Parachain auctions are fuelling Polkadot’s price run – here’s why they’re a big deal

Posted: 10 November 2021 11:39 pm

Parachain auctions are a cornerstone of the Polkadot ecosystem and reduce the circulating supply of DOT coins – potentially boosting price.

  • The price of Polkadot's native DOT coin has increased by 69% in the month leading up to the first parachain auction, set to commence on Thursday.
  • 11 parachain auctions will run from 11 November 2021 to 10 March 2022, reducing the circulating supply of DOT with each auction as projects stake DOT to secure a slot.
  • Parachains are designed to help improve the operational efficiency of the Polkadot network as well as enhance its cross-chain interoperability.

Polkadot (DOT) hit an all-time high value of AUD$70 (US$51.47) earlier this month, with the currency having maintained its positive price action ever since, largely due to the fact that over the next 7 days, a number of projects will be participating in Polkadot's first parachain auction. At press time, DOT is trading at a price point of AUD$68.21 (US$50.26).

Pundits believe that the upcoming auctions will help put positive pressure on the price of the digital asset with investors scampering to acquire DOT tokens as a means of contributing to various crowd-loan projects, effectively reducing the total supply of tokens in circulation. Furthermore, with 11 sets of parachain auctions set to take place over the course of the next 4 odd months, it appears as though the value of DOT will increase as long as participation in auctions continues.

How to buy Polkadot

What are parachain auctions?

Parachains are essentially sub-chains that operate within the larger Polkadot network, allowing developers greater control over transaction speeds, consensus rules and scalability. They are a bit like the "layer-2" system on Ethereum, except that they are a native feature of Polkadot, where the main Polkadot blockchain is used for final settlement and security. The catch though is that there are a limited number of parachains available – so projects must compete through a candle auction system.

Parachains help improve the overall scalability of the Polkadot network and allow projects to tap into other networks and blockchains, instead of being restricted to a single chain. They do this by enabling cross-chain communication, which enables a Polkadot-based blockchain to transact with other chains such as Ethereum or Polygon.

The idea of cross-chain interoperability is one that has gained a lot of momentum recently, with a growing list of projects looking to build technical bridges to help spur cross-chain interactions. This feature has helped attract a growing number of institutional funds to invest in the Polkadot ecosystem.

The first set of parachain auctions are set to commence on 11 November and will go on for 1 week. Following that, there will be 10 other auctions that will take place until 10 March.

Why do they matter?

While most other blockchains are designed to help developers devise decentralised applications via smart contracts, using parachains, devs can gain complete control over the underlying Polkadot network. This operational design helps provide parachain auction winners the ability to optimise their projects for pretty much any use case that they may see fit.

Since parachains are designed to serve as custom, independent, project-specific blockchains, they can be easily integrated into Polkadot's core framework. This is why DOT is able to facilitate seamless transactions (such as sending and receiving assets, seamless smart contract executions, etc) between its different parachains.

What lies ahead?

Over the last 30 days, DOTs value has increased from around US$30 to over US$50, representing a gain of 47%. And with the upcoming parachain auctions having already generated a significant amount of market interest, it will be interesting to see how the currency's ongoing momentum continues to play out.

Interested in cryptocurrency? Learn more about the basics with our beginner's guide to Bitcoin, dive deeper by learning about Ethereum and see what blockchain can do with our simple guide to DeFi.

Disclosure: The author owns a range of cryptocurrencies at the time of writing

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