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What are Parachains and Why are they Important for Crypto?

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Over the years, the cryptocurrency industry spent a lot of time and effort in an attempt to make blockchain technology actually useful for the masses. The keyword here is masses, of course, since the blockchain was pretty much better than most, if not all, traditional systems on the day it was created. However, since the early days of Bitcoin, the inability to scale was seen as its largest problem.

With that in mind, there were many different methods that the industry tried out to try and solve this issue, and one of the solutions that developers came up with included parachains — a revolutionary technology native to Polkadot’s ecosystem. Today, we wanted to take a deeper look into this tech and see what it actually is, how it works, and what makes it special.

What are Parachains?

Let’s start from the beginning, by answering what parachains are, in the first place.

Polkadot describes parachains as the diverse individual layer-1 blockchains that run in parallel with the rest of the Polkadot ecosystem, on both the Polkadot and Kusama Networks.

The parachains are secured by the central chain, also known as the Relay Chain. They also share the entire ecosystem’s security, scalability, governance, and interoperability, tapping into all the benefits of the Polkadot ecosystem. Also, thanks to the project’s general cross-chain composability, pretty much any type of asset or data can be moved from one parachain to the other. This also opens up a number of additional applications and use cases, since parachains can also be connected to external networks via cross-network bridges.

As for Polkadot’s central Relay Chain, it offers layer-0 security and interoperability, and it can support up to 100 layer-1 blockchains connected as parachains.

Characteristics of Parachains

Parachains come with a number of benefits and advantages, coming from their advanced characteristics, which include:

1) Scalability

Scalability is one of the first and biggest characteristics to mention when it comes to parachains, as the entire parachain model allows Polkadot to reach major scalability at layer-1, instead of having to rely on layer-2 solutions. This is also a more efficient, and by far more decentralized way to achieve scalability that will allow the blockchain to properly serve its community.

Parachains also allow the system to spread out transactions and have them processed in parallel over the entire ecosystem, which increases the number of transactions that can be processed simultaneously.

2) Specialization and Flexibility

The design of the entire parachain model was created with a specific idea of what the internet of the future will look like. The developers imagined the future internet as one that will use many different types of blockchains that may be dedicated to different things but are ultimately all working together.

All of these chains would provide a variety of services, similar to how the internet offers different services right now. So, some chains might be used for online gaming, while others would focus on finance, identity management, or some other purpose.

This is why Polkadot decided to place no criteria on the parachain design, apart from the fact that they need to be able to prove that each block on the parachain follows the agreed upon protocol.

In other words, there is quite a lot of flexibility in the sense that each parachain is allowed to have its own, unique design, alongside its own token, its own governance process, and even be dedicated to its own, specific use cases. They can even be used as public or private networks, serve communities or enterprises, and also work as development platforms, and more.

The possibilities are endless, and everything is allowed, as long as each parachain can prove to the Polkadot validators that the blocks of the parachains follow the protocol.

3) Governance

Polkadot allows parachains to adopt any governance model they want, with a number of pre-built modules available for implementation of different governance systems already. This is another way in which the project provides flexibility since the community is allowed to access some of the most sophisticated on-chain governance mechanisms, which would allow teams to reduce the chance of hard forks on their chain. This would be desirable as hard forks are always a risk since they can end up splitting entire communities, as witnessed with Bitcoin Cash and Bitcoin SV in November 2018.

On-chain governance can also offer accountable transparency for the communities, which is a prerequisite for so many institutions that need to see that the decision-making processes are clear and available before they even consider getting involved with the blockchain.

4) Interoperability

Next, we have interoperability, which allows blockchain communities that use parachains to achieve full control over their own layer-1 chain. At the same time, they also benefit from the possibility to engage in free trade, not only with other parachains but external networks, as well. So, a community based around one parachain in Polkadot’s ecosystem can just as easily communicate with Ethereum’s blockchain, as it would with another parachain.

That is, of course, only because Polkadot’s own cross-chain composability allows it. Because of it, it is possible to send tokens, data of any type, including even verifiable credentials, smart contracts calls, and even off-chain data received from oracles.

With interoperability, the possibilities within the blockchain space are opening up to nearly endless opportunities, and interoperability is also considered the key feature that will someday lead to Web 3.0.

5) Slot Leasing

Another important thing to note is that projects that wish to run as a parachain have to lease a slot on the Relay Chain. This is done by winning a parachain slot auction, where auction bids are placed in the native token of the network. With the native token being DOT in Polkadot’s case, of course, and KSM in Kusama’s ecosystem.

Slots on Polkadot can be leased for a minimum of six months, while the maximum length is two years. By opting to participate in the parachain slot auction, teams essentially agree to lock up the DOT coins that they are bidding, for the duration of the chosen lease period. After that, they will get back the full amount. However, while the lease period is in effect, the DOT is reserved in the original account. However, it cannot be used for transferring, staking, or pretty much any other use.

6) Lower cost

Another advantage of using parachains is that they are connected to Polkadot’s main chain, which allows them to access as much computing power as they need. The advantage, however, is the fact that they don’t get additional fees, or gas costs.

As for the actual cost of running a parachain, it can be described as the opportunity cost from lacking access to the locked DOT/KSM (for the duration of the lease) to unlocking the full amount of DOT/KSM bonded by a team for a parachain slot after the lease period ends.

Teams can choose to fund their slot through crowd loans if they so desire, and then, they can reward contributors in any way they see fit. However, that does represent an additional cost. Other costs are mostly minor ones, such as the expense of running collator nodes on the parachain. But, generally speaking, for apps with a lot of traffic and users, using a Polkadot-based parachain is typically always a more economical solution than running a solo blockchain.

7) Parachains and Parathreads

Finally, let’s differentiate parathreads and parachains. Essentially, parathreads are parachains that are connected to Polkadot’s main chain by using a pay-as-you-go model, instead of leasing a slot. This model may be more fitting for some projects, as it is particularly suitable for those that don’t need constant access to the network.

Of course, Polkadot’s blockchains can switch between parachains and parathreads as per need. Of course, some may also opt to go for parathreads due to the fact that there are no accessible parachain slots on the Relay Chain. Rather than waiting with the development of their project before a place opens up, they can use a parathread and then switch to a parachain when a slot becomes available.

Conclusion

Parachains on the likes of Polkadot and Kusama are an advanced approach to solving scalability, as well as a number of other issues that have been bothering the blockchain industry for a long time. They offer a number of benefits, and in order to understand them properly, one should be familiar with their characteristics. Parachains might lead to the next stage in the development of the blockchain industry, as they are extremely compatible with a number of other blockchain solutions and technologies, including oracles. This is why Polkadot has been attracting a lot of attention, and why it is one of the projects with the most potential for the future.

Ali is a freelance writer covering the cryptocurrency markets and the blockchain industry. He has 8 years of experience writing about cryptocurrencies, technology, and trading. His work can be found in various high-profile investment sites including CCN, Capital.com, Bitcoinist, and NewsBTC.

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