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Polkadot and Kusama prices increased when Master Ventures announced the creation of a $30 million Polkadot ecosystem fund.
Polkadot (DOT) and Kusama (KSM) climbed in tandem on June 3 as traders analysed a substantial investment into their blockchain ecosystems by a venture capital firm.
Dubbed as Master Ventures, an Asian blockchain incubator and venture capitalist announced that it had launched a $30 million venture capital fund called Master Ventures Polkadot VC Fund. In a press release published Wednesday, the firm said that its fund would “support and finance the Parachain bids” of tier-1 blockchain projects that want to win a Parachain slot on the Polkadot Relay Chain.
Master Ventures further stated that the revenues will be used to help early-stage firms launch on top of the Polkadot and Kusama ecosystems.
Traders used the announcement to increase their bids on the DOT and KSM pairings. Because of their quick interest, the DOT/USD exchange rate increased by up to 27.91 percent from its Wednesday starting rate to $29.21. During the same time period, Kusama’s KSM/USD rose 39.35 percent to $511.91.
The dramatic movements upwards were accompanied by strong outlooks on social media, with widely-followed pundits forecasting that the Polkadot and Kusama spot markets would continue to rise.
— Trading Tank (@TradingTank) June 2, 2021
The idea that Master Venture’s $30 million investment in the Polkadot ecosystem would result in a faster auctioning of its “Parachain slots.” was at the heart of optimistic comparisons. In perspective, a Parachain is analogous to a blockchain (layer 1) coupled to a certain functionality, along with its own unique features and governance system.
One can, for example, bid on the Polkadot Parachain slot in order to establish a decentralised oracle network on top of it. As a consequence, the end result would be an application-, user-, and liquidity-specific unique blockchain capable of querying data from other Parachains, with Polkadot functioning as a layer 0 solution — a node — that facilitates connectivity across its component blockchains.
In the meanwhile, Kusama is an experimental version of Polkadot that operates as a separate blockchain network. It serves as a sandbox for developers to test pre-release versions of their applications before publishing them to Polkadot’s mainnet.
Potential demand for DOT and KSM
Developers bidding for Parachain slots on Polkadot and Kusama would need to use the projects’ native assets, DOT and KSM, respectively.
The $30 million Master Ventures fund will help and finance these developers and their tier-1 initiatives. That implies the venture capital company would have to buy DOT and KSM tokens to support the bids in the Parachain auction. Polkadot and Kusama, in turn, would lock the tokens for as long as the developers wanted to operate their project on respective parachains, which might range from six months to two years.
If the Polkadot ecosystem is successful, an ever-increasing sum of DOT and KSM tokens will be locked for the duration of the parachain slot. As a result, their whole available supply would be depleted. That might explain why traders have suddenly become positive on DOT and KSM.
Mira Christanto, a researcher at crypto data analytics firm Messari, wrote in one of her posts from May that 65% of DOT supply has been staked. Meanwhile, 30% of DOT remains in circulation. Therefore, the upcoming Parachain auction would take more Polkadot tokens out of circulation. Christanto added:
“After the parachain launch, 40% of DOT could be bonded in parachains, hence reducing effective circulating supply to only 15%.”
Conversely, a lower turnout for Polkadot and Kusama’s Parachain auctions could leave DOT and KSM with a lower-than-expected demand, risking spot price corrections.