Parachain is a data structure for a specific application. It is globally coordinated and interacts with the validators of the Polkadot relay chain, which is responsible for coordinating the system as a whole. Parachains almost always take the form of a blockchain,
but this is not a mandatory condition.
Parachains can create their own token and launch their own economy. They do not require schemes like PoS, but Polkadot gives them complete freedom to implement ideas, whether it's staking or transaction fees in their own token. The relay network will ensure the execution of all transactions regardless of the rules of the parachain.
Parachains can interact with each other. This is done using the Cross-Consensus Message Format (XCM), a standard that defines how messages should be transmitted. Using XCM, developers determine the data and sources that their networks will receive and send. Communication through XCM is not only between networks, but also between smart contracts and bridges. The key element of XCM is collators.
Who are collators?
Network administrators called collators serve the parachains. They are very similar to validators of any other blockchain, such as Ethereum, but Polkadot is responsible for security guarantees. As network participants (blockchain node), they maintain a full node of the parachain, store all necessary information about it, collect user transactions of the parachain, combine them into block candidates, and create proof-of-validity state transition proofs (PoV). The parachain is responsible for motivating and rewarding collators.
One might think that the more collators there are, the safer the system will be, but this is a popular misconception. A large number of collators slows down the network, and their ability to do harm is very limited. They can only censor transactions, but the parachain can easily overcome any blockage by a few neutral collators, without reaching a majority. Theoretically, even one collator should be enough to overcome censorship.
How does the parachain protocol work?
The main goal of the protocol is to process a parachain block from creation to inclusion through a process. It can be repeated multiple times and in parallel for each parachain connected to the relay network. The validators and collators participate in the protocol.
Currently, the number of available parachain slots is limited for several years in advance. There are only about 100 of them, and the slots are distributed in the following ways:
System parachains contain the main functions of the Polkadot protocol, but in parachains instead of the relay network.
Parachain auctions are auctions where users vote for a project with their DOT tokens. The winner leases the slot. In case the project is unable to renew the lease, it becomes a parathread.
Parathreads are an idea for parachains in the form of temporary access to Polkadot without the need to lease a slot, which is shared among competing networks. Some of them do not have the ability to lease a slot, as they consider it impractical since they pay for each executed block.
Why use parachains?
Parachains scale the Polkadot system by parallel processing transactions while maintaining the overall security of the network.
As a result, parachains solve two fundamental problems of many blockchains - scalability and flexibility. They help create narrowly focused blockchains that collaborate with each other for mutual benefit.
It is important to note the potential of parachains. For example:
Creating high-frequency networks that perform many fast transactions due to high optimization.
Creating private networks that do not reveal any information to the public due to the use of new cryptography.
Creating networks that implement smart contracts.
Even Polkadot developers believe that the full potential of using parachains has yet to be realized in the future.