What Are Parachains? Complete Beginner's Guide

Every blockchain infrastructure fundamentally strives to achieve 3 main objectives: Decentralisation, Security and Scalability. The process of implementing all three principles simultaneously, however, constitutes one of the biggest challenges in the crypto space and is indeed a hurdle that is yet to be overcome.

In addition to this, several blockchains are struggling to implement intercommunication and cross-chain composability features as they find themselves being siloed and isolated within their respective ecosystems and limited by their very own design. It is therefore clear that crypto exchanges, projects and blockchain-based services ultimately need to find new ways to interact with other decentralised networks to ensure that data is seamlessly exchanged and assets are efficiently transferred.

In fact, it is not at all productive that users wanting to transfer assets from one network to the other incur such overwhelming complications and bottlenecks, while also having to pay exorbitant gas fees for a simple swap or transfer.

Essentially, the solution to this resides in cross-chain interoperability as it would allow projects to effectively cooperate with one another and break the boundaries separating their respective infrastructures. However, most of the existing solutions that provide cross-blockchain communication are either too complicated, risky, overloaded or will most likely include a third party medium. Having a third party act as escrow during a cross-chain operation thoroughly deprives blockchain of its innate decentralised philosophy and inherently defeats the purpose of its technology altogether.

To remedy this, the Polkadot Network is initiating a Polkadot-based parachain development for blockchains to safely and reliably interact. This type of parachain development allows for the creation of new, parallel Layer-1 blockchains that are connected to the Polkadot Relay Chain and facilitate the cross-chain movement of data, transactions and assets, while ensuring network security and scaling potential.

Before diving into the parachain ecosystem, it is constructive to briefly discuss Polkadot’s role as a multi-chain network, interoperability enabler and true innovator in the DeFi space.

What Is Polkadot?

Envisioned by Ethereum co-founder Dr. Gavin Wood, Polkadot is a protocol that allows data to move across different blockchains creating a novel ecosystem to initiate DeFi infrastructure for heterogenous sharding, adaptability and transparency.

Through its parachain system, Polkadot can act as a multi-chain network that processes several, parallelised transactions on multiple chains at once, eliminating the one by one transaction bottlenecks typical of traditional networks. Given its use of parallel processing power, Polkadot can offer improved scalability solutions to its projects and create the most optimal conditions for them to achieve future growth and adoption.

Polkadot’s central chain and foundational layer is known as the Relay Chain, which constitutes the base architecture containing all of the protocol’s validators and authenticators staked in DOT. The Relay Chain is composed of a relatively small number of transaction types and possesses a deliberately minimal layer of functionality, for instance smart contracts are not supported on it. In fact, the main responsibility of Polkadot’s Relay Chain is to coordinate and manage the ecosystem as a whole which, of course, includes parachains. Any specific work is delegated to parachains, which have differing implementations and features.

Polkadot was designed to be a Layer-0 multi-chain network, meaning that its Central Relay Chain can provide Layer-0 security and scalability for up to 100 Layer-1 blockchains connected as parachains. This is quite the groundbreaker as it enables a plethora of blockchain infrastructures to build and develop within its ecosystem, while furnishing Polkadot with a value-rich, dynamic and ultimately interoperable network.

Indeed, it is primarily thanks to this multi-chain hybridity that Polkadot is able to utterly reshape the DeFi landscape and cultivate an entirely new set of value propositions through its parachain-based, built-in layer of interoperability.

What Are Parachains?

Parachains are the diverse individual Layer-1 blockchains that run in parallel within the Polkadot ecosystem, on both the Polkadot and Kusama Networks. Connected to and secured by the Central Relay Chain, parachains share and benefit from the security, interoperability, scalability and governance of Polkadot. Polkadot’s cross-chain composability, furthermore, 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 just in DeFi but in the broader crypto space as a whole.

Structurally speaking, parachains are maintained by a network maintainer known as a collator. The collator is in charge of collecting parachain transactions from users and producing state transition proofs for Relay Chain validators. Essentially, collators maintain parachains by aggregating parachain transactions into parachain block candidates and producing state transition proofs for validators based on those blocks.

Thanks to the inherent interoperability that Polkadot provides them with, parachains can also connect to external networks such as Bitcoin and Ethereum using cross-network bridges. An utmost example of a parachain providing cross-chain bridge capabilities is no other than Clover Finance, a project that leverages a unique 2-way peg system to seamlessly move assets and data from the Polkadot Network to Bitcoin and/or Ethereum, among a variety of other chains.

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

• Decentralised Finance
• Decentralised Data Storage
• Internet of Things
• Identity Verification
• Gaming
• Credentials
• Non-Fungible Tokens (NFTs)
• Oracles
• Digital Wallets

These parachain-native, malleable features indeed allow Polkadot to build a truly dynamic digital asset infrastructure and provide the scalability, security and interoperability needed to really 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. As they all run on the same blockchain and compete for its computing resources, this can lead to congestion, long execution times and unpredictable running costs. In fact, this is considered to be one of the major inhibitions limiting blockchain infrastructures from achieving real-world adoption, and this is because they are simply not efficient enough and present too many complications to be fully-deployed.

On the other hand, parachains are individual and independent blockchains designed for a single purpose and that provide their users with a huge selection of utilities and different use cases. Furthermore, these individual parachains are capable of communicating with each other, building a high-performing network of blockchains rather than a single blockchain trying to solve all the issues on one virtual computer. In doing so, Polkadot-based parachains strive to ultimately diminish the constraints imposed by chain maximalism and reduce the risks of Balkanisation.

Parachains: The Future Of Blockchain

Polkadot’s parachain model was designed with the belief that the internet of the future will entail many different blockchains working in tandem and collaborating with one another. Thus, just as the internet now caters to different users and their specific needs, blockchains also need to be able to provide a variety of services, with one network perhaps being gaming-specific, another for finance, one for data storage, other networks for NFTs and internet of things applications, among the many other possible utilities.

Therefore, because of this future interoperable vision, Polkadot does not place any specific requirement on the design of its parachains, other than the fact that they must be able to prove to Polkadot validators that every block of the parachain follows the agreed-upon protocol. This allows parachains to enjoy quite a substantial amount of infrastructural leeway and this flexibility means that every single parachain can possess its very own design, governance process and token, optimised for its particular use case.

This relative architectural freedom also allows parachains to be run as private or public networks, as enterprises or communities, as platforms for developers and other projects to build applications on top of, as DeFi service providers or as ultimate cross-chain bridge protocols. The possibilities are clearly manifold and they embody the true essence of Polkadot’s multi-chain design, while enhancing the development of the interoperable, cohesive blockchain network of the future.

Scalability

Through its parachain model, Polkadot allows projects to achieve scalability at Layer-1 rather than having to rely on Layer-2 solutions altogether. This is in fact quite the advancement as it allows for the creation of a majorly decentralised, more efficient methodology of implementing blockchain scalability.

This is primarily because parachains, as Polkadot-based Layer-1 blockchains, can process transactions in parallel and spread out the workload consistently across their entire ecosystem, increasing transactional throughput and scalability as a whole.

Interoperability

Parachains allow blockchain communities to have full control and sovereignty over their own Layer-1 blockchain while also benefitting from the possibility of engaging in free trade with other parachains and external networks. By leveraging Polkadot’s cross-chain composability features, parachains can synthesise an interoperable economic infrastructure through which they can exchange assets, data, smart contract calls and off-chain oracle information such as stock price feeds or real-time market developments.

This essentially puts an end to the siloed nature of the blockchain space and opens up new opportunities for applications to interoperate and intercommunicate with one another, ultimately reducing the limitations of chain maximalism as well as Balkanisation risks.

Let us now discuss the mechanism used by parachains to communicate with one another and process cross-chain transactions, effectively overcoming the boundaries between their separate architectures.

Cross-Chain Message Passing (XCMP)

As previously mentioned, parachains take their name from the concept of parallelised chains that run parallel to the central Relay Chain within the Polkadot ecosystem, on both the Polkadot and Kusama Networks. Due to their parallel nature, parachains are also able to parallelise transaction processing and deliver new levels of scalability to both Polkadot and Polkadot-based projects.

They are fully connected to the Relay Chain and enjoy the security provided by the Polkadot framework. However, in order to communicate with other systems, parachains leverage a mechanism called Cross-Chain Message Passing (XCMP).

Polkadot’s XCMP is a protocol that lets its otherwise isolated parachain networks send messages and data between each other in a secure and completely trustless manner. To achieve this, Polkadot deploys a simple queuing mechanism based around a Merkle tree structure to ensure trust and verification clarity. The Relay Chain validators are responsible for moving transactions on the output queue of one parachain into the input queue of the destination parachain, but only the metadata associated with this output-input process in stored as hash within the Relay Chain.

While the XCMP design is still under development, Polkadot has set a few defining parametres with regards to its architecture and main functionalities, and these are listed as follows:

• Cross-chain 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 in charge of 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 hand off to a validator, it will aggregate the latest input queue data and process it.
• Validators will authenticate the proof that a parachain’s block includes the processing of the expected input messages to that parachain.

Cross-Chain Message Passing (XCMP), that is the mechanism allowing data or assets to be moved between two parachains, is firstly initiated by opening up a channel between the two parachains. This channel must be recognised by both the sender and the recipient parachain, and it is a one-way channel. Furthermore, a pair of parachains can have at most two channels between them, one for sending messages and another for receiving them. In order for the channel to be established, a deposit in DOT is required which will then be returned once the channel closes again.

Thus, through the XCMP channel, two separate parachains can create an intercommunicative structure for them to transfer valuable data and assets between each other and attain an unprecedented layer of interoperability that was indeed yet to be seen within the digital asset ecosystem.

Governance

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

Moreover, on-chain governance ensures transparency for parachain communities and constitutes a major prerequisite for institutions and potential investors who, more often than not, want to see clear decision making processes before getting involved in a project.

Parachain Slot Leasing

Projects that wish to run as parachains on Polkadot need to lease a slot on the Relay Chain by winning a parachain slot auction. A parachain slot is a scarce resource on the Polkadot Network and only a limited number will be available. Over time, as parachains ramp up, there may only be a few slots that are unlocked every few months but the end goal is to eventually have 100 slots available on Polkadot, split between parachains and parathreads.

Auction bids are placed in the Network’s native token, being DOT for Polkadot and KSM for Kusama. Teams can choose to lease a slot on Polkadot for a minimum of 6 months and a maximum of 2 years. By participating in a Polkadot or Kusama slot auction, the parachain’s team agrees to lock up the amount of DOT or KSM they bid for the entire duration of the chosen slot lease period, after which the amount will be fully returned to them.

Throughout the slot lease period, the KSM or DOT is reserved in the original account but is not available for staking, transferring and cannot be redeployed. Furthermore, teams can bid for a slot auction through self funding or via a crowd-loan system, in which contributions are solicited from existing DOT or KSM holders in exchange for some kind of reward.

For investors, a key difference between parachains and ICOs, IDOs and IEOs resides in the fact that participants maintain full ownership and control of their tokens. In fact, as opposed to swapping ETH or BNB for tokens at ICO, users can stake their DOT or KSM in exchange for project airdrops. If the parachain wins the slot auction on either Polkadot or Kusama, funds will be locked for the dedicated time period. If, however, the parachain loses the slot the participant’s funds are simple returned to them.

Parachain Slot Acquisition

Polkadot only supports a limited number of parachains, currently estimated to be around 100. Given this limited slot availability, Polkadot can allocate them as follows:

• Governance granted parachains, or ‘common good’ parachains.
• Auction granted parachains.
• Parathreads.

Governance granted parachains are allocated by Polkadot’s on-chain governance system, and are deemed as a ‘common good’ for the network. These might entail cross-chain bridges from Polkadot to other chains, for instance. Common good parachains are usually considered system level chains and do not typically possess an economic model of their own. The finality of these parachains is to primarily help remove transactions from the Relay Chain, allowing for a more efficient parachain processing.

Auction granted parachains are those granted in a permissionless auction, hence their name. Parachain teams can either bid with their own DOT assets, or deploy a crowd-load system to source tokens from the project’s community.

Parathreads have the same API as parachains, however they operate on a ‘pay-as-you-go’ basis. Let us now discuss Parathreads in greater detail.

Parathreads

Parathreads open up the competitive parachain paradigm and lower the barrier of entry to gaining the benefits of shared security and connectivity. With parathreads, Polkadot is even more accessible to projects that perhaps don’t possess the capital required to bid for a parachain slot action and gives them the opportunity to join its Network if their application requires greater throughput.

In fact, while parachains can borrow DOT or KSM from users via crowd-loans, they might not have a strong enough community to begin with. Thus, using parathreads, a team can gain access to the Relay Chain and bootstrap their application by implementing a ‘pay-as-you-go’ system.

The parathread model is particularly suitable for projects that do not require continuous connectivity to the network. Moreover, this is generally quite advantageous for projects as it allows them to switch between being parachains and parathreads depending on their needs and on the availability of parachain slots on the central Relay Chain.

Acala Network: Polkadot’s First Parachain On Rococo

Polkadot’s vision for a sharded parachain ecosystem is gradually becoming a reality with Acala Network becoming the first to win a parachain slot on the Rococo Testnet. Acala Network, the self-proclaimed DeFi hub for Polkadot, announced that it had secured the slot on March 26th 2021.

Back in February, Acala launched an Ethereum Virtual Machine (EVM) based on Polkadot’s Substrate framework to facilitate interoperability with Ethereum-native assets and is currency looking to forward the goal of providing cross-chain interoperability on the rapidly expanding Polkadot Network. Furthermore, Acala aspires to also launch a dollar-pegged stable coin designed for cross-chain applications and to be used in any Polkadot-based project.

Polkadot launched Rococo as a parachain testnet in August of 2020 in order to effectively test cross-shard communication protocols for Polkadot and allow projects to be deployed as parachains on Polkadot’s sister chain, Kusama Network.

Kusama Parachain Auctions

Polkadot’s ‘canary network’ and sister chain Kusama is also implementing parachain slot auctions and is looking to on-board projects of the highest quality as parachains on its Network. Launching parachains on Kusama represents the culmination of a multi-stage process that began with the launch of Kusama Chain Candidate 1, back in August 2019.

The first real-world, functioning parachain to launch was Statemine, which is essentially Kusama’s version of Polkadot’s Statemint. Designed by Parity Technologies, Statemine is a Polkadot-based, generic asset parachain developed to provide users with functionality for deploying assets such as CBDCs, stablecoins, other fungible tokens and NFTs.

Kusama’s Statemine acts as a common goods parachain and, thus, its slot was granted through governance instead of an auction system. The Statemine parachain can also be used to deploy central bank digital currencies (CBDCs), NFTs and other fungible tokens on Kusama. While Statemine’s utility as a solitary chain remains of key importance to the KSM ecosystem, its inherent value will only be realised once a community of interoperable parachain networks goes live on the Kusama architecture.

Kusama’s first parachain slot auction opened on June 15th 2021 and resulted in Karura Network winning the first slot with a total lock-up bid of 500,000 KSM, equating to more than $100 million at the time of writing.

Karura Network is looking to deliver a DeFi hub similar to that of its sister chain Acala Network, but on Kusama. While Karura and Acala are designed to operate in parallel and implement the same code, they are distinguished by their financial derivatives and are expected to become fully interoperable once the cross-chain bridge between Polkadot and Kusama becomes functional.

Upcoming Parachains On Polkadot And Kusama

It is by now clear that parachains are ramping up high interest levels across the space and are intriguing large quantities of users, investors and developers alike. With slot auctions raising over $200 million in crowd-loans so far, projects are gearing up to participate in the parachain bidding race and numerous campaigns have indeed already commenced.

Currently, the only guaranteed parachain slots on the Kusama Network are those allocated to Karura Network, Statemine and Moonriver. However, by analysing the PolkadotJS App, it is evident that there are bound to be many more.

Polkadot-specific parachains, instead, are set to go live later this year but there still does not seem to be any point of reference as to when this may be. For greater context, Polkadot’s founder Gavin Wood stated: 

Polkadot’s parachains launch is expected to begin once two things have happened: firstly, a full external audit should be completed on all new logic. Secondly, the Kusama canary network should have demonstrated that the new logic works in the wild by executing at least one successful auction involving crowdloans and hosting at least one functional parachain […] After Kusama’s first auctions complete successfully, one would expect Polkadot’s auctions to happen soon after.’
-- Gavin Wood - Polkadot Medium 

Conclusion

Parachains can be viewed as those fundamental elements driving cross-chain composability and interoperability within the Polkadot and Kusama Networks, as they allow for the creation of a truly dynamic and utterly versatile architecture. In fact, by implementing parachains within its ecosystem, Polkadot is able to split its infrastructure into a multiplicity of parallel Layer-1 blockchains which allow it to process transactions efficiently and move assets across its network in a more decentralised fashion. 

Polkadot’s parachain model is furthermore in-tone with the idea that future blockchains will have to perform a variety of specialised functions and will by nature have to possess a wide repertoire of capabilities.

Thus, because their innate flexibility, scalability and interoperability features, parachains could very well be the potential solution to some of the most pressing issues haunting blockchain today and indeed eliminate the previously irresolvable, complex bottlenecks inhibiting the technology from achieving mass adoption and use case.