Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.
Polkadot has come with an interesting and secure way of funding crypto projects via a new concept dubbed Initial Parachain Offering (IPO) by leveraging its parachain architecture and using its native DOT tokens.
The blockchain technology is all set to replace the traditional financial instruments, and Polkadot plans to lead the show. In a press release shared with CoinSpeaker on Tuesday, October 6, Polkadot revealed details of its latest offering Initial Parachain Offering (IPO).
The Polkadot IPO aims at introducing a completely new model to launch blockchain and other decentralized projects. The idea is to create a transparent and scalable process while eliminating other uncertainties coming in midway. Drawing cues from the traditional IPO (Initial Public Offering) markets, crypto markets came with the concept of Initial Coin Offering (ICO) for fundraising of new crypto projects.
The ICO market saw a massive rush of investors during the crypto market bull run of 2017. However, it soon lost steam after several projects turned fraudulent looting investors with millions-of-dollars. The ICO model was later replaced by IEO (Initial Exchange Offering) where exchanges offered cryptocurrency projects the launchpad to enter the market. Here, the exchanges leveraged its credibility with its customers, however, the process remained centralized to an extent.
The Initial Parachain Offering (IPO) takes a shot on reviving the crowdfunding mechanism. The IPO resides on Polkadot’s core architecture of parachains, which are nothing but multiple parallel blockchain shards contributing to the scalability of the network.
The Relay chain of Polkadot offers layer-zero security and interoperability. Here all the parachains attached to the Polkadot network serve as sovereign layer-one blockchains. However, bonding a parachain to the Polkadot networks requires the use of the native DOT tokens.
Parachains are specialized shards on Polkadot. Find out more about them and the process of obtaining a parachain slot: https://t.co/ZE2JGW1DPR
— Polkadot (@Polkadot) October 6, 2020
This will allow parachains to share Polkadots features like interoperability, scalability, security, and governance functionality. Now, let get back to understanding how the Polkadot IPO will work.
How Polkadot Initial Parachain Offering (IPO) Works
The current goal of Polkadot is to support 100 parachains connected to its blockchain. Since the parachain slots are limited, they will be auctioned through a permissionless auction process. To participate in the auctions, the parachain projects will need to undergo the Initial Parachain Offering process.
This will allow projects to accept DOT loans through DOT token holders. Funds raised via this crowdfunding module will directly go into the Polkadot Relay Chain. The press release further explains:
“If the project is able to secure enough contributions to win the auction, then the DOT loans will be returned to the contributor at the end of the parachain lease period. If the project is unable to secure enough contributions and the auction is lost, then the DOT will be returned to contributors immediately”.
Thus, the Polkadot Relay chain will work as an escrow ensuring fund safety for the DOT holders. This is unlike the Ethereum‘s ERC20 tokens ICO funding where investors send their ETH to an unknown address and can’t withdraw later if the project fails. In Polkadot IPO, investors also get their DOT tokens back by the end of the parachain lease period. It helps to ultimately create a more safe and secure environment for investors and projects alike.
The concept of Initial Parachain Offering looks promising at this stage. It aims to address other existing flaws within the crypto ecosystem thereby bringing a new value proposition of fundraising to the crypto market. Polkadot has seen good seen success recently with the native DOT tokens entering the top ten crypto ranks. At press time, each DOT token is trading at $3.77 with a market cap of $740 million.