What is Crowdloan?

Crowdloan is a method of raising funds for new crypto projects by employing Polkadot or Kusama blockchain networks.

Typically, new crypto projects utilize the Initial Coin Offering (ICO) strategy for the early stages of funding. Investors choose whether to support the ICO based on the team’s credibility, the project outline presented in the whitepaper, and the community involved in the project development process. However, the ICO model is not a guarantee of success.

Crowdloans were created as part of Polkadot’s core framework to improve the chances of success for new crypto projects. With Polkadot’s crowdloans, project teams can develop parachains to generate $DOT which they can use to partake in the parachain auctions.

Prior to parachain slot auctions, crowdloans are given a timeframe for the teams to borrow $DOT from the community members. Users give the $DOT to the project’s relay chain rather than directly to the team.

Once the project team has gathered the required funds, a bid is submitted using the $DOT acquired from the crowdloan. If the project receives a parachain slot, the $DOT received from investors is locked based on the conditions of the parachain lease, between six months and two years.

Once the lease concludes, the investors get their $DOT back. Throughout the lease period, the $DOT or $KSM provided by the investors is never in the project team’s possession.

Crowdloans have exponentially improved the process of ICOs. Investors receive rewards for bonding tokens for the project teams, with the most popular reward being the native coins of new projects. Locking $DOT in a parachain lease on behalf of Acala can help investors yield $ACA tokens.

Proceeding with a crowdloan is only common for projects that are certain to generate an economic return since the project teams never hold the tokens used for parachain auctions in their possession.

Crowdloan is focused on ensuring that the investors’ contributions are protected. Investors have the opportunity to earn extra tokens on a prospective project, rather than exchanging pre-existing tokens for the tokens created by new projects.

Regardless of whether the project succeeds or fails, investors are guaranteed to recover their $DOTs at the end of the lease. This can incentivize investors to join crowdloan projects as they can be assured of the security of their primary tokens.

While crowdloans are a relatively new crowdfunding strategy in the crypto space, they are slowly gaining traction. It is a secure investment method that helps filter the teams and ensure the quality of the projects looking for crowdloan funding.