Kusama Protocol: The Innovation Incubator

Crypto

If the crypto space is known for an approach that prioritises innovation over stability, then Kusama has taken this ethos to an extreme. Dubbed Polkadot’s “wild cousin”, Kusama was launched in May 2019, boasting rapid functionality and a commitment to experimentation.

One of Kusama’s primary roles is to act as Polkadot’s “canary network”, which is essentially a pre-production environment, where features are tested and refined in real-world conditions before being introduced to the broader DOT ecosystem.

While Kusama and Polkadot share much of the same underlying infrastructure, offering a scalable and multi-chain framework for blockchain projects, Kusama has evolved beyond its testnet origins. Today, Kusama is a standalone blockchain backed by its own Kusama (KSM) token, a robust community and a core development team. Its ecosystem now features various sector-specific applications and blockchains built using the Substrate SDK.

Polkadot vs. Kusama: Shared foundations, diverging priorities

Polkadot and Kusama ecosystems share the same consensus mechanism (Nominated Proof of Stake), architecture (parachains connected to a the main relay chain), and on-chain governance model, but diverge significantly in their operational priorities.

Kusama focuses on speed and cost-efficiency, making it ideal for developers to quickly deploy projects on its network. In contrast, Polkadot leans heavily on “bank-like” security. Projects demanding high throughput without the need for such security – like gaming, social networking, and content distribution – may prefer Kusama. The network also offers more affordable bonding requirements for running a parachain.

Many teams use Kusama as a stepping stone before transitioning to Polkadot (like identity parachain KILT Protocol), but some prefer to remain and leverage Kusama’s unique environment. Others may choose to continue operating on Kusama as a testnet while using one of Polkadot’s parachain slots as a mainnet – as was the case with smart contract platform, Moonbeam, and its Moonriver testnet.

For tokenholders, Kusama’s dynamic nature may be one of its major value propositions. As a hub for crypto innovation, it creates an environment where potential breakthroughs can occur, and if successful, could lead to significant growth. Its link to Polkadot also means that innovations on Kusama could signal upcoming trends for the DOT ecosystem, offering KSM tokenholders early access to new crypto projects with a bigger risk appetite.

Kusama’s parachains as a growth driver

Parachains are specialised chains that run alongside Kusama’s main network, enhancing its capacity and efficiency. They form the core of Kusama’s growth strategy, allowing for diverse applications and solutions. Each parachain is tailored for a specific purpose.

Parachains play a key role in Kusama’s economy and are selected through parachain slot auctions that determine which ones get to connect to the Relay Chain (the main network). Winning a slot requires locking up Kusama (KSM) tokens for the lease duration, which can be up to two years. This mechanism ensures that only credible projects with substantial backing and confidence from the community get a slot.

Like Polkadot, crowdloans further enhance the democratic nature of this process. Parachain candidates can crowdsource their bids, allowing the KSM tokenholders to back projects they believe in and earn rewards in return. This not only decentralises the funding process but also gives a clear indication of which projects have strong community support.

Kusama’s ecosystem has already branched out into a multitude of sub-sectors including DeFi, Gaming and eSports, cross-chain bridges, oracles, privacy, marketplaces, to name a few. The current number of parachains (46 in comparison to 50 on Polkadot) as well as active participation in auctions and crowdloans despite a prolonged crypto winter signals an active community with a potential for future growth.

Kusama’s token supply model

Kusama employs an inflationary token model with a 10% annual rate, designed to reward active network participants and fund its on-chain treasury. The inflation adjusts based on staking, aiming for an ideal staking rate between 45% to 75%. This ensures network security while maintaining token liquidity. If 50% of KSM tokens are staked, all inflationary rewards go to validators and nominators; deviations allocate a portion to the treasury.

The Kusama treasury acts as Kusama’s financial reserve, supporting value-adding activities for the ecosystem. Managed by the Kusama Council and influenced by KSM tokenholders, it promotes full fund utilisation, as any unspent funds within a 24-day period will see 1 percent of the total fund burned.

In addition, adjustments can be made to the inflation rate through on-chain governance, which is important for Kusama to remain adaptive to changing needs and financial conditions.

Summary

Kusama offers a unique value proposition by providing an environment for optimised for blockchain experimentation. Serving as a preliminary network to Polkadot, it facilitates real-world testing of innovative projects, ensuring they are refined before transitioning to larger networks. This proactive approach positions Kusama as a vital hub for emerging technologies in the crypto ecosystem.

Now, as a standalone blockchain network with its own unique community and projects, there is the potential to see future growth, particularly as the crypto market begins to show signs of recovery.

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Disclaimer: This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.

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