How much revenue can Coretime bring to Polkadot 2.0? Will the demand for DOT increase?
At the recent Polkadot Decoded conference, Polkadot founder Gavin Wood proposed the concept of Polkadot 2.0. One of the crucial points is that Polkadot 2.0 will change the allocation method of the core blockchain resource, Coretime , enhancing the flexibility and efficiency of resource distribution.
What changes have occurred in resource allocation in Polkadot 2.0? What impact might it have on the demand and value of DOT?
Changes in Polkadot 2.0.
- Slot leasing → Coretime procurement
A pivotal transformation in Polkadot 2.0 lies in its approach to Coretime allocation.
Coretime denotes the duration required for validation and consensus on the Polkadot relay chain, representing the most scarce resource within the network.
In the version of Polkadot 1.0 , Coretime was allocated to parachains via slot leasing, an auction mechanism allowing parachains to bid for a designated tenure, ranging from 6 to 24 months. Within this period, a parachain was granted access to a specific slot, essentially a fixed block time.
However, with the advent of Polkadot 2.0, Coretime evolves into a fluid, tradable, and accumulative asset, purchasable or salable as block time. On the primary market, Coretime can be procured through two distinct methods: bulk acquisition and instant purchase.
- Bulk Purchase: Coretime for a duration of four weeks is sold at a fixed price each time. This mirrors slot leasing but boasts greater flexibility. Parachains can secure a continuous block period either via auction or outright acquisition, remitting the corresponding Coretime charges. Such an approach is tailored for parachains with a prolonged demand for block time.
- Instant Purchase: A pay-as-you-go model, where pricing fluctuates based on market dynamics. This method can be employed to augment transaction throughput or diminish latency.
If a parachain, parathread, or para-shard possesses surplus Coretime, it can vend this Coretime to entities in need of block time, reaping corresponding returns. In this manner, a secondary market for Coretime emerges, fostering a more nimble and efficient allocation of block time.
- From staking to use slots → Paying to utilize Coretime
While both Polkadot 1.0 and 2.0 allude to ‘leasing’, their methods of value capture are markedly distinct.
In Polkadot 1.0, upon a parachain winning the slot auction, they merely need to lock their DOTs in the network for a specified duration (ranging from 6 months to two years). Once this period concludes, the DOTs are returned in full.
Essentially, the ‘leasing’ of slots in Polkadot 1.0 diverges from our conventional understanding of ‘renting’. Here, it’s more about placing a deposit without any rental fees. Picture this: leasing an apartment where the landlord requires only a deposit, say $10,000, without monthly rents. Upon the lease’s expiration after a year, the deposit is refunded in its entirety.
Under this framework, what the parachains sacrifice is merely the opportunity cost of locking their DOTs for that period. This means that by choosing to confine DOTs to slots, one forgoes other potential benefits, such as staking them to yield an annual return of around 10%.
Conversely, Polkadot 2.0 revolves around the direct sale of Coretime. Chains or applications pay a certain fee to gain usage rights of Coretime. This arrangement aligns more with our everyday interpretation of ‘renting’. The revenue from selling Coretime fundamentally acts as rental income. Analogous to renting an apartment where the landlord charges, say $3000 per month, ensuring a month’s stay. Naturally, this rental fee isn’t refundable.
Under this model, chains or applications bear a direct cost.
3. Revenue from selling Coretime may be redirected to the treasury for redistribution.
Under Polkadot 2.0, profits from selling Coretime might flow into the treasury, from where resources are reallocated. The greater the market demand for Coretime, the more proceeds the treasury receives.
Governed by the OpenGov mechanism, the treasury is essentially managed by DOT holders. Essentially, these stakeholders can use their DOTs to vote on the disposition of treasury funds.
On one hand, funds can be allocated to support projects within the Polkadot ecosystem, an ongoing endeavor. As Polkadot thrives as an interoperable system, the flourishing of diverse projects (storage, computation, NFTs, DID, etc.) attracts even more entities to join the ecosystem.
On the other hand, holders might opt to burn (all or a portion of) these DOTs, reducing the supply, thereby mitigating inflation or even inducing deflation.
How significant will the demand for DOT be under Polkadot 2.0?
There are many factors influencing the demand for DOT under Polkadot 2.0, making it challenging to estimate. However, community member ‘rich’ has simulated the demand for Coretime and its pricing based on historical slot auction prices from Kusama, which can serve as a reference.
Rich’s methodology was based on calculating the total acquisition costs for all Kusama slots by multiplying the contemporary KSM price by the amount of KSM locked. As mentioned, the cost in Polkadot 1.0 was an opportunity cost. To translate this into a direct cost, the staking rewards (which could not be earned due to KSM being locked in slots) were factored in. Given Kusama’s staking reward is roughly an annualized 10%, this was taken as the opportunity cost. Thus, the slot acquisition cost was further multiplied by 10% to derive the opportunity cost. From this, the cost for every four weeks (Bulk Purchase) and per block (Instant Purchase) was determined.
Based on Rich’s estimations, from 2020 to July 2023, the annual Coretime demand averaged $18.19 million. Using historical trends to price Coretime, the instant Coretime’s average price per block would be $8.78, and a four-week bulk Coretime would average $1.54 million.
However, these figures are extrapolated from historical data. In reality, with the launch of Polkadot 2.0 and its enhanced flexibility, there might be increased interest in acquiring Coretime, leading to potentially higher demand.
Furthermore, purchasing Coretime isn’t the sole utility of DOT. In Polkadot 2.0’s revised model, several factors could drive DOT’s value:
• Demand for Yield through Native Staking: DOT holders can stake DOT to participate in Polkadot’s validation and consensus, earning rewards. Staking yields vary based on staking and inflation rates, usually ranging between 10% to 15%. Staked DOT, being locked, is taken out of circulation, increasing DOT’s scarcity and value.
• Demand for Voting Power: DOT holders can leverage their DOT for governance activities, like making proposals or voting. Holding more DOT confers greater voting power, influencing the network’s decision-making.
• Demand for Purchasing Coretime: DOT can be expended to cover Coretime costs. With Coretime prices dictated by market dynamics, an uptick in demand could elevate its price, enhancing DOT’s value.
• Demand from Secondary Market for Coretime: Entities with surplus Coretime can vend it to those in need, reaping benefits. This model ensures that Coretime holders can derive value from it even when not directly utilizing it. Coretime’s secondary market prices, being market-driven, will rise if supply dwindles, boosting DOT’s value.
• Demand for DeFi Participation: Various applications on the Polkadot network offer a plethora of decentralized finance (DeFi) services, including lending, trading, insurance, oracles, etc. Such services present DOT holders with myriad earning potentials, concurrently increasing DOT’s liquidity and utilization on the network, augmenting its value.
• Treasury Burns: Revenues from Coretime sales are deposited into the treasury, whose funds are at the discretion of DOT holders. If they opt to incinerate a portion of these assets, DOT’s circulating supply diminishes, escalating its scarcity and value.
Polkadot 2.0 represents a significant upgrade to the Polkadot network, breaking the traditional pattern of blockchain resource allocation by introducing Coretime as a core resource. The flexible allocation method of Coretime provides more flexibility and efficiency for parachains, parathreads, and parashards, and also brings more revenue to the treasury. This income can be used to support projects in the ecosystem or to burn DOT, thereby enhancing the scarcity and value of DOT.
Polkadot 2.0 is an innovative and forward-looking project that might bring tremendous changes and opportunities to the Polkadot network and even the entire blockchain industry. Let’s look forward to the official launch of Polkadot 2.0 together.
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