Another proposal to fix Polkadot's crowdloan and auction system

[ericwang]

Hi all,

I am proposing a system to boost parachain demand and project incentives to join the ecosystem while balancing out Polkadot’s economic inflation. Essentially, I propose to divert some of Polkadot’s current validator incentives (10% annual inflation) and, in conjunction, possibly also increase the total inflation rate of DOT, towards incentivizing both builders and DOT contributors towards parachain auctions in a new mechanism. This is heavily inspired by Astar’s dapp staking mechanism, which is designed to increase dapp developer support its protocol.

The mechanism is as follows:

1. Imagine an ideal staked and locked-in-auction ratio for DOT (50% and 30% of the total supply, respectively, are some numbers that I have heard floating around) that can be adjusted by governance mechanisms accordingly over time. The DOT rewards would be balanced such that rewards are allocated towards staking and auctions at a 50:30 ratio.
2. The ratio would be enforced such that if the total amount of DOT staked in validators exceed 50%, then the reward per DOT staked would decrease, and vice versa for locked-in-auction DOTs. A roughly drawn illustration for this would look something like:

3. Create an inflation rate that covers both staked and locked-in-auction DOTs.
4. Reward half of locked-in-auction DOT rewards towards DOT contributors, and the other half to parachain teams themselves. The reward amount per parachain depends on how many DOTs are contributed towards each parachain in proportion to the total amount of DOTs contributed towards parachains. DOTs can be given through a vesting schedule (i.e. linearly over two years).
5. Parachain teams may still offer incentives themselves in their native token to encourage contributions or win the auction themselves.

The result is that there would be:
a. increased alignment from users towards supporting actual builders, the lifeblood of any crypto ecosystem
b. diversification from the currently unsustainable inflation rate in validators
c. incentivation of an ideal contribution ratio for both staking and parachain auctions, and
d. a moat for users to be incentivized to contribue a large amount of DOT towards crowdloans.

Background

I have been an avid supporter of Polkadot for a while – being in Parity full time for over three years, and now remaining as an ecosystem growth advisor to Parity and being Head of BD at a Substrate-based interoperability platform called Analog. From my observations, Polkadot’s crowdloan and auction system started off very promising. The idea that you sacrifice DOT rewards that would be otherwise given out to validators to obtain security and native interoperability was a strong idea in theory. However, insufficient marketing and bear market realities showed the weaknesses of our system. I think it is safe to say that nobody in the Polkadot ecosystem is happy with the status quo of auctions, and I believe that increased awareness and marketing alone will only drive things such that when mindshare towards Polkadot is hot/we are in a bull market, auctions will be en vogue and in demand, whereas in all other conditions the mechanism will fall short of its goals in securing a large amount of locked DOTs.

We have seen both outside critics on CT blast crowdloans as being ineffective only to be dismissed by ardent Polkadot supporters who, although having strong arguments in theory, refuse to consider market realities, as well as community member proposals to fix crowdloans receive both support as well as constructive criticism.

The truth is that a robust parachain auction and crowdloan system should be as resistant to market fluctuations as possible and provide an easy system for participation while supporting builders. Why don’t we create some DOT rewards for builders who successfully win an auction and for those who contribute to auctions to diversify their risk in projects’ success while still supporting their favorite projects? My company, Analog, has been researching ways to incorporate Dapp staking-like mechanisms into our chain, because we believe it is a very strong way to get developer support, and came up with a similar mechanism to what is proposed for ourselves. I think Dapp staking plays at least part of the reason of Astar’s success today.

In addition, the bear markets and economics have showed that a 10% fixed annual inflation rate allocated mainly towards validators is not only unsustainable in the long term, but also creates significant selling pressure in the short to medium term. Some of those rewards can and should be diverted towards activities that also reduce the free-floating DOT and benefits the overall builder economy.

I created this proposal after discussing this idea with multiple teams in the ecosystem, who all voiced support. I believe this proposed system is not perfect, but even if it is not adopted, I hope this will be able to play a small part in fixing the auction system today.

[YungBeef]

Very interesting idea, I think it shows promise, however

@ericwang

Reward half of locked-in-auction DOT rewards towards DOT contributors, and the other half to parachain teams themselves.

I think the other half should go to the parachain treasuries.

[ericwang]

I think you’re right. It would be better to be some way to support that Parachain without giving it to the team directly.

[DegenofDotsama]

Thank you for this. I am 100% for us having these conversations because I believe we can improve this entire mechanism. One that is mutually beneficial for all parties. I see things more from a user perspective.

re: inflation;

I often wondered if an adjustable inflation mechanism could be implemented effectively based on some key metrics around available supply, circulating, and locked.

I feel like a fixed rate inflation is old school thought and practice that has just carried over & certainly a 10% forever inflation isn’t truly needed for the health of the chain?

[sota]

Thanks, @ericwang for mentioning Astar and our dApp staking. Though we have to make sure % is reasonable, I like your idea. One thing I am sure of is that a lot of people are not satisfied with the current mechanism of Polkadot parachain auctions and as the auction continues, fewer and fewer people are interested. There are several reasons: first, there are few high-profile projects. This is something Parity’s BD team needs to do better. After all, locking DOTs into projects that are not high-profile is not cost-effective because the decision to lock in a DOT is measured by ROI. Second, parachain candidates can now choose when to join the auction. People don’t care much about the difference between parachain number 55 and parachain number 56 for example. Auctions have higher bidding because there are multiple bidders competing with each other, which results in more DOTs being locked. But what is happening now is that auction participants have conspired to minimize DOT bids by making adjustments. For example, I will talk with Moonbeam not to overlap the bidding slot next time to minimize DOTs we need.

Under this circumstance, I believe it is a good idea to incentivize people to join DOT auctions by rewarding them with DOT tokens. Without this, I assume fewer and fewer people will join the auction and I am heavily concerned about the DOT’s token economics after DOTs for the first 5 auctions will be returned early next year.

[rich]

A major question is not just the redistribution of staking rewards, but the core value accrual of the security provider - e.g. this is a two part question since it also relies on parachains generating sustainable value creation, or this model is simply a bail out that will drive the price of KSM and DOT down as teams need to sell into working capital to build parachains.

Ways to approach this is via a token swap.

The ‘business model’ of the relay is security as a service.
The ‘business models’ of the parachains is not.

Liquid KSM → Parachain treasuries
Illiquid Parachain tokens → Statemint/e

By accruing value to the network in the form of stake in the parachains it supports, we align incentives better for the long term.

This strategy clearly relies on the parachains developing product/market fit and therefore generating demand for blockspace and therefore sustainable valuations backed by real adoption.

With the treasury holding a diverse range of assets, this then creates a rising price floor for KSM/DOT that can be valued objectively by investors.

It is worth noting, the likely upside potential for this model is weighted heavily towards smaller, less capital hungry parachain projects, since those have the greatest leverage in terms of positive price action who can figure out their PMF more organically.

This approach ultimately allows any parachain team to conduct a swap agreement - the ROI to the treasury is relative to the token price of the counterparty parachain.

[Acai]

As we all have seen, the current supply and demand of DOT in the Polkadot ecosystem are in a state of imbalance. Firstly, let’s take a look at the demand side of DOT. Currently, the demand for DOT mainly comes from two aspects: usage demand (such as TX, identify, PoS, and governance voting) and auction demand. Considering the current development status of the ecosystem, the usage demand is not very high and has a certain upper limit, while the auction demand that was originally expected to become the main demand point of the ecosystem is currently in a cold winter. This has led to a serious imbalance between the supply and demand of DOT, resulting in a sluggish market performance. Moreover, this performance will further discourage new users from joining Polkadot, which will continue to exacerbate the lack of demand for auctions.

As @sota also mentioned,

One thing I am sure of is that a lot of people are not satisfied with the current mechanism of Polkadot parachain auctions and as the auction continues, fewer and fewer people are interested. There are several reasons: first, there are few high-profile projects. This is something Parity’s BD team needs to do better.

fewer high-quality projects are participating in the auctions, and fewer users are paying attention to auctions. The current auctions have become stagnant, and no one wants to lock up their DOT for two years or purchase DOT to help their favorite projects win slots.

To change this situation, it is time for us to make some changes. On the supply side, I hope to reduce the system’s inflation and lower it to 6%-7%, which I think is relatively healthy.

At the same time, on the demand side, in order to encourage user participation in auctions and reduce the psychological threshold for participation, I don’t think it is necessary to distribute additional rewards to users or parachain teams. Providing an official liquidity solution for users may be a good way to improve the current situation of locking up DOT for two years. Currently, there are many liquidity solutions in parachains, but they are relatively fragmented and lack user trust. maybe we can create a product similar to an auction pool, like a staking pool, where users can participate in parallel chain auctions and receive system-level liquidity tokens, and combine it with various parachain’s DeFi solutions, it may effectively alleviate user liquidity anxiety and reduce the threshold for new users to participate in auctions.

When supply and demand reach a state of relative balance, the market performance of Polkadot is likely to improve. This, in turn, could enhance the efficiency of the team’s BD work efforts, attract more high-quality projects to the Polkadot ecosystem, and create a virtuous cycle of auction demand, revitalizing the previously cold auction market.

[Guitarman]

Would like to add, currently with this market, alot of the project is doing self fund… like what Sota mention, projects are taking turns to win the auction. Thus the amount of dots required are way lesser compared to the first few auctions…

In this manner, projects are doing self-funding. In this manner, it defeats the idea of using crowdloans to bootstrap native tokens instead of ICO…

If moving forward, when projects keeps on self-funding the aunction, holders cant do much with dots, but only gov and staking.

I think we should look into this…

[0xTPP]

there is already an existing solution for this with bifrost slot auction liquidity protocol (SALP) allowing for liquidity during these crowdloan lock ups. its now just a question about ensuring these “vstokens” as they call them, to become more prominent within the ecosystem and have utility and value across parachains. so i think a solution for liquidity and opportunity cost is available just needs to be pushed