Polkadot(DOT)

Polkadot is a heterogeneous blockchain which allows cross-chain communication and interoperability by bringing multiple chains (Parachains) into a single network.

Kusama(KSM) - The wild cousin of DOT

Kusama is an early , raw version of Polkadot which functions in the same way by bridging chains.Kusama serves as a playground for developers to test their projects before bringing them over to polkadot.

Note:- As you read further, I'll be referring to only "Polkadot" ( for ease of reading) and not to both KSM and DOT separately. Since Kusama is essentially just a slight variation of DOT , the auction works in the same way as DOT.

Parachains

A parachain is kinda like a sidechain which connects to the Relay Chain which provides security to it. A parachain is not restricted to being only a blockchain snce it is defined as "application specific data-structure".

In order for a parachain to get added to the Polkadot ecosystem,  it must occupy one of the parachain slots. The number of slots available for occupation is limited(the goal is to have 100 parachains) , here is where projects are gonna have to compete to get themselves a slot. This is done through an unpermissioned candle auction.

Candle Auctions

Candle auctions were started way back in the 1600's and the auction would commence when a candle was lit. As you probably would have guessed, the auction would run until the flame died out. This made sure that nobody knew when the auction would end , so people would begin bidding seriously right from the start. The bidder with the highest bid at the end of the auction is the winner.

Polkadot/Kusama Auctions

Online Candle auctions require a few tweaks from the traditional way in order to make sure that it stays trustless and to prevent attacks.

One disadvantage of having a "normal" open auction online is the case of auction sniping where bidders know the exact time when the auction ends and hence remain hesitant to bid until the closing stages to get a cheaper price.

Candle auctions ensure fairness because nobody will know the exact time when an auction ends. The same mechanism must be replicated for Parachain auctions but this is done online in the digitalspace.Fairness can be ensured only if the time when an auction ends is provably random and in such a way that no party should be able to snipe it.

Cryptography provides the means to do this through VRF.

VRF - Verifiable Random Functions

VRFs are cryptographic primitives which map inputs onto a verifiable pseudorandom output. A simple way to understand is , these functions produce outputs which seem obviously random but they can prove that the ouput is derived from the same input.

VRF is used in a lot of places in the cryptospace. Right from Byzantine Fault Tolerance to minting NFTs.

How is VRF used in Parachain Auctions?

Polkadot uses a random beacon which is based on VRF as explained above. The VRF will be used to determine when the auction ends. Since it is not possible for anybody to determine when the VRF decides the end-time , the auction becomes fair for all the parties involved. Auction sniping is not a threat now , since every bidder will be compelled to reveal their true price.

When bidding for a parachain slot , an account can bid for the available period or specified ranges during the period. A parachain can occupy a slot for a maximum of 2 years. The 2-year period is divided into 6-month periods. 

A parachain slot is "fungible" ie. all the slots are treated the same. A parachain could occupy one slot for a duration and it could occupy another slot in the next period.

Let the auction begin!

Each of the 6-month intervals in the 2 year time period is further subdivided into a "lease period".  A "range" is defined as a time duration which is more than one continuous period.
The auctions will be conducted before the leasing begins.

During an auction , bidders need to submit a configuration of bids and specify the amount of DOT they are willing to "bond". They can bid for any continuous range of the periods 1-4.

When an account bonds their tokens , it is essentially giving up it's right to "stake" those tokens in order to pay for the slot.

Choosing the winner

The selection algorithm will pick the winner by choosing the bid configuration which maximizes the amount of DOT held over the 2 years during which the parachain occupies the slot. So , the highest bid might not actually win.

Here's how the configuration of bids may look like :

const bid = [
     {
         range = [1,2,3] ,

        bond_amount = 100 ; //amount of DOT

    } ,

    { 

       range = [1,2,3,4] ,

      bond_amount = 50 ; //amount of DOT

    } ,

] ;

Auction scenarios:

Let's say two people are bidding for one parachain slot.

X is ready to bid 100 DOT for range [ 3,4].

Y is ready to bid 125 DOT for range [1,2].

Assuming that only X and Y are the bidders in the auction , both of them actually get ownership of the slot. Y who won the bid for range [1,2] gets the slot for the first year and X gets ownership of slot for the second year.(since range is [3,4]).

Let's see what happens when the ranges of the bids overlap. All three bidders are competing for one slot.

X bids 90 DOT for range [3-4].

Y bids 60 DOT for range[1-4].

Z bids 25 DOT for range[1-2].

The total value of each bid is calculated using

Bid valuation = (amount of DOT) X (number of periods)

X - 90*2 = 180 DOT for range [3,4]

Y - 60*4 = 240 DOT for range [1,4]

Z - 25*2 = 50 DOT for range [1,2]

Although X had the highest bid of 90 DOT, Y wins the slot for the entire range (2 years). X was bidding for the range (3,4) so he would have had to share the slot with Z  who was bidding for the first year (1,2). 

X bid value = 180 DOT

Z bid value = 50 DOT

X+Z bid value= 230 DOT

Y bid value = 240 DOT

The combined bid value of X and Z is lower than that of Y.

Y has the highest bid (after multiplying) and for the entire range [1,4] .Y wins the slot as the algorithm chooses the bid which maximizes amount of DOT over 2 years.

And that is how auctions are done on Polkadot/ Kusama.

Both of the projects have a lot of potential and a lot of hype. Parachains are just the first steps towards achieving a scalable blockchain. Polkadot definitely has a major role in the internet of tomorrow: an Internet of Blockchains.

If you want to read more about Parachain auctions , be sure to refer the link under Resources.

This article just briefly explains the idea about parachain auctions and I have tried to keep it as simple as I can so it can reach a wider audience.

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