What Is a Crowdloan?
In the crypto world, most projects traditionally relied on Initial Coin Offerings (ICOs) as a funding method during their initial stages.
However, ICOs lacked a guarantee of success and often relied on investors’ trust in the team, whitepaper, and community.
To address this issue, Polkadot introduced the concept of crowd loans.
Crowdloan Phase in Parachain Slot Auctions
Before any parachain slot auction, there is a dedicated timeline for the crowdloan phase.
During this period, teams can borrow $DOT from community members to participate in the auctions.
Rather than giving their $DOT directly to the team, users contribute their $DOT to the relay chain associated with the project.
Funding, Lease, and Return of Funds
Once the funds are gathered, the project submits a bid using the $DOT received from the crowdloan.
If the project secures the parachain slot, the investors’ $DOT are locked for a specific term determined by the parachain lease, typically ranging from six months to a maximum of two years.
At the end of the lease, the $DOTs are returned to the investors.
It’s important to note that the team never gains possession of the investors’ $DOTs/$KSMs throughout this process.
Investor Protection and Recovery of Funds
Crowdloans differ from the traditional token exchange model in protecting investors’ funds while allowing them to earn additional tokens from potential projects.
Regardless of the project’s outcome, investors can always recover their $DOTs after the parachain lease expires.
This gives investors confidence, as their primary tokens are secure and not dependent on the project’s success.
Enhancing Parachain Slot Access
Crowdloans are an intriguing addition to the blockchain sector, helping teams secure para chain slots while ensuring the protection of invested tokens, as projects never gain access to them.
This measure also helps evaluate the quality of teams seeking crowdloans.