A paradigm shift is happening in the Polkadot ecosystem

Author:Marvin Tong

Review:Shawn Lin@1PAR; MIDDLE.X

Written on the 1st anniversary of PAKA, this article aims to review the significant updates that Polkadot ecosystem has undergone in the past year, and share PAKA’s investment insights

We believe that in the past two years, Polkadot has achieved early stage success — — it realized the occupation of the basic protocol in the Layer0/1 market and successfully verified the establishment of the slot tokennomic model of DOT and KSM; surprisingly, as a testnet, Kusama’s success far exceeded the imagination of all early participants. For example, Kusama has developed a community culture with supporters that are very different from the Polkadot community. There are already more than 10 parachains running smoothly on Kusama, and the TVL of smart contract chains such as Karura and Moonriver has reached hundreds of millions of dollars.

Polkadot’s ecosystem paradigm is a three-tier structure:

· The base layer is the relay chain (Layer0), also known as Polkadot or Kusama, which provides shared security for the entire network, and is responsible for the consensus guarantee and basic functions of the parachain: such as cross-chain messaging

· The middle layer is a public chain that connects the parachains and the external bridged (Layer1). Parachains include public good parachains and parachains connected through slot auctions. They are responsible for business infrastructure, such as smart contract and privacy infrastructure; external public chains include value layer such as Bitcoin and Ethereum;

· The top layer is responsible for abstract logic protocols and decentralized applications (Dapps) such as DeFi protocols developed based on a certain parachain, DAO services designed based on common- good parachains, and future scaling solutions on redundant parachain in the future(Layer 2).

In the past year, we have noticed that the ecosystem has evolved beyond Dr. Gavin’s expectations in his white paper, with a large number of new ecological environment emerging. Therefore we will share PAKA DAO’s observations with all readers.

▸ Expecting Chaos: Kusama’s Community Adventure

We found that the Kusama community has grown into a more active community with its own cultural characteristics, even to some extent it is more distinctive than the Polkadot community. This is related to the token structure of $KSM and $DOT.

KSM Holders vs DOT Holders ( Source: subscan.io )

Note: The mod and para addresses were removed, and the cutoff block heights are Kussma-10103285 and Polkadot-7711658, respectively.

Kusama’s Native Token

Kusama’s native token, $KSM, basically comes from the airdrop of $DOT. When the mainnet went live in 2019, Kusama’s network value discovery was still in a hazy state. With market turbulence and a clear vision, it was a typical community-driven type. This project has formed a user structure where most of the $KSM holders are retailers, and most of its holders are retail users, not institutions, and it also promotes Kusama to become a typical community-driven project. In terms of community culture, Kusama encourages innovation and adventure, and the slogan of its community is “Expecting Chaos”. Innovation did happen:

  1. On Kusama, the fraternity culture of the “Society” module emerged early on: Kappa Sigma Mu is a membership club based on the Substrate community platform. This is a community DAO motivated by social behaviors, aiming to encourage users to join a community where they can participate in rule-making. Treasury encourages community members to participate with rewards and incentives. At present, there is only one on- chain community on Kusama. More communities are expected to emerge when runtime upgrade is completed.
  2. Fast Upgrade of Governance Module: Treasury in the Governance Module supported only referendums and approvals. However, after Kusama community found the need to follow up on a large number of grants applications from Treasury, they developed “bounty” and “tips” for different scenarios. Bounty is for specific projects with rewards, where the council can assign a project manager to follow up. After completing the bounty, the manager will get a part of the rewardas well. Tip is for small rewards, which can be quickly allocated to daily community incentives and reimbursement.
  3. Native and technical edge-breaking projects such as RMRK are emerging.

The culture of Kusama has been reinforced by continuous positive feedback throughout the development of the community:

· Take a closer look at Kusama Council, you will see great diversity and many well-known community influencers (e.g. @DonnieBigBags, @Jam10o). It shows that the Kusama community has broken away from the centralized connection with the Parity/Web3 Foundation and has become a truly autonomous community.

· Religiousness: Take Kusama’s bird-shaped logo as an example, the community culture is constantly strengthened through the bird-themed creatives airdropped by RMRK’s Kanaria or third-party artists. You can confirm this from the name, introduction, and language of Kusama’s influencers on Twitter.

· A defensive mentality of the community: You will find that the Kusama community’s self-defense mentality far exceeds the Polkadot community, and its action is amazingly vigorous: in the case of the Integritee crowdloan, the Dotsama community aggressively resisted the launch of the KSMStarter to participate in the crowdloan in order to protect themselves and even issued a proposal to temporarily terminate the auction of the parachain.

Some of the above situations are probably not expected by the early supports of Polkafot. We can predict that Kusama community is becoming a driving power alongside Polkadot community. There’re more potentials in the future including:

· A larger scale of Innovations of Kusama ecosystem

· The damping rate of total lockup amount in Kusama slot auction is likely to be lower than that in Polkadot, as the new parachain must win the support of the Kusama community first in order to participate.

· Highly speculative capital and projects backed by such capital are less likely to win the respect of the Kusama community.

· Metaverse built on Kusama network may grow far beyond expectations.

It is very interesting that this phenomenon converges with the communitization of Defi2.0 and Social-Fi, which means that the influence of capitals behind the scenes will be further weakened. It is specifically reflected in the fact that crypto institutions cannot obtain a large amount of discounted tokens as before, resulting in fewer tickets as before. They can be the early investors only through active participation in the community creation.

▸ Technology Exploration: Common Good Chain, XCM and ink! Contract

The early design of relaychain included many essential blockchain functions: asset module, transfer system, governance module, minor smart contract (pallet), etc. However, during the evolution and development of Parity, we found that the technical concept of Relaychain has been converted from a public chain to Layer0, which is simply responsible for the most fundamental parts, such as cross-chain message routing and consensus security. The modules of relaychain such as asset issuance and governance may all be disassembled into separate parachains!

These parachains will exist as “public-good parachains”, i.e. parachains that run without the need to participate in slot auctions. At present, the public- good parachain of Kusama and Polkadot is Statemine/Statemint, which is only used as a basic asset module to issue and manage the fungible and non-fungible token system.

Public-good parachains may also open for auction. For example, Canvas, a parachain that supports ink! contract, is similarly positioned to Moonbeam but focused on ink! contract deployment. The Moonbeam and Moonriver cases are more special: Parity was deployed by an independent project after the open source community had largely implemented Substrate’s EVM-compatible layer, Frontier. We believe that Dapps based on Canvas and Statemint, two public- good parachains, will usher in an explosion of application.

In addition, third-party teams can also apply to become public- good parachains. For example, the application submitted by the Encointer team is likely to become the first public welfare parachain realized by a third-party team. This also confirms our judgment that the Kusama community has a unique culture. What’s interesting is that in the community’s discussion of this proposal, in addition to “common good” and “benefits for Kusama”, there is also a demand for “governance overlap”, that is,the Council of the public good parachain should ideally be aligned with the Kusama Council. This is the case, for example, with Statemint.

We have also found some very high-quality infrastructure development teams for Polkadot, most of them focused on infrastructure development and do not expect to issue tokens for the time being. This is a manifestation of the open-source ecosystem moving to a higher level- we rarely observe similar phenomena in other ecosystems, and the ecology with this phenomenon has ushered in a fundamental mutation, such as Arweave. Notable Polkadot infrastructure builders include: Patract Labs, ChainSafe, Onfinality, and zCloak.

In Q3 2021, Dr. Gavin Wood published three articles on XCM (The Cross-Consensus Message Format), which are the most critical technical idea upgrades of Parity this year:

XCM: The Cross-Consensus Message Format

Abstract: XCM is not a messaging protocol but a generic message format whose application is not only limited to cross-chain, but also can be extended to cross-consensus.

XCM Part II: Versioning and Compatibility

Abstract: XCM, as a common message format, like a programming language, which changing will abstruct the communication among different users, a language should change in an ever-changing world. Therefore, XCM needs a versioning tool for its orderly upgrade, a tool that allows communicating parties to confirm the version of XCM currently in use mutually.

XCM Part III: Execution and Error Management

Abstract: The XCM execution model, XCVM, is a very high-level, non-Turing-complete virtual machine. It is register-based (rather than stack-based) and has several special-purpose registers, most of which hold highly-structured data. XCM enables the efficient execution of commands and error management.

We believe one of the important points is that XCM will not only serve assets across chains, but also has the possibilities of data messaging which may go far beyond most people’s perceptions.

Moreover, we believe the recognition of Ink! contract is underestimated: ink! contract may be the first to support cross-chain contract-level communication! Here’re the following scenarios:

· Sushi Swap deploys the same set of contracts in both Chain A and Chain B, named Contract A and Contract B.

· Asset A is on chain A while Asset B is on chain B.

· If I wish to exchange asset A for asset B, I can only do so by minting asset A’ on chain B first through a cross-chain bridge, and then through asset A’. There’s no way to call directly between A and B contracts (due to the limitations to EVM).

· But in the ink! contract, contract A can call contract B directly via XCM, where the assets can be exchanged without further snapshot/minting.

This is just one case where our imagination is limited. In fact, the combination of direct calls of cross-chain contracts may bring exponential increase of efficiency and diversity to the existing DeFi ecosystem. For example, deploying WASM inside trusted hardware to perform cross-chain messaging, the contract can even send an HTTP request. Phala positions this kind of contract as “fat contracts”, i.e., they complement the features that traditional smart contracts do not have, such as low latency, high-performance computing, privacy, etc. We believe that ink! contracts can do more.

We have also been following the current technical advancement of various parachain project. PAKA DAO members also discuss development issues very often. In addition to a thriving developer ecosystem, we have identified several noteworthy technical issues:

· XCM standards in rapid iteration can impose more alignment costs on downstream parachain updates and application deployments.

· Relaychain’s version upgrades frequently, and ditto, there’s a lot of pressure on the parachains development, which may lead to insufficient technical resources for business updates.

· It takes quite a long time for parachains to go live on average. In the case of Kusama Slot Auction, for example, parachains take about 30–60 days from the time the slot is auctioned to the day when real business are deployed (not just a shell chain), i.e. The technical cold start will take up 15% of the slot usage time

▸ The Rise of Integrated Applications

In the first two years of the Polkadot ecosystem, most startups would want to be parachains. However, we have observed that things have changed recently. The rise of RMRK and Zenlink has brought us a new way of thinking: do we need parachains?

We even believe that integrated dapps will leverage the next phase of the Polkadot ecosystem. This direction of integrated dapps and protocols will become a popular thing in the ecosystem!

In the wiki documentation on the Polkadot website, we see a comparison of smart contracts and parachains as follows:

· When a feature is implemented with a smart contract, the smart contract you write must be deployed on a specific chain and associated with an address on that chain. In contrast, a Runtime or Module developed on a parachain to implement the feature you want is to create a standlone state machine.

· Smart contracts must be update manually, while parachains will be able to swap out their code completely with root commands or governance Pallets automatically, making upgrades easier.

· When you build a smart contract, it will eventually be deployed to a target chain with specific environment. Parachains allow developers to state their own chain’s environment and even allow others to write smart contracts for them.

We believe that a new type of application beyond this paradigm has emerged in the Polkadot ecosystem, which is integrated decentralized applications. Represented by RMRK and Zenlink. The following is the summarise of the multiple characteristics of this paradigm application:

· The back-end logic of the application is decentralized.

· Users are interacting with the chain rather than the application.

· The application is not a parachain, but a pluggable module which is a pallet that can (but not necessarily) be deployed on a parachain.

· Different back-end modules of an application may be deployed on different chains. For example, Zenlink’s swap pallet is deployed on multiple parachains.

· Upgradeability: Upgrading of applications is flexible.

· The token for the application is issued on statemint.

Unlike the smart contracts (e.g. DeFi project) on EVM chains, integrated applications not only keep the characteristics of decentralization and smart contract, but are also technically flexible. RMRK and Zenlink are the pioneers of this type of application, which can be integrated into new DAPPs with good experience and innovation by deploying multiple pallets on different parachains and using the optimal performance of various parachains.

We believe that integrated applications will lead to best practices for XCM and will create a thriving ecosystem that other public chains cannot replicate.

▸ Constraints: frequent version updates of XCM and asset fragmentation

After the launch of Karura and Moonriver, we noticed that their TVLs didn’t reach expectations.

As of November 11, Moonriver’s TVL is about 377M, and Karura’s TVL is $91M, ranking 18th and 34th respectively in the TVL ranking of all public chains, failing to be included in the Top 10.

Ranking and metrics for DeFi (Decentralized Finance) protocols.defillama.com

One of the reasons we inferred is the lack of liquidity in Polkadot’s DeFi ecosystem (excluding the native token of the protocols):

· Karura’s main source of liquidity is the stake of KSMs, the staking of which allows for the minting of KUSD. Therefore, the number of KSMs involved in the minting of KUSD determines the true extent of Karura’s liquidity. The usage scenario of KUSD, in turn, determines the demand to mint KUSD.

Karura TVL distribution

· Moonriver’s liquidity comes from EVM bridges, such as Ethereum, BSC, Fantom, etc., with the main source bridge being Anyswap at the moment.

MoonBeam TVL distribution

Even though Moonriver has had an enormous number of fork projects and the community fomo sentiment is relatively good, its TVL remains at a low level of a few hundred million dollars. What’s the cause?

We believe that this is the result of a combination of factors:

  1. Due to the frequent version updates of XCM, most parachains are slow in confirming each other’s versions and interfacing with XCM for debugging. As a result, only Karura and Bifrost are connected to the 10 parachains running on Kusama, while most parachains are still in silos. Thus the combinatorial nature of the parachains has not been given full play. This has led to the DeFi in Moon ecosystem not yet interoperable with that of the Acala ecosystem, and to the fact that Moon bridged assets/Karura minted assets cannot be used in other parachains, so the increase of community’s demand to mint assets tends to become slower.
  2. Asset fragmentation: The Karura parachain already has two kinds of minted KSM assets (lKSM, vsKSM), while the assets on Moonriver are more complicated. We believe this led to a fragmentation of liquidity into N pieces for DeFi projects in the Polkadot ecosystem. Because applications that can fully leverage XCM for asset aggregation have not yet been built, resulting in liquidity being scattered among various fragmented assets and capital not being fully used to its utmost efficiency.

▸ Paradigm Shift

To sum up, we believe Polkadot is in the midst of one of the most significant paradigm shifts:

· Community: The Kusama community is a strong driving force and has even became the mainstream of the voice.

· Technology: Relaychain will focus more on Layer0, and the new public- good parachain will be a new force.

· XCM: XCM is more complete. ink! contract will become a cutting edge and a dark horse of the ecosystem.

· Parachain: The progress of launching is relatively slow. After fully launching the parachain, it will bring a significant improvement in fundamentals.

· Applications: Integrated applications have emerged with features that other public chain ecosystems do not have and are on edge of an outbreak.

· Inadequate liquidity: the progress of XCM and asset fragmentation become more prominent, but Polkadot’s DeFi will usher its explosion after Polkadot DeFi goes live and the XCM version consensus is strengthened.

▸ Key Opportunities

PAKA will focus on the following key opportunities in the near future (not an investment suggestion):

· Integrated applications: We will advise some parachain projects to transform into “integrated decentralized applications”and use RMRK and Zenlink as benchmarks to explore the practice. This will be the main direction of PAKA in the next phase.

· Leading applications incubated by each parachain ecosystem, and projects that are closely integrated with the Kusama community culture.

· Protocols that can address the problem of inadequate liquidity in the Polkadot ecosystem: e.g. bridge protocols, or protocols that can aggregate the liquidity of fungible assets.

· Application or developer that use ink! contract technology.

· Infrastructure: e.g. Subquery, Zeitgeist, zCloak, Manta Network.

· Metaverse: e.g. bit.country.

PAKA is a starter’s fund in the Polkadot ecosystem, a DAO Venture co-founded by a group of parachain initiators, aiming to discover and help innovative teams in the Polkadot ecosystem. We hope to bring our experience in entrepreneurship and technology to the Polkadot ecosystem and help the next generation of entrepreneurs through the form of DAO while promoting the vision of Web3.0.

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PAKA

Founders fund in Polkadot ecosystem, running as a DAO venture. Long Polkadot, short Web2.0