Kusama Overview

Kusama is a scalable network of multiple specialized blockchains built using the same tools and nearly the same codebase as Polkadot. The network is a development environment for teams who want to prepare for deployment on Polkadot or for earlier stage teams that want to deploy exclusively on Kusama. As with Polkadot, Kusama’s long-term opportunity is primarily based around demand for parachain slots since users must lock up KSM for a period of time to secure them.

Kusama as a “Sherpa” for Polkadot

The blog post dismissed the common misperception (we are no exception!) that Kusama is a testnet: only one part of Kusama’s purpose is to fulfill a testing and experimentation function for eventual Polkadot deployments. The “Canary network” use-case falls under this category — new features such as parachains, XCMP and SPREE will be deployed to Kusama before being deployed to Polkadot. This will allow the team to test new features in a live, real world environment with real economic consequences before they are deployed to Polkadot. This is especially critical for features that have to do with security or incentive mechanisms, since it is impossible to really test these types of features on a testnet with a valueless token (just imagine playing Texas Hold’em without real money at stake).

While teams will deploy parachains to Kusama primarily to test features that rely on KSM having — such as incentives and security, it is likely that prior to a Kusama parachain deployment, teams will first test purely technological features on Westend, Kusama’s — testnet. It is also likely that new features will be deployed to Westend before deploying to Kusama for the same reason. This two-tiered approach to experimentation further ensures the success of Polkadot.

Since Kusama will implement Polkadot’s latest technology before it is even deployed to Polkadot, it provides the perfect environment for businesses to deploy a pre-production version of their Polkadot parachain. As elaborated in the next section, being a standalone network allows Kusama to take “testing” one step further. Teams that intend to deploy new features on their Polkadot parachain get a chance to first deploy them to their Kusama parachain where they can encounter potential pitfalls in a lower-stakes environment. By “carving out” Kusama, Polkadot has a chance to be impeccable as problems could be exposed first and fixed already on Kusama.

Consequently, Kusama can be an ongoing experimental platform for parachains and the Polkadot team to trial technical upgrades, new product features, and incentive mechanism improvements. This further differentiates Kusama from a testnet, as parachains will now be able to test how their new feature, as well as future expected upgrades to Polkadot’s tech stack, affect actual crypto-economic incentives and security with the availability of a real-world environment for experimentation.

With this, Kusama reminds us a lot of the Himalayan Sherpas who scout and navigate the unknown complexities and dangers, so that they always lead the climbers on the safest path ahead.

Kusama as a Stand-alone Network

As a natural extension, Kusama will live on as a standalone network, as described in the blog post. The way we read it, Kusama’s independence from and the interdependence with Polkadot can be drawn from the following three categories:

• Cost Considerations

Depending on the sources of the bond put down for the parachain lease, the token-denominated cost of deploying a parachain will either be the opportunity cost of staking, or the borrowing cost. While we do not have the actual auction results as of yet, judging from appropriate comparables, private sale prices, OTC quotations, as well as secondary market trading situations, the Kusama leasing cost should be significantly lower than Polkadot leasing cost. While making certain assumptions, the model below estimates the bond requirements and costs of deploying a Kusama parachain. In particular, we assume USD 135 as the hypothetical DOT price.

¹The actual cost for a two-year lease is pending the details of final bidding mechanism as well as actual supply-demand dynamics

²Estimated bond requirement for a 2 year parachain slot lease based on a survey of Substrate developers with limited sample size

³Estimated at approximately 1.2% of the parachain cost on Polkadot since this is the approximate average percentage of utility costs between ETC/ETH. For the sake of this analysis, we arbitrarily used the average gas costs for ETH and ETC on April 23, and their respective market price on April 24.

⁴Source: Parathreads: Pay-as-you-go Parachains

⁵We assume a hypothetical DOT price of USD 135.

⁶As of April 24, 2020, KSM has been traded between the ATL of 0.92 USD and the ATH of 5.38 USD per CoinMarketCap data.

⁷Annual return from staking is approximately 20%; the return from two-year staking will be 44% assuming the reward from year one is staked in year two

⁸Some DOT/KSM holders may opt to lend their tokens in exchange for some instant fiat liquidity. According to most lending platforms, the borrowing interest of the majority tokens does not exceed 10%. For simplifying calculations, we arbitrarily apply a 10% rate here.

⁹We assume that the parathread deposit cost will be the same number of KSM as DOTs. From: Parathreads: Pay-as-you-go Parachains, we know the Polkadot parathread deposit cost will be approximately 50 DOTs.

The estimate above implies the deposit and actual cost of a two-year Kusama Parachain could be as low as USD 8,100 and USD 151 respectively. This is significantly lower than Polkadot’s estimated deposit and cost of USD 675,000 and USD 67,500 respectively. This affordability makes Kusama an appropriate venue for certain unfunded or underfunded teams to maintain production deployments, build prototypes and anchor communities before they’re able to raise additional capital and upgrade to Polkadot.

• Product Attributes

Polkadot is positioned to be a higher-stakes environment that efficiently manages scarce resources and is completely focused on providing a high degree of security and robustness. In comparison, Kusama is less robust and less secure. It is less robust because new technologies will be consistently deployed to Kusama for testing purposes before being deployed to Polkadot. Theoretically, this means Kusama could break more often but this will be mitigated by the use of Kusama’s valueless testnet, Westend. Additionally, Kusama governance moves “faster” by design, meaning the network can evolve faster than Polkadot can. Both these design features make Kusama the appropriate venue for teams who want to stay abreast with the absolute frontier of the technologies that will be deployed to Polkadot. It is less secure simply because the price of KSM is much lower than DOTs, making it easier to take over Kusama via governance.

Depending on what you are building — whether it is an inter-bank financial services platform or a collectible car racing game — here is the menu to guide your platform choice. The partition of product attributes suggest that Kusama is unlikely to cannibalize typical users of Polkadot.

• Community Composition

Three types of Kusama communities are forming in sight. According to Gavin Wood in this Q&A, pallet deployments like Society, Tipping, Recovery, and Long as well as utilization of Kusama’s treasury will foster community interest and involvement in a variety of experiments. Secondly, teams initially building on Kusama will, of course, have their communities initially centered around Kusama. Acala, Moonbeam, and Chainlink are the first batch of teams to announce their deployment on Kusama. Even after their upgrade to Polkadot, some of their genesis community might linger on Kusama. Lastly, Polkadot parachains who mirror themselves on Kusama for testing purposes will have a parallel community by way of incentivising stakeholders to actively try out new features. The aforementioned is an indication of genuine demand for Kusama parachains, which gives us confidence that Kusama will accrue significant value over time.

The Kusama-Polkadot Teeterboard

The above analysis is largely based on the assumption that the Polkadot parachain demand will surpass supply, driving unmet needs to Kusama. The current pipeline suggests this is most likely the case. As noted in the HASH CIB report, there are “around a hundred startups interested in building on the Substrate framework, out of which 50 are active, with 20 seeking to connect to Polkadot as parachains”. From this impressive level of interest for a network even before its release, it is reasonable to predict that there are a number of other projects who are considering building on Polkadot but monitoring its launch before they make their decision. If Polkadot launches successfully, we’d expect many of these projects to start active development, further contributing to parachain demand.

Another underlying assumption is that the market price and the network value of DOT are much higher than those of KSM. Will the teeterboard remain this way though? The scenario carries some resemblance to the NYSE / NASDAQ dynamics. Under general perception, NYSE is the largest stock exchange in the world that hosts blue chips and mature companies. This is still the case except that we live in an age where high-tech sectors spearhead economic growth, and these companies have various profiles. NASDAQ has gained lots of traction with its relaxed listing requirements, aggressively low fees, and additional product and service offerings, as evidenced by the fact that the number of companies opted to list on NASDAQ is a few times that on NYSE. In 2019, NASDAQ beat NYSE in terms of IPO fund raising.

This analogy is very far-out but it offers food for thought. We tend to believe that Kusama will have a more active and diverse ecosystem in the future due to its flexibility. As a consequence, the network value should grow and the balance between Kusama and Polkadot that we are familiar with today might change. However we do not expect the teeterboard to drastically shift heights as Polkadot is still the flagship platform with better clout and resources, and the prosperity of Polkadot is a prerequisite for the prosperity of Kusama.

The Kusama community may take the network on a different path than Polkadot. Currently, the codebases of the two networks are expected to be extremely similar so switching a parachain deployment from one to the other should be technically trivial. However the more divergent the two networks become, both technologically and from a community perspective, the more difficulty teams might face in migrating parachains from one network to the other. The planned bridge between Kusama and Polkadot should mitigate these switching costs as teams building on either network will be able to access value on the other. With the impending launch of Polkadot, all of our theories and hypotheses will be tested soon. Therefore, how things pan out from here is very much worth looking forward to.

Disclosure: Du Capital is a DOT holder. We also claimed KSM through the DOT signal event. Currently we stake the aforementioned KSM via various validators and obtain staking rewards on an ongoing basis. We have not traded KSM on the secondary market, and do not intend to do so in the coming months. This op-ed only reflects our thoughts on Kusama based on the recent announcements by the Polkadot team and is for informational purposes only. Readers should not take this op-ed as investment or financial, or other advice. This article is written by Rae Deng, with advice from Venom Huang.

For decades, low efficiency has plagued the practices in development finance, from official assistance and development loans to charity funds.

Research has found that only 15 to 20 percent of the originally deployed funding could make it to the intended beneficiaries in the recipient countries, while the multiple layers of the delivery system leeched the remaining bulk — in the form of embezzlement, corruption or redundant administrative costs.

Scandals, such as Zaire’s former president’s stealing of billions of dollars of aid money, materially tainted the name of “international aid” and unfortunately triggered the “aid fatigue” in the 1990s.

There was no lack of serious efforts in resolving the problem, but, in reality, little progress had been made. Although the introduction of independent third parties did provide a certain level of oversight, the managerial costs incurred outweighed the benefits to the receivers.

From the perspective of neo-institutional economics, the issue of low efficiency is deeply rooted in the delivery system of development finance, as the classic “principal-agent problem” is unavoidable.

The principals here, who normally reside in a better-off country, serve as the upstream in development finance by transferring part of their wealth to the needy in a less-developed country. Due to the cross-jurisdictional and the long-distance nature of development finance, principals delegate agents who usually sub-delegate to implement the fund transfer on the ground to reduce costs.

The multi- and sub-contracting leaves room for leveraging information asymmetry, which incentivizes the agents to prioritize their own interest instead of that of the principals, resulting in “moral hazard” and “adverse selection.” In other words, the fundamental cause for the low-efficiency problem in development finance is insufficient information; in neo-institutionalism, we call it a “broken information feedback loop.”

The loop is broken because the presence of the agents or the multiple layers of agents inevitably leads to friction or even the monopoly of the information between the donors and the beneficiaries. Donors are not entitled to adequate visibility into the project status and the beneficiaries become the takers of whatever the agents provide.

Development finance is in need of a solution that is able to straighten information asymmetry, hold stakeholders accountable, and block the leakage in the fund transfer process. Fintech innovation, since its very inception, carries the commitment to improving transparency and efficiency while lowering transaction costs and entry barriers.

Blockchain — a decentralized ledger and database that is cryptographically secured, immutable and trustworthy — came into sight. It is not a panacea, but the nature of the technology prepares it to be the antidote to the aforementioned chronic pains in development finance.

The combination of transparent information input, verifiable data sources and traceable activity footprints effectively amends the broken information feedback loop. It promises the transfer of the maximum possible value from the origin to the destination.

Traditional actors in development finance have already stepped in the field. The United Nations have roughly 15 agencies that carry their own blockchain initiatives, the most progressive of which is the World Food Programme (WFP) based in Rome.

Under its “Blockchain for Zero Hunger” project launched in 2016, the WFP works with the technology service provider to build a private blockchain network that allows for seamless and fast cash transfer, bypassing third-party financial intermediaries.

More than 100,000 Syrian refugees in the Jordan camp have redeemed WFP assistance with the solution. The savings from bank transfer fees alone exceeds 40,000 U.S. dollars per month.

In September 2018, the Chinese government vowed to upgrade its state-level “Charity China” platform by exploring the application of the blockchain technologies in donation tracking and transparent management, and by constructing a tamper-proof information inquiry system.

They believe the blockchain technology has the potential to tackle the pain point of the trust issue via enabling information openness and regulatory transparency. While most such efforts are still in pilot stages, it is generally agreed that “blockchain” is no longer just a buzzword; instead, it underpins solid solutions to real development problems.

Within the blockchain industry, while some of the application scenarios are still up for debate, a consensus has been reached that the technology is well-suited for banking the unbanked and the underbanked.

Talents, venture capital money and resources have been flooding toward projects that tailor remittance networks for migrant workers in Southeast Asia, onboard individuals and small- and medium-sized enterprises that are otherwise denied access to traditional banking to microfinance service platforms in Sub-Saharan Africa, or create digital identities to entitle the socially deprived to social services and social welfare programs.

The biggest crypto exchange in the world even spun off a non-profit mandate, which leverages the technology to convert crypto donations into lunches on nearly 4,000 school kids’ tables in Uganda.

Currently, those experiments exist largely in private charity or multilateral development initiatives. Whether the blockchain technology will be widely adopted as an alternative in the space of development finance, potentially even for the grand aid programs orchestrated by the United States or China, is yet to be tested.

What is undeniable is that technology advancement is flattening the world and the urge to participate as equals has to be satisfied.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com.)

Originally published at https://news.cgtn.com on May 1, 2019.