HydraDX’s Basilisk (BSX) Parachain Win May Foreshadow a Kusama Sell-Off

  • Kusama (KSM) dump is expected after the end of each batch of parachain auctions. Conversely, KSM accumulation is expected prior to each batch of parachain auctions.
  • The liquidity bootstrapping protocol Basilisk (BSX) won the eighth parachain auction on Polkadot’s sister network, Kusama.
  • Basilisk combines features of Uniswap and Balancer in order to deliver an automated market maker protocol that aims to support liquidity for new and niche community tokens.

The dates for Polkadot’s first auction slots have still not been announced, but auction slots on Polkadot’s “canary” network Kusama have been underway since June of 2021. Although Kusama’s original purpose was to be a network for testing code that would eventually be deployed on Polkadot, Kusama is now a full-pledged blockchain ecosystem with its own layers of side blockchains called “parachains” and decentralised applications (DApps). Millions of dollars’ worth of Kusama’s native token, KSM, are being staked by eager applications that are trying to win a seat in Kusama’s exclusive list of supported parachains.

However, every auction has only one winner. The losers get their KSM back once an auction is over. After Kusama’s first batch of five parachain auctions, downward pressure on Kusama’s price was experienced. This shouldn’t come as a surprise. When the liquidity sink is removed, some owners may decide to sell their KSM, therefore, the supply of KSM on the market increases.

Source: Cointmarketcap.com, Numbrs.com

Two Time’s the Charm for the Snek

In late August, the second batch of parachain slot auctions began. After Kilt and Calamari took the sixth and seventh spots respectively, Basilisk Finance won the eighth parachain slot auction. Basilisk previously failed to win the fifth Kusama parachain slot auction, narrowly losing out to Bifrost. Allowing fresh token projects to bootstrap their liquidity with an automated market maker (AMM) implementation of their choosing, Basilisk endeavours to lead the way by being the first fully-functioning community-operated parachain. Its mission is to enable frictionless liquidity for the long-tail crypto assets.

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This batch of parachain slot auctions is ending on approximately 5 October, 2021. The question is whether a KSM dump will happen again like last time or if the last dump was highly correlated with Bitcoin’s downturn in price. Importantly, the big date on the horizon to watch out for is 12 May, 2022, when all of the Kusama that was staked for the first five winning parachains will be unlocked. That means 1,114,629 KSM currently worth $354m and 11.5% of KSM’s circulating supply can potentially pull down the price; therefore, there may be a sell off of KSM in the months leading up to May. The golden lining is that the opposite effect is also possible. In preparation for the slot auctions, investors and DApps may accumulate the Kusama required for the slot auction, resulting in price appreciation.

Parachain Auctions

A parachain is a customised blockchain that allows platforms to use smart contracts and transfer assets and messages to other parachains and the main Kusama blockchain. The parachain auction process is the mechanism through which a new project, with its own blockchain, launches on Kusama. Auctions require teams to bid against other teams that are also trying to secure a spot on the network. The Kusama for the bids can be deposited by single accounts (whales) or crowdsourced loans. Auctions occur over a week-long period and often involve several teams competing against each other to attain a maximum 48 - week slot on the Kusuma blockchain.

Source: Kusama

Explainer: what is a candle auction?

“Candle auctions are a variant of open auctions where bidders submit bids that are increasingly higher and the highest bidder at the conclusion of the auction is considered the winner. Candle auctions were originally employed in the 16th century for the sale of ships and get their name from the "inch of a candle" that determined the open period of the auction. When the flame extinguished and the candle went out, the auction would suddenly terminate and the standing bid at that point would win”. - Polkadot wiki

Source: Jonas Gehrlein, Web3 Foundation

The auction runs for a period of seven days consisting of a two-day opening period and five-day ending period. The winner is selected at any time in the ending period but is only revealed at the end of day seven. If a team doesn't win on their first attempt, they can try again, as Basilisk did. Teams are not necessarily tied to a 48-week slot but can opt for a six-week or 12-week slot for example, and then migrate from Kusama to Polkadot.

The Triumph of Roko's Basilisk

Coming in with strong community support and organic growth, Basilisk was a natural winner for the slot. The eighth auction began Wednesday, 15 September. During the auction, 12,000 stakeholders locked 222,221 of Kusama’s native KSM token on the Basilisk finance crowdloan. This was more than was needed so the BSX crowdloan capped out. However, investors and enthusiasts can still get involved. Basilisk's Liquidity Bootstrapping Pool (LBP) is about to open according to the project's roadmap. The LBP will allow investors to snatch up 5,63% of all BSX. This way investors can still get in on the ground floor of this exciting project.

An independent chain driven by community support under their steward system, Basilisk AMM pools filter new assets to allow for bootstrapping of liquidity before they enter the HDX Omnipol, automatically removing any dangerous tokens. Distinguishing itself from other LBPs with its constantly updating contract, the platform is relatively cheaper than similar protocols which utilise Ethereum. Aiming to expand using a LBP based Basilisk pool, partnerships with Moonbean, Snowfork and Zeitgeist are in the works in order to growth hack and combine multiple overlapping communities into one.

With no marketing budget, the hype driven by the protocol is entirely organic using various social media and networking platforms including Telegram, Discord and Substack. With selective airdrops to wallets deemed active, its creators are hesitant about airdrops en masse. Taking security concerns into account, Basilisk’s creators hope to conduct a series of community audits before Omnipool goes live.

Speaking on how collators will be selected, Basilisk’s creators outlined the following process,

“We will launch with our own set of collators until the network is live & stable. After that, we will elect a limited set of collators (50?) which will be selected among the most active and reliable community members.” - HydraDx Newsletter

According to Adam Steeber, Basilisk's “plan is to create a diverse set of asset pools where users can earn rewards by contributing liquidity so that other users can leverage that liquidity to swap assets. Bootstrapping in this case simply references the fact that no liquidity will come from a central source; the incentives that Basilisk will code into their protocol will motivate a decentralized network of individuals to provide liquidity for the network”.

Similar to Uniswap, Basilisk will provide this kind of protocol to the Kusama relay-chain, allowing users to swap KSM and other parachain assets to facilitate better price discovery for the entire ecosystem. One hundred billion BSX tokens will power the Basilisk system and while the developers claim they will support an NFT market, details remain vague but this is to be expected in a relatively young project.

Conclusion
Basilisk’s future roadmap involves AMM pools, NFTs and various collaborations. The HydraDX team behind Basilisk are intent on keeping the project community-based and paid entirely by a central treasury financed by small trading fees. This new Kusama parachain may stand the test of time; however, their success all depends on the success of Kusama, and so far, Kusama’s candle-auction mechanism seems to have the same cyclical accumulation and sell-off tendencies as initial coin offerings did for Ethereum (ETH). Losers of slot auctions may decide to sell, once their staked KSM is released, if they feel rejected by the network. Furthermore, winners of slot auctions may sell once their staked KSM is released and their parachain slot-lease has expired. The fate of the network will be determined by investors’ perceptions of Kusama’s long-term potential to attract a burgeoning ecosystem of decentralised finance applications.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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