For Polkadot and Kusama, a crowdloan is a way for young projects to get the support they need to join the Kusama or Polkadot network as a parachain.
The term itself can be misleading, because you are not actually "lending" funds to a parachain; rather, your crowdloan deposits (KSM tokens for Kusama project crowdloans and DOT tokens for Polkadot project crowdloans) are locked into the sponsored account of either Kusama or Polkadot for a certain period of time ("lock period"). Generally, during this blocking period (or after) you are eligible to receive a reward. This reward is usually the project's own token.
While they are locked, the contributed KSM / DOT tokens can be used to cover the cost of parachain rent (the amount needed to secure a parachain slot on Kusama or Polkadot networks), but are never directly available to the project's parachain. If the project fails to win the auction, the funds are returned to their owner and fully unlocked.
Crowdloans are just one of the ways a project can attract KSM/DOT to bid. There are many other ways a project can attract these tokens to participate in a parachain auction, including (private and public sales, ICOs, IDOs, and more).
In addition, using a crowdloan does not prohibit a project from bidding above a set limit. In other words, projects can also add their own KSM/DOT to the bid in addition to the crowdloan's KSM/DOT.
Crowdloan is a great opportunity for people to support a project they are passionate about and earn tokens from that network. Not every parachain project will crowdloan, and each will have slightly different terms and rewards. Regardless of the differences in the crowdloans of different projects, all crowdloans should include the following two parameters:
- The length of the crowdloan campaign, that is, how many auctions the crowdloan will have to run;
- The amount of remuneration.
You'll need to check with the teams running them for details on the individual conditions of the crowdloan. For crowdloan projects, it could be an important mechanism for launching their network on Kusama or Polkadot. Some of the many benefits for a crowdloan parachain project include:
An efficient way to distribute tokens to community members who enthusiastically support your project.
The ability to cover the cost of a parachain slot without a time-consuming and resource-intensive fundraising process.
A way to gauge support for a new project or parachain and demonstrate market demand.
Judging from projects that have already organized crowdloans, there are three ways people can access crowdloans.
- Directly through the Polkadot.js GUI (on the blockchain) Contribute directly to the blockchain using the Polkadot GUI (on their website).
- Through a custom dashboard (in blockchain). Contribute via a customizable dashboard created by the parachain project.
- Through a custodian (outside the blockchain) Contribute through a custodian such as Binance or Coinlist. To participate, a person simply logs into the custodian platform and follows the instructions. This type of crowdfunding occurs outside of chain.
Many projects have used a combination of these methods, giving people the option to use the one they are most comfortable with.
Once a crowdloan is registered, the project will determine how long the crowdloan campaign will last. This is done by specifying a "campaign end date," which is tied to a specific block. "Campaign" simply describes how long a crowdloan can keep contributions locked up to participate in auctions. The campaign end date is the date when the crowdloan can no longer be used to bid. If a project fails to win a slot before the campaign end date, the crowdloan campaign ends and the KSM/DOT contributed by the crowdloan will be unlocked and returned to their owners.
The Kusama and Polkadot networks have a limited number of parachute slots, and auctions for these slots can be incredibly competitive. The campaign end date takes into account the possibility of losing one or more primary auctions and allows projects the flexibility to participate in multiple subsequent auctions. It also determines what to expect for crowdloan participants, who probably don't want their tokens locked up indefinitely while a project tries to win an auction for a few weeks.
Crowdloan needs to be open/active in order to get a parachain slot during the auction and there is stiff competition to get such slots. This must go hand in hand with the auction(s).
Parachayers will want to cover as many of these opportunities as possible, especially if they expect fierce competition. Information about the frequency of the auctions is still being published, but the auctions are expected to last 7 days.
Since all participants agree to lock their tokens until the end of the crowdfunding campaign, long campaigns entail an additional opportunity cost for KSM / DOT token holders: the longer the campaign, the longer KSM / DOT tokens are locked and cannot yield staking rewards. In such cases, projects may offer these participants some rewards (which may be non-monetary), but that is up to them.
Projects bidding on parachain slots and receiving the necessary DOT / KSM from their community as part of the crowdsloan can choose the type of reward, if any, that they will offer to participants as a reward.
Kusama and Polkadot advise projects to limit the amount of rewards offered. This limitation could be in KSM / DOT, the project's own tokens, or something completely extraneous. Projects can provide details about the rewards a person can expect to receive. For example, the ratio between contributed KSMs and received tokens can be fixed or dynamic, which will change depending on the level of participation in the crowdsloan.
In addition, projects may offer rewards for pre-registration to the crowdsloan, early contributions, referring to other addresses, etc. etc. Rewards can be offered even if the crowdsloan campaign is unsuccessful and the project does not win a parachay slot. But after a project wins a slot, surprises or bonus rewards are more likely to be announced. Finally, while many projects offer rewards in the form of tokens, it is important to note that rewards can also be offline, such as "souvenirs."
Overall, it is important to remember that a project's reward plan and distribution is entirely up to the project team.