- INVESTMENT IDEAS
Kusama-been-loadin’ – Expect Chaos
- Kusama (KSM) has already seen its price increase over 100% since the recent market crash in July.
- With the second round of parachain auctions commencing soon (September 1), demand for KSM could push its price to new highs.
- Staking and crowd loans offer incredible opportunities to turbo boost your ROI.
- That said, locking up tokens makes it difficult to liquidate your KSM during a market crash.
If you are not familiar with the Kusama, it is time to get yourself acquainted with this unique blockchain network. Also known as "Polkadot's wild cousin”, Kusama is built using a framework and codebase that is identical to Polkadot. The main difference being that new features and functionalities are first tested on Kusama before being deployed on Polkadot and hence it is known as the “canary network”.
Kusama is unique because it is geared towards developers looking to innovate and deploy their own blockchain to be used as a preparatory network before launching on Polkadot. For example, MoonBeam Network, a smart contract platform which will enable Ethereum compatibility on Polkadot, first launched on Kusama as MoonRiver. Building first on Kusama is a way to completely understand the potential risks and advantages of the Polkadot environment.
If you are unsure about the fundamentals or backers of the project, fear not! Kusama was built by Parity Technologies, the same team that created Polkadot. Parity Technologies is a core blockchain infrastructure company that was co-founded by Dr. Gavin Wood. Yes! The same Dr. Wood who co-founded Ethereum. In addition, Kusama is funded by grants from the Web3 Foundation. Rumour has it that while it took Dr. Wood just 3 days to build ethereum, he and his team thoughtfully set out to build Kusama and Polkadot over the course of 3 years. From the beginning it was designed to overcome all of Ethereum’s flaws.
At its core, like Polkadot, Kusama is a blockchain onto which other specialized blockchain can connect, forming a unified multi-blockchain network. As such both Polkadot and Kusama aim to solve several drawbacks that isolated blockchains have. Blockchains such as Bitcoin and Ethereum were built in isolation and they do not communicate with one another. On the other hand blockchain networks in the Kusama (and Polkadot) environment are interconnected, enabling them to communicate with one another, making them interoperable.
Too much too fast? Let’s look at it using an analogy. To get a better perspective of how Kusama works and the advantages it brings, imagine your shopping experience across two scenarios. You are in need of several household items such as groceries, appliances, tools, clothes etc. In the first scenario, you go to a strip mall (shopping plaza or retail outlets) to make those purchases. For the sake of this example, assume that each store (think blockchain) within the strip mall accepts only its native currency. You go to several different stores (each specializing in one category of goods) to make purchases across the categories in your shopping list and make payments in the store native currencies. Realize how you would have to make several different payments one by one and you are now required to carry several different receipts for your purchases?
Your path was very sequential i.e you completed a task in one store and then went to another. On busy days this could cause severe congestion (and frustration for you). Moreover, aggregating your receipts and the return process would be a painstaking task. This is one way to think of how the ethereum ecosystem and its transactions work.
Now, imagine the second scenario in which you go to Walmart or Costco to make the same purchases. Instead of going to different stores and making individual payments, you purchase all your items in one store and make one single payment at check out. As a result, transactions across all your items happen in parallel, thereby making the experience faster and more convenient.
Your return process would also be handled much more easily. The vendors for each category of items can focus on what they do best instead of expending time and energy on the logistics of billing, warehousing, security etc. Kusama and Polkadot aim to solve the issues of congestion in a similar manner - they provide the security, handle overall wellbeing of the network and process transactions across different blockchain in parallel so that each of those blockchain can focus on what they do best.
The Kusama Network, as such, does not provide smart contract functionality. Instead, it serves as the “relay chain” or the heart of the multichain network. It allows the different blockchains connected to it to run in parallel and focus on their specialization, while the relay chain provides the security, finalizes the transaction in blocks and coordinates the working of the entire system as a whole.
The different blockchain protocols that connect to the Kusama Network are known as parachains (short for parallel chains). Each of these blockchain specialize in a specific purpose. Recently, Kusama network onboarded the following networks onto its ecosystem:
Karura Network - intends to be the DeFi hub and stablecoin platform for the Kusama network
MoonRiver - indends to be an ethereum-compatible smart contract platform for the Kusama network.
Shiden Network - is a multi-chain decentralized application layer on Kusama Network.
Khala Network - is a trustless computation platform that enables massive cloud processing without sacrificing data confidentiality.
Bitfrost - allows users to participate in DeFi applications while earning staking rewards on their cryptocurrency.
In order to connect to the Kusama Network base layer, blockchain projects or parachains must win a spot through a Dutch auction. And to secure a place on one of Kusama’s limited number of parachain slots, projects will have to lock up a competitive number of KSM tokens with the Kusama Network for up to 2 years. The locked KSM tokens, however, will be returned to the parachain projects after the designated lease period is done. Teams that are competing for a slot are unable to see how much other teams are bidding, and the auction will end at a random, undetermined moment. As such, it incentivises the bidding parachain to bid as many KSM as soon as possible.
Smaller projects, that can’t afford to inhabit an entire parachain, can also rent a Kusama parathread, which is, basically, a parachain that has been shared and broken down into smaller chains, or ‘threads’, to share the cost. This is like renting a room within an apartment, instead of paying to rent the entire apartment.
The Investment Opportunity
Price Appreciation. Like most cryptocurrencies this cycle, KSM has had a stellar run since its inception. Its price has rocketed from a mere $0.87 to $621, at its peak, before retracing to the current range around $300. With a circulating supply of just 8.47m tokens and a total supply of 10m tokens, KSM was already a scarce resource. The parachain auctions would only exacerbate this shortage as millions more KSM will be locked away for months to come. With such strong technicals in the near term, it is not hard to imagine KSM potentially reaching new highs.
Staking. The average staking reward for KSM in the current environment is 14%. Many exchanges such as Kraken make it remarkably easy to stake and unstake your token without any risk of theft or unbonding period. If you are a long term investor, staking your token is a great way to maximize your return.
Crowdloans. If a team is not confident with the amount of KSM available in their balance sheet for bidding the parachain auction, they may choose to crowdsource more from the KSM community. They can do so by soliciting a large pool of KSM holders to loan their tokens for the fixed lock-up period. Since investors that lend their token will not be able to trade or stake them, they are compensated handsomely by the projects for the opportunity cost. This compensation will likely come in the form of the projects’ respective tokens and therein lies the incredible opportunity - Crowdloan participants who lend KSM get to speculate on new projects without actually having to spend any of their tokens.
The arithmetic from the recent crowloan seems to suggest the risk/reward seems mostly skewed to the upside. Take for example an individual who purchased 10 KSM at a price of $300. If that person invested in the Karura (KAR) crowdloan, they would have received 23 KAR per KSM. Markets began trading KAR at $8 when Karura went live. As a result, the return on investment totalled 61%. An even more sensational example was the rewards earned by participating in Moonriver(MOVR) crowdloan. Participants were rewarded with 14 MOVR per KSM loaned. With MOVR price surging to $150 per token that would translate to a jaw dropping 7x return from just rewards!
Risks. Participating in crowdloans however comes with its own set of risks. Since KSM holders need to unbind their tokens to loan them out, they lose their ability to earn staking rewards. Staking rewards average 14%, which is no insignificant amount. Next, since the loaned KSM would be locked for a finite duration, typically 24 months, the crowdloan participant will not have the option to trade his or her KSM at opportunistic moments.
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.