Polkadot has released a fully detailed explanation of its new IPO (Initial Parachain Offering) model and how it’s going to work.
This is the first time the project has gone in-depth about the process, and it’s also the first time they are officially discussing it as teams are preparing for the launch. In an official press release shared with CryptoPotato, the team explained how the new process would work.
Back in 2017, the cryptocurrency field was taken by a storm by the boom of initial coin offerings (ICOs) where investors had to send their funds to a project, anticipating the launch of its native token and it subsequent exchange listing to make a profit.
Polkadot aims to give the power back to its users and has come up with a new model called Initial Parachain Offering (IPO). While the term is oftentimes used in legacy finance, the process has nothing to do with initial public offerings.
First, it’s worth noting that Polkadot is a blockchain network that scales by spreading transactions across a variety of multiple parallel blockchain shards referred to as parachains. Since the launch of the Rococo testament last month, there have been seven teams adding a parachain.
To bond, a parachain to Polkadot, development teams need to acquire the native DOT token. This is where the new model called “Initial Parachain Offering” comes into the picture.
The entire mechanism is made possible thanks to the Substrate crowdfunding module. It will allow teams to accept DOT loans from any current holder of the DOT token.
The funds that are secured through this model will go through an account existing on the Polkadot Relay Chain.
If the project is able to secure the necessary contribution to win the auction, the DOT loans will be returned to the contributor at the end of the parachain lease period. On the other hand, if the project fails to reach the minimum amount needed, the DOT will be returned to the contributor immediately.
There’s an obvious difference between the Initial Parachain Offering and the Initial Coin Offering. With the latter, users had to send money, be it ETH, BTC, or fiat, to a team in return for the new project’s native token. However, this opened up a huge risk factor of scam artists, and, as history showed, a lot of the projects were nothing but blatant frauds designed to steal people’s money.
With the new Initial Parachain Offering, users will get their DOT tokens back at the end of the leasing period. However, they will also receive the project’s native token as a reward for their contribution.
This is a much safer response and a fair way for teams to raise funds and distribute tokens before launching their chains on Polkadot.