Regressive Allocation and XCM in Polkapad. Why This Is the Future of Polkadot

There are two things that make Polkapad different from other popular launchpads. They will allow us to become a very useful part of the Dotsama ecosystem, and ensure its long-term development. These are native XCM support and regressive token allocation.

The Need for XCM

One of the problems with blockchains is the difficulty in establishing links between them. This is especially true when you need to transfer a token from one chain to another. This process should be decentralized, transparent and trustworthy. You also need to securely confirm transaction data. The way projects do it right now is through bridges. But a big problem with using bridges is that they get hacked and that you can lose money. For example, in March 2022, Ronin Bridge connecting the Axie Infinity network to Ethereum was hacked, and $625 million was stolen from the project. This became the largest hack in DeFi history.

The architecture of Polkadot is designed to solve this problem. The system consists of separate blockchains (parachains), but a direct connection can be established between them using Cross-Consensus Messaging (XCM). This format has a peculiarity: being in one parachain (for example, Moonbeam), you can directly send information to another parachain. This allows you to, say, send a token from a certain wallet in one parachain to another.

Using these XCM messages, we can interconnect smart contracts in different parachains linked via this XCM channel. In fact, the existing XCM standard allows you to generate tokens in one parachain upon request from another. And in the future, XCM involves not only token burn or generation, but also other, even more complex ways of using a communication channel.

A Problem With Synthetic Tokens

At the moment, cross-chain bridges use synthetic tokens to transfer assets between conventional blockchains. This means they freeze tokens in one chain, and make a “receipt” for them in another (so-called “wrapped” token). Using this synthetic token a user can always get the original token back.

Synthetic tokens are convenient. For example, there is a Wormhole bridge that enables existing assets to be moved between Ethereum and Solana blockchains. You can create a “wrapped” version of Ethereum and use it on the Solana chain, interacting with projects that need it. This also provides an easy way to profit for DeFi exchanges: when they collect a big pool of liquidity, they can easily “transfer” assets between chains (in fact, freeze them in one chain and unfreeze them in another), taking a fee in the process. But then again, that same liquidity becomes a big target for hackers. For example, in February 2022, $320 million worth of tokens were stolen from the Wormhole bridge.

The danger of using bridges is one of the reasons Ethereum founder Vitalik Buterin previously made the case that bridges won’t be around much longer in the crypto ecosystem, saying there are “fundamental limits to the security of bridges that hop across multiple zones of sovereignty.”

There are several reasons for the danger of bridges, and they are quite understandable:

  1. Huge concentration of liquidity in one place. That is, the lack of decentralization.
  2. The presence of automation, along with the early age of crypto technology, provides unforeseen gaps that allow attackers to sometimes take advantage of bridges.
  3. A popular problem in 2022: unpeg from the initial price of an asset. This is unfortunately typical for many wrapped tokens.

The initial asset has some innate value, which is formed on the basis of many parameters: native use cases, the ability to stake it, and so on. A synthetic asset in another network most often does not have these benefits and additionally bears risks when “passing” back through unwrapping. Plus, this unwrapping procedure takes time, making synthetic token innately less attractive than the original version. Therefore, the community has to actively fight to ensure that wrapped tokens do not depeg in price from the originals and do not become meaningless.

In a high and stable market arbitrage works to match the price of the original and the synthetic asset. If there is a difference, an arbitrator will come to buy synthetics cheaply and immediately sell them for more. But in a negative market situation, such arbitrage stops working, which leads to unpeg (since there is no one to equalize the price).

In short, this happens because people are afraid there is no guarantee to exchange the wrapped token for the original one. This makes bridges and wrapped assets all the more dangerous in a bear market.

For Polkadot, a network with bridges is all the more unsuitable. When there are 10, 20 or 100 parachains, the system becomes too complex and riddled with potential security holes. Between two blockchains, synthetic tokens work. But if you try to connect a third blockchain, and try to transfer a receipt for the first token from the second chain to the third, you will have a problem with the liquidity pool. It won’t be clear whose wrapped token it will be, the first or second blockchain. And how to proceed with “unwrapping” it. There are just too many receipt configurations. And when we add the 4th or the 5th blockchain to the mix…

Fortunately, Polkadot solves all these problems at once within the system architecture. Due to XCM, the network has a decentralized way of transferring messages between parachains, which goes through the securitization layer inside the relay chain of dotsama itself. This allows the network to:

  1. Forgo the creation of liquidity pools at bridges (points of centralization).
  2. Ensure 100% liquidity for tokens on both parachains.

Therefore, conceptually, linking parachains through XCM is simpler and safer. You can easily calculate where and how many tokens are staked, and where assets need to be transferred. We can just make a series of smart contracts, and now we can spawn tokens in one chain and burn them in another without inventing any additional intermediary tokens. This can become one of the strongest points of the whole ecosystem and help attract new users to it.

XCM as a Way to Develop a Launchpad

None of the launchpads previously natively supported XCM, even those that claimed to work with Polkadot parachains. But on 4 May 2022 Parity Technologies finally launched highly-anticipated XCM v3 on mainnet, which enables asset transfers between parachains and further enhances interoperability. The market is now finally ready for launchpads that act as links between parachains and work with them directly, without synthetic tokens. And we are the first launchpad to offer this functionality.

Polkapad is the first true heterogeneous multi-chain launchpad. It is able to freely link up to any parachain, and help new projects develop within it. We can work for all communities of different parachains, collecting users’ credibility and ensuring the allocation of tokens. All the while remaining completely secure, since no extra mechanisms, aside from XCMP, are being used.

This is very important for the Dotsama ecosystem. Previously, if a project was launched on a different parachain than the one you had tokens on, it was extremely difficult to support it. Questions arose about how to stake your tokens, and how to transfer them to one common pool for calculating allocation. Therefore, it was inconvenient to participate in the launch of startups on neighboring parachains.As a result, each parachain formed its own niche community, which did little to support neighboring projects, even if they were all on the same relay chain. This made the whole Dotsama ecosystem weaker. But now, with Polkapad, you can feely stake and freeze tokens, and collect liquidity exactly in the chain where the project is launched, without exchanging or wrapping anything. This allows all Polkadot and Kusama users to support new projects together.

Regressive Allocation in Polkapad — Why It Works

When wanting to invest in a start-up, a person first needs to prove their credibility. This is one of the functions of launchpads: ensuring that users are valuable to the project and can help it succeed. We need to know if a person has free funds, is stable, and will not sell all the tokens at once.

Let’s say a person shows that they have $100 in tokens on one of the networks, and as a result, they can get a new project’s token allocation for $1. Such a system has proven itself in pre-IPOs. Therefore it is currently widely used when launching new crypto projects. But there is a peculiarity here: tokens are volatile! If the launchpad or the blockchain on top of which it was built are successful, their token price goes up. As a result, those people who started using the launchpad first get a big advantage. They have more tokens, they are “more valuable”, and so they gain a larger allocation. Meanwhile new users, who are interested in launching projects and want to invest in them, get almost nothing.

This is a common occurrence. For example, DAO Maker is in such a situation now. Almost 98% of its tokens are now concentrated in the hands of the top 100 holders. If you want to invest in a new project running on DAO Maker and get an allocation on par with these whales, you need to stake huge sums, millions of dollars. Of course, such a system is not suitable for new users, they do not have such funds. And so new launching projects get less traction within the community, and have a smaller audience overall.

As a result, we see that the number of users of the DAO Maker itself is decreasing. The number of total wallet addresses holding DAO has dropped from 18,000 to 15,000 over the past six months, even despite the success of the project. There is almost no point for new people to join. Only those who were there early remained. And new startups launched through this launchpad are not gaining the user base they would like.

Such launchpads are in the majority. Almost all of them offer a linear model of token allocation (or even worse, a tier model, where the more you stake, the greater the allocation percentage you get). As a result, almost all launchpads currently face such problems: new users do not see an opportunity for themselves to compete with the “old-timers” → gradually fewer and fewer of them join → this leads to ecosystem stagnation. And, paradoxically, the more successful the launchpad is, and the faster the price of its token grows, the faster it becomes unprofitable and inhospitable for new users.

Polkapad solves this problem by presenting its regressive allocation model. Simply put, this means that when your verified creditworthiness is $200, you get a $1 token allocation. And when you are a whale and you have 100 times more funds, you get not $100, but $5. This gives an interesting effect: you can invest even when you have little money. What’s more important is a genuine interest in the project.

With this system in place, launching startups find it easier to recruit new users, their token now has a wider distribution. It is easier for projects to reach mass adoption.

Of the minuses, such a system is impossible without KYC. You need to verify users so that one person with a million dollars cannot create a hundred thousand accounts and stake $10 each. This was a story with CoinList. There were bot farms there with 100,000 accounts, the only task of which was to bring profit (= high stake) to their creators. As a result, new startups failed to gain a real user base. An organic ecosystem wasn’t created, and the projects, even if they raised money, were DOA.

To counter that, Polkapad offers a thorough KYC process to remove multiaccounts. We can guarantee that each of the users who come to the project is a new unique client.

 The more people participate in the allocation, the higher the chance that the project will gain real users, referrals, clients, etc. The more real transactions, the higher the demand for the token, the higher its price.

Polkadot and Kusama have a lot of whales, most of the tokens are held by several thousand people. But to succeed, an average dApp needs 20,000 daily active users. Startups need to attract a lot of smart people to operate, grow, and gradually expand the ecosystem. Without a regressive allocation of tokens, this won’t be possible.

Meanwhile, whales can enter at the presale stage, and invest in a potentially successful project directly. There is also a separate LP-pool for them. With a high entry threshold, but 40-50 times fewer users. This is the place where they can compete with each other without disturbing other wildlife in the process.

Bottom line — new startups raise money, but also have the opportunity to recruit enough users to be successful in the long run.Read more about our XCM integration and allocation model, with numbers and calculations, in the Polkapad Whitepaper (sections 4 and 5).


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