How much DOT in Crowdloans?
Here are the first five auctions, which represent the largest and most significant projects that have ever launched on Polkadot. In these auctions, you can see Moonbeam, Acala, Parallel, Asar, and Clover Finance. Moonbeam, for example, managed to gather 35 million DOT, which is worth $147 million today. Acala gathered 32 million DOT (approximately 133 million dollars), Parallel 10 million DOT, and so on. The first batch of Polkadot slot crowd auctions gathered a total of 13 million DOT, which is worth $467 million today.
The crucial point is when these amounts are locked up. All these auctions had the same leasing period, which started in December 2021 and ends on October 24, 2023, which is roughly a month from now. This means that on October 24th, approximately $467 million worth of DOT tokens will be released into the market. These are not just tokens held by private investors; many of these were contributed by early participants and crowdloan contributors to Polkadot projects. Because the entire Polkadot ecosystem has been affected by the bear market, and people need liquidity, it's expected that a significant amount of these tokens will be sold. This will be a substantial event because all $467 million worth of DOT tokens will be unlocked in one day. Unlike VC unlocks with vesting schedules, these tokens are held by real retail investors. For example, Clover had contributions from 5,000 individuals, Parallel Finance had 4,000 contributors, Asar had 27,000, Moonbeam had 48,000, and Acala had 24,000 contributors, totaling over 100,000 people who contributed over $460 million. These are not just a few entities; they represent a broad base of retail investors. In a bear market, these investors are more likely to seek liquidity, so this unlock event is a major concern in the Polkadot community.
To assess the potential long-term impact, I conducted some calculations using Google Sheets. Since these auctions ran from late 2021 to the present, there were many auctions. The good news is that only the first auctions were highly competitive and hyped. As the auctions progressed, the projects became smaller and couldn't compete for the first slots. Consequently, the crowdloan amounts for these later projects were not as high.
DOT Unlock Amounts
There have been seven batches of parachain auctions to date, each with its unlock date. These dates range from October 24, 2023, to August 2025. Notably, the largest DOT contributions were made in the first and second crowdloan periods. The first batch had $450 million contributed, and the second had $122 million, which is still a substantial amount. However, as the auctions progressed, the amounts contributed decreased significantly. By the third auction batch, only about $20 million was contributed, and after the fourth batch, it dropped to around $2 to $3 million every few months. These later contributions are no longer significant. The column chart illustrates this trend, showing the total DOT tokens being released over the next two years.
The largest unlock occurs on October 24, 2023, with $453 million being released, and there's still some sell pressure by the second unlock on January 16, 2024. However, by April 2024, the sell pressure is expected to decrease significantly. A total of $20 million over three months is relatively minor considering Polkadot has a daily trading volume of 100 million DOT. So, the majority of the sell pressure is anticipated to happen between October and January.
Now, considering this information about the unlock schedule, does that mean it's all bearish for Polkadot, and is the project doomed? I don't think so because there is a significant update coming to Polkadot, known as Polkadot 2.0. This upgrade will bring substantial changes to the network, particularly in how parachain auctions work.
What is Polkadot 2.0
Polkadot 2.0 is a significant upgrade introduced by Polkadot's founder, Gavin Wood, in June of this year. The goal is to transition from the lease-based model of parachains to a more "pay-as-you-go" model based on what they call "core time" or processing resources. Before Polkadot 2.0, joining Polkadot required going through a parachain auction process, which could be costly and required commitment for two years with DOT tokens locked up.However, with the introduction of Polkadot 2.0, even smaller projects will have the opportunity to pay a more accessible amount of DOT to rent processing power on the Polkadot relay chain for as short as one month. This is expected to reduce the cost barrier for smaller teams, making it more accessible for them to participate.Gavin Wood mentioned that Polkadot 2.0 would use a new system for allocating block space, which is more flexible than the existing lease model. Developers can buy block space as needed, either in bulk or on-demand. This change is designed to facilitate the entry of new projects into the Polkadot ecosystem and make Polkadot more attractive to web 2 businesses adopting web 3 frameworks. Essentially, it allows projects to pay for resources as they go, like renting cloud resources.
This is a significant milestone as it revolutionizes the core consensus and promise of Polkadot, rather than just being a periodic upgrade. The new system is expected to increase the liquidity of the Polkadot coin itself by reducing token lock-up periods and introducing more trading volume. The side-by-side comparison between Polkadot 1.0 and Polkadot 2.0 outlines the changes and improvements.
DOT Token Burn Upgrade
Additionally, under Polkadot 2.0, entities with surplus core time may sell it, which could result in the secondary market value of DOT growing. This is intended to boost trading volume since core time rentals will be paid in DOT and will be constantly transacted in DOT. As a result, this change is expected to increase the liquidity of DOT.Secondly, revenue from core time sales will be channeled into the Polkadot Treasury, and DOT token holders can decide how the treasury funds are distributed through governance. The treasury spend is flexible, and there's also the possibility of periodically burning DOT tokens, making the token deflationary. While this isn't set in stone, discussions have already started on GitHub regarding whether they should burn the revenue from core time sales. There are arguments on both sides of this issue.Given the poor performance of DOT's price in the past year, there is hope that they will proceed with the burning process. The idea is to have transparent burning, with a live dashboard tracking core time sales, the influx of DOT tokens, and the amount being burned. This could help reduce the circulating supply of DOT and potentially drive up demand and price. While these discussions are ongoing, it's a positive step toward achieving longer-term sustainability for the project.
In summary, Polkadot 2.0 brings significant changes to the network's tokenomics, governance, and core time management. These changes are aimed at improving the ecosystem's sustainability and value.