What Does 2022 Have in Store for DOT? (Opinion)

Polkadot’s parachain auctions have been one of the most hotly anticipated events for the platform since it launched on mainnet in May last year.

When the project announced in mid-October that the auctions would be starting on November 11, DOT prices rallied by over 25% before going on to reach a new all-time high within a few weeks. The reasons for the excitement were manifold.

Firstly, Polkadot and its cousin network Kusama are the first blockchain platforms to operate the concept of a parachain slot. Whereas most blockchains are open to any developer to come and set up shop, Polkadot has a fixed number of parachains that connect to its central Relay chain. Moreover, projects can’t simply buy these slots – the parachain auctions are where they bid in DOT tokens for the lease on a slot.

To enhance their chances of making the highest bid, projects can request that their supporters bond their own DOT in a crowdloan. However, this is quite a big ask – Polkadot’s parachain slots are 96 weeks long, and crowdloan participants can’t access their DOT at all during this time. So to make it worthwhile, projects offer enticements in the form of their own token rewards.

But to introduce an intriguing dynamic to this tokenomic model, remember that Polkadot is also a proof-of-stake network. DOT holders can already earn rewards for staking their DOT under the Nominated Proof-of-Stake consensus. So parachain contestants must make sure that their token rewards are enough of an enticement to outweigh the attraction of staking.

How is the Push-Pull DOT Token Dynamic Taking Effect?

The parachain auctions are now two weeks in, so we’re beginning to get an idea of how these staking versus crowdloan dynamics are playing out.

According to DotMarketCap, after two weeks, there are nearly 100 million DOT locked in crowdloans, representing over $3 billion in total value. The charts show a distinct upward trend at the point that the parachain auctions opened before leveling off to the same steady increase seen in the lead. However, the number of contributors looks to be on a steady upward trajectory.

These auctions are due to take place in two batches, with five parachain slots auctioned and due to go live on December 18. Assuming the rate of participation continues to increase on its current trajectory, we could expect to see up to around $4.5 billion worth of DOT locked up for most of the next two years.

A Global Supporter Community

It’s worth noting that DotMarketCap also lists participation numbers – over 230,000 currently – but these are likely to be grossly underrepresented due to the fact that several exchanges are supporting Polkadot’s crowdloans.

For example, at the time of writing, the biggest contributor to the Moonbeam crowdloan, according to Parachains.info, has put in over 11.7 million DOT, worth over $450 million. It seems most likely that sums of this magnitude come from exchanges rather than individual investors, meaning that a single deposit represents hundreds or even thousands of supporters.

This community will be incentivized to continue supporting Polkadot for the duration of the time their DOTs are bonded, which bodes well for the success of projects operating on the platform.

In any case, we won’t have to wait long to find out. On December 18, all five of the first parachains will be able to go live. As that day will mark the moment when the clock starts ticking on the 96 weeks of their lease, they’ll need to be ready to go if they want to ensure they’re demonstrating maximum value to their lenders.

It should be noted that the frontrunners for the parachain slots have all battle-tested their projects twice over. For example, Acala, the DeFi protocol that’s already taken the first parachain slot, also operates its sibling platform Karura on the Kusama network. So, we can anticipate a very short lead time to launch for each parachain after the slots go live on December 18.

What’s Been the Impact on Staking?

Coming to the other side of the DOT tokenomic equation, there has been an evident impact on DOT staking since the parachain slots were announced.

For much of the year, Polkadot was the second most popular staking network after Cardano, boasting over 70% of the total DOT supply locked. However, since October, many stakers have unstaked their DOT, meaning that the network now has around 53% of DOT locked in proof-of-stake. However, in response to the reduced staked DOT, the issuance algorithm will increase the rewards, ultimately attracting more DOT to be staked from the open market to increase the security of the network.

Remember – these are just the first slots. Another six are planned before March, bringing the total to eleven. However, we can expect Polkadot to keep increasing the number of parachains over the coming months and years, meaning that this continuing cycle of bonding more DOT in crowdloans, which creates additional incentives to stake, will continue unabated for some time to come.

Based on the performance of the parachain auctions over the last two weeks, the DOT tokenimic model is proving successful.