Interpretation of Polkadot 2.0: What impact does the new nuclear leasing mechanism have on the demand for DOT

Author: PolkaWorld

Coretime’s flexible allocation method will provide more flexibility and efficiency for parachains, parathreads, and parallel shards, while also bringing more revenue to the treasury. These revenues can be used to fund projects in the ecology, and can also be used to destroy DOT, thereby increasing the scarcity and value of DOT.

At the recent Polkadot Decoded conference, Polkadot founder Gavin Wood proposed the idea of Polkadot 2.0. One of the most important points is: Polkadot 2.0 will change the allocation method of Coretime (core time), the core resource of the blockchain, and improve the flexibility and efficiency of resource allocation.

What changes have taken place in Polkadot 2.0 in resource allocation? What impact might it have on the demand and value of DOT?

Polkadot 2.0 changes

1. Slot rental → Coretime purchase

A major change in Polkadot 2.0 is the allocation of Coretime.

Coretime refers to the time required to perform verification and consensus on the Polkadot relay chain, which is the most scarce resource in the Polkadot network.

In Polkadot 1.0, Coretime is allocated to parachains through slot leasing. Slot leasing is an auction mechanism that allows parachains to bid for a fixed period of time (6 to 24 months) during which a parachain can use a slot, which is a fixed block time period.

In Polkadot 2.0, Coretime will become a liquid, tradable, and accumulative resource that can be used to buy or sell block time. Coretime can be obtained in two ways in the primary market: bulk purchase and instant purchase.

Bulk Purchase: Four weeks of Coretime are sold at a fixed price each time. Similar to slot leasing, but more flexible. Parachains can obtain a continuous block time through auction or direct purchase, and pay the corresponding Coretime fee. This approach is suitable for those parachains that have long-term requirements for block time.

Instant Purchase (Instant Purchase): pay on demand, and the price will be determined according to market conditions. Can be used to increase transaction throughput, reduce latency, etc.

If a parachain, parathread or parallel shard has excess Coretime, it can sell Coretime to other entities that need block time and obtain corresponding benefits. In this way, Coretime forms a secondary market, making the allocation of block time more flexible and efficient.

2. Lock warehouse to use slot → pay to use Coretime

Although “lease” is mentioned in both Polkadot 1.0 and 2.0, the value capture methods of the two are completely different.

In Polkadot 1.0, after the parachain wins the slot auction, it only needs to lock DOTs in the network for a period of time (6 months to two years), and these DOTs will be returned in full after expiration.

So in essence, the “rent” slot mentioned in Polkadot 1.0 is different from what we call “rent” in life. It only pays deposits, not rent. It’s a bit like when you go to rent a house, the landlord tells you that you only need to pay a deposit of, for example, 10,000, and you don’t need to pay rent. After the one-year lease period is up, the deposit will be returned to you in full.

In this mode, what the parachain pays is only the opportunity cost of locking DOT during the parachain. It means that if you choose to lock the DOT in the slot, you cannot use the DOT to do other things, such as pledge and get an annualized return of about 10%.

In Polkadot 2.0, Coretime is sold directly, and the chain/application pays a certain price to obtain the corresponding right to use Coretime. This form is actually closer to our “rent” in the daily context, and the income obtained from the sale of Coretime is essentially rent. It’s like when you go to rent a house, the landlord says that you need to pay 3,000 yuan a month in rent, and you can live in it for a month. Of course, the rent will not be refunded in the end.

In this model, the chain/application pays a direct cost.

3. The proceeds from the sale of Coretime can be redistributed into the treasury

Under Polkadot 2.0, the proceeds from the sale of Coretime may enter the treasury, which will redistribute resources once. And the greater the market demand for Coretime, the more income will flow into the treasury.

Under the governance mechanism of OpenGov, the national treasury is under the control of DOT holders. Essentially, token holders can use DOT to vote on what to do with the money in the treasury.

On the one hand, you can fund projects in the Polkadot ecosystem, which is what the treasury has been doing. Since Polkadot is an interoperable ecosystem, the better the development of various projects (storage, computing, NFT, DID, etc.) in the ecosystem, the more projects will be attracted to join the ecosystem.

On the other hand, currency holders can also choose to destroy (all or part of) these DOTs to reduce the supply of DOTs, thereby reducing inflation, or even becoming deflation.

W3F’s jonas started a discussion about destroying Coretime revenue

What is the demand for DOT under Polkadot 2.0?

There are many factors that affect the demand for DOT under Polkadot 2.0, and it is difficult to estimate. However, Polkadot community member rich simulated the demand for Coretime and the price of Coretime based on the historical data of Kusama slot auction prices, which can be used as a reference.

Original post:

Rich’s calculation method is roughly to find out the slot acquisition cost of all Kusama in the past (KSM price at that time x number of KSM locked). As mentioned earlier, the cost in Polkadot 1.0 is an opportunity cost, which needs to be converted into a direct cost. Since the KSM locked in the slot cannot participate in the pledge, we use Kusama’s pledge income (about 10% per year) as the opportunity cost, so Multiply the socket acquisition cost by 10% to get the opportunity cost. Based on this, the cost per 4 weeks (bulk purchase) and the cost per block (just-in-time purchase) are calculated.

According to Rich’s calculation, from July 2020 to July 2023, the average annual Coretime demand is 18.19 million US dollars. If Coretime is priced according to historical conditions, the average price of instant Coretime should be $8.78 per block, and the average price of bulk Coretime for a period of four weeks should be $1.54 million.

But these are only demands calculated based on historical data. In fact, if Polkadot 2.0 goes online, it may attract more projects to buy Coretime due to its more flexible usage, which will bring higher demand.

And buying Coretime is not the only usage scenario for DOT. Under the new model of Polkadot 2.0, the following factors may drive the value of DOT:

• The need to obtain income through native staking (Native Staking): DOT holders can participate in the verification and consensus of the Polkadot network by staking DOT to obtain income. The rate of return on staking depends on the staking rate and the inflation rate, usually between 10% and 15%. The pledged DOT will be locked and cannot be used for other purposes, so the pledge will reduce the circulating supply of DOT, thereby increasing the scarcity and value of DOT.
• Need to increase voting weight: DOT holders can use DOT to participate in the governance of the Polkadot network, including initiating proposals, voting, etc. Holding more DOT can increase the voting weight, thereby affecting the decision-making of the Polkadot network.
• Requirements for purchasing Coretime: DOT can be used to pay the corresponding Coretime fee. The price of Coret Time is determined by market supply and demand, so if demand increases, the price of Coretime will also increase, thereby increasing the value of DOT.
• The need to purchase Coretime through the secondary market: Entities with excess Coretime can sell Coretime to other entities that need block time and obtain corresponding benefits. In this way, Coretime holders can still obtain value from the block time when they are not using the block time. The secondary market of Coretime is also determined by market supply and demand, so if the supply decreases, the price of Coretime will also increase, thereby increasing the value of DOT.
• The need to participate in DeFi: There are many different applications on the Polkadot network, which provide a variety of decentralized financial (DeFi) services, such as lending, trading, insurance, oracle machines, etc. These services allow DOT holders to obtain more income opportunities. At the same time, these services will also increase the liquidity and utilization of DOT in the Polkadot network, thereby increasing the value of DOT.
• Destruction through the treasury: The proceeds from selling Coretime will enter the treasury, and the funds stored in the treasury are determined by DOT holders. If DOT holders decide to destroy part of the funds in the treasury, then the circulating supply of DOT will be reduced, thereby increasing the scarcity and value of DOT.

Conclusion

Polkadot 2.0 is a major upgrade of the Polkadot network. It will break the inherent mode of resource allocation in the blockchain and introduce the core resource of Coretime. Coretime’s flexible allocation method will provide more flexibility and efficiency for parachains, parathreads, and parallel shards, while also bringing more revenue to the treasury. These revenues can be used to fund projects in the ecology, and can also be used to destroy DOT, thereby increasing the scarcity and value of DOT.

Polkadot 2.0 is a highly innovative and forward-looking project, which may bring huge changes and opportunities to the Polkadot network and even the entire blockchain industry. Let us look forward to the official launch of Polkadot 2.0.