Parachains: The Future of the Blockchain?

By: Jack Nelson, Defy Trends

Introduction

All blockchain infrastructure is fundamentally concerned with achieving 3 main objectives: Decentralization, Security and Scalability. Commonly referred to as the Blockchain Trilemma, the application of these three principles simultaneously constitutes one of the greatest challenges in the world of cryptocurrencies and is, in fact, an obstacle that has not yet been overcome.

Additionally, various blockchains are struggling to implement cross-chain intercommunication and interoperability features as they are isolated within their respective ecosystems and limited by their own design. It is therefore clear that cryptocurrency exchanges, blockchain-based projects and services ultimately need to find new ways to interact with other decentralized networks to ensure that data is exchanged seamlessly and assets are transferred efficiently.

In fact, it is not at all productive for users who want to transfer assets from one network to another to incur such overwhelming complications and bottlenecks, as well as having to pay exorbitant gas fees for a simple exchange or transfer.

In essence, the solution to this lies in cross-chain interoperability, as it would allow projects to cooperate effectively with each other and break down the boundaries that separate their respective infrastructures. However, most of the existing solutions that provide cross-chain communication are too complicated, dangerous, overloaded, or likely to include a third-party medium. Having a third party act as an intermediary during a cross-chain operation completely deprives the blockchain of its innate decentralized philosophy and completely defeats the purpose of its technology.

The Blockchain Trilemma — Ledger

What are Parachains?

Parachains are the various individual Layer 1 blockchains that function in parallel within the Polkadot ecosystem, both on the Polkadot network and the Kusama network. Connected and secured by the central relay chain, parachains share and benefit from Polkadot’s security, interoperability, scalability, and governance. In addition, Polkadot’s cross-chain interoperability allows any type of data or asset to be transferred between parachains, which, in turn, opens up a new horizon of use cases and potential applications, not only in DeFi, but throughout the world of cryptocurrencies.

Structurally speaking, parachains are maintained by a network maintainer known as a collator. The collator is responsible for collecting parachain transactions from users and producing state transition tests for relay chain validators. In essence, collaters maintain parachains by aggregating parachain transactions into candidate parachain blocks and producing state transition tests for validators based on those blocks.

Image Source: PolkadotWiki

Collators maintain the parachain network, aggregate transactions, and generate state transition tests for validators within the relay chain.

Thanks to the inherent interoperability provided by Polkadot, parachains can also connect to external networks like Bitcoin and Ethereum using network-to-network bridges. A perfect example of a parachain that provides cross-chain bridging capabilities is none other than Clover Finance, a project that leverages a unique system called a 2-way peg to seamlessly move assets and data from the Polkadot network to Bitcoin and/or Ethereum, among a variety of other chains.

Furthermore, due to their intrinsic versatility, parachains can be custom built to serve any particular use case, including:

  • Decentralized Finance (DeFi)
  • Decentralized Data Storage
  • Internet of Things (IoT)
  • Identity Verification
  • Digital Wallets
  • Video Games & GameFi
  • On-Chain Credentials
  • Non-Fungible Tokens (NFTs)
  • Data Oracles

These malleable characteristics, in fact, allow Polkadot to build a truly dynamic digital asset infrastructure and provide the scalability, security, and interoperability necessary to truly turn the promise of blockchain into the next generation of the Internet: Web 3.0.

The Difference Between Parachains and Smart Contracts

Smart contracts are small pieces of software that run on dedicated blockchains, such as Ethereum, Elrond, Solana, Tezos, and Cardano, among many others. Since they all run on the same blockchain and compete for your computing resources, this can lead to congestion, long execution times, and unpredictable running costs. In fact, this is considered to be one of the main obstacles preventing blockchain infrastructures from being adopted in the real world, because they are simply not efficient enough and too complicated to fully implement.

On the other hand, parachains are individual and independent blockchains designed for a single purpose and providing their users with a huge variety of services and different use cases. Additionally, these individual parachains are able to communicate with each other, building a high-performance blockchain network rather than a single blockchain trying to solve all problems in a single virtual computer. In doing so, Polkadot-based parachains strive to ultimately lessen the constraints imposed by chain maximalism and reduce the risks of balkanization.

Parachains: The Future of the Blockchain

Polkadot’s parachain model was designed with the belief that the internet of the future will involve many different blockchains that will work together and collaborate with each other. Thus, just as the internet adapts to different users and their specific needs, blockchains must also be able to provide a variety of services, with one network perhaps specific to gaming, another to finance, another to storage of data, other networks for NFTs and applications of the internet of things, among many other possible uses. Therefore, due to this interoperable vision of the future, Polkadot does not impose any specific requirements on the design of its parachains, other than the fact that they must be able to prove to Polkadot validators that each block in the parachain follows the agreed protocol. This allows parachains a lot of infrastructural leeway, and this flexibility means that each parachain can have its own design, governance process, and token, optimized for its particular use case.

This relative architectural freedom also allows parachains to function in many different forms, including private or public networks, businesses or communities, platforms for developers and other projects to build on top of, DeFi service providers, or as definitive bridge protocols between chains. The possibilities are clearly manifold and embody the true essence of Polkadot’s multi-chain design, while empowering the development of the interoperable and cohesive blockchain network of the future.

Image Source: Mapleblock Capital

Scalability

Through its parachain model, Polkadot enables projects to achieve Layer 1 scalability, rather than having to rely entirely on Layer 2 solutions. This is indeed a breakthrough, as it enables creation of a mostly decentralized and more efficient methodology to implement blockchain scalability.

This is primarily because parachains, such as Polkadot-based Layer 1 blockchains, can process transactions in parallel and spread workload consistently across their ecosystem, increasing transaction throughput and scalability across the board.

Interoperability

Parachains allow blockchain communities to have full control and sovereignty over their own Layer 1 blockchain, while benefiting from the ability to engage in free trade with other parachains and external networks. Leveraging Polkadot’s cross-chain interoperability features, parachains can synthesize an interoperable economic infrastructure through which they can exchange assets, data, calls to smart contracts, and information from off-chain oracles, such as stock price feeds or the evolution of the market in real time.

This essentially ends the sited nature of the blockchain world and opens up new opportunities for applications to interoperate and communicate with each other, ultimately reducing the limitations of chain maximalism as well as the risks of balkanization.

We will now discuss the mechanism that parachains use to communicate with each other and process cross-chain transactions, effectively bridging the boundaries between their separate architectures.

Cross-Chain Message Passing (XCMP)

As mentioned above, parachains take their name from the concept of parallelized chains running in parallel to the central relay chain within the Polkadot ecosystem, both on the Polkadot network and the Kusama network. Due to their parallel nature, parachains are also capable of parallelizing transaction processing and bringing new levels of scalability to both Polkadot-based and Kusama-based projects.

They are fully connected to the relay chain and enjoy the security provided by the Polkadot environment. However, to communicate with other systems, parachains take advantage of a mechanism called cross-chain message passing (XCMP).

Polkadot’s XCMP is a protocol that allows its otherwise isolated networks of parachains to send messages and data to each other securely and completely without trust. To achieve this, Polkadot deploys a simple queuing mechanism based on a Merkle tree structure to ensure reliability and clarity of verification. Relay chain validators are responsible for moving transactions from the output queue of a parachain to the input queue of the destination parachain, but only the metadata associated with this output-input process is stored as a hash within the relay chain.

Although the design of the XCMP is still under development, Polkadot has established some parameters that define its architecture and its main functionalities, which are listed below:

  • Interchain messages will not go to the relay chain.
  • Cross-chain messages will be limited to a maximum size in bytes.
  • Parachains can reject messages from other parachains.
  • Collators are responsible for routing messages between chains.
  • Collators generate a list of output messages and will receive input messages from other parachains.
  • When a collator produces a new block to deliver to a validator, it will add the latest data from the input queue and process it.
  • Validators will authenticate proof that a parachain’s block includes processing the input messages intended for that parachain.

XCMP is initiated by first opening a channel between the two parachains. This channel must be recognized by both the sending and receiving parachains, and is a unidirectional channel. Also, a pair of parachains can have at most two channels between them, one to send messages and one to receive them. For the channel to be established, a deposit is required in $DOT which will be returned once the channel is closed again.

Thus, through the XCMP channel, two different parachains can create an intercommunication structure for data and valuable assets to be transferred to each other and achieve an unprecedented interoperability capacity that, in fact, has not yet been seen within the digital asset ecosystem.

Governance

Polkadot parachains are flexible and free to adopt whatever governance model they see fit. Furthermore, parachains can access a number of ready-made modules to implement various on-chain governance systems. As Polkadot provides its parachains and their respective teams with a number of sophisticated on-chain governance systems, this greatly reduces the chances of hard forks, which could split a project’s community in two.

In addition, on-chain governance ensures transparency for parachain communities and is an important requirement for institutions and potential investors who, in most cases, want to see clear decision-making processes before engaging in a project.

Parachain Slot Rentals & Auctions

Projects that wish to function as parachains on Polkadot have to rent a slot on the relay chain by winning a parachain slot auction. A parachain slot is a rare resource on the Polkadot Network and only a limited number will be available. Over time, as parachains increase, there may only be a few slots unlocked every few months, but the ultimate goal is to eventually have 100 slots available in Polkadot, divided between parachains and parathreads.

The auction offers are made in the native token of the Network, $DOT for Polkadot and $KSM for Kusama. Teams can choose to rent a Polkadot slot for a minimum of 6 months and a maximum of 2 years. By participating in a Polkadot or Kusama slot auction, the parachain team agrees to lock in the amount of $DOT or $KSM they have bid for the entire lease period of the chosen slot, after which the amount will be returned to their account.

During the slot rental period, $KSM or $DOT is reserved in the original account, but is not available for staking, transfer and cannot be redistributed. Additionally, teams can submit to a slot auction through self-funding or through a crowdlending system, in which contributions are solicited from existing $DOT or $KSM holders in exchange for some type of reward.

For investors, a key difference between parachains and ICOs, IDOs, and IEOs lies in the fact that participants retain full ownership and control of their tokens. In fact, unlike exchanging ETH or BNB for tokens in an ICO, users can stake their $DOT or $KSM in exchange for airdrops from the project. If the parachain wins the Polkadot or Kusama slot auction, the funds will be locked for the dedicated time period. If, on the contrary, the parachain loses the slot, the participant’s funds will be returned without further ado.

Image Source: Moonbeam

Acquisition of Parachain Slots

Polkadot only supports a limited number of parachains, currently estimated at about 100. Given this limited availability of slots, Polkadot can allocate them as follows:

  • Parachains granted for governance, or “common good” parachains.
  • Parachains granted by auction.
  • Parathreads.

The parachains granted for governance are assigned by the governance system within the Polkadot chain, and are considered “common good” for the network. They may involve, for example, cross-chain bridges from Polkadot to other chains. Common good parachains are often considered system-level chains and do not usually have their own economic model. The purpose of these parachains is primarily to help remove transactions from the relay chain, allowing for more efficient processing of the parachains.

Auction awarded parachains are those that are awarded at a public auction, hence their name. Parachain teams can bid with their own $DOT assets, or deploy a crowdfunding system to obtain tokens from the project community.

Parathreads have the same API as parachains, but work on a “pay as you go” basis. Let’s now go into parathreads in more detail.

Image Source: PolkadotWiki

Parathreads

Parathreads extend the competitive paradigm of parachains and lower the barriers of entry to reap the benefits of shared security and connectivity. With parathreads, Polkadot is even more accessible to projects that may not have the capital to bid for a parachain slot, and gives them the opportunity to join its network if their application requires higher performance.

In fact, although parachains can borrow $DOT or $KSM from users through crowdfunding, they may not have a strong enough community to start with. Therefore, using parathreads, a team can gain access to the relay chain and launch its application by implementing a “pay as you go” system.

The parathreads model is especially suitable for projects that do not require continuous connectivity to the network. Also, it is usually quite advantageous for projects, as it allows them to switch between being parachains and parathreads depending on their needs and the availability of parachain slots in the central relay chain.

Conclusion

Parachains can be considered as the fundamental elements that drive cross-chain interoperability within the Polkadot and Kusama networks, as they allow the creation of a truly dynamic and fully versatile architecture. In fact, by implementing parachains within its ecosystem, Polkadot is able to divide its infrastructure into a multiplicity of parallel Layer 1 blockchains that allow it to process transactions efficiently and move assets through its network in a more decentralized manner.

Polkadot’s parachain model is also in tune with the idea that future blockchains will need to perform a variety of specialized functions and, by nature, will need to possess a broad repertoire of capabilities.

Therefore, due to their innate characteristics of flexibility, scalability, and interoperability, parachains could very well be the potential solution to some of the most pressing problems that face blockchain today, and indeed eliminate the complex previously intractable bottlenecks that prevent the technology from reaching mass adoption and use cases.

By: Jack Nelson, Defy Trends

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Disclaimer: This article is for educational purposes only and must not be treated as financial or legal advice.

Please conduct due diligence and manage your risks accordingly.

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