What happened

Digital tokens related to the Polkadot blockchain network are skyrocketing on Friday, Nov. 4. As of 1 p.m. EDT, the Polkadot (DOT -3.58%) token showed a 24-hour gain of 19%, while the network's testing token, Kusama (KSM -1.49%), was up by 20.3%. In addition, the Enjin Coin (ENJ -5.42%), which uses Polkadot to manage its non-fungible token (NFT) and Metaverse systems, jumped 26.4% over the same period.

These tokens in the Polkadot universe are surging as the underlying network takes an essential step toward full functionality.

So what

Thursday night, the Polkadot project started entering potential parachains and their related crowdloans into the parachain slot auction that will take place next Thursday. This system is an alternative to the initial coin-offering process that injects funding into most cryptocurrency launches.

The difference is that Polkadot's parachain system provides a more democratic way to determine which projects should be funded. Anyone can take part in this process by bonding at least five Polkadot tokens to their favorite parachain ideas. At current Polkadot prices, that works out to a minimum investment of roughly $250.

Polkadot has already approved one parachain called Shell, but that's just a preliminary test. Shell doesn't actually do anything useful, unlike most of the top parachain proposals that are vying for the first five slots in next-week's auction.

In the long run, Polkadot envisions a total of roughly 100 active parachains. After that, this auction will be followed by many others on a rolling schedule, with approximately one new auction per week. So far, the first 10 auctions have been scheduled, stretching into March 2022.

Transparent rendering of several parallel chains where each link is covered in digital data strings.

Image source: Getty Images.

Now what

When the first parachain goes live on Polkadot, the network will be complete under the terms of the original design documents. The system will evolve over time with more auctions, more Polkadot-based token launches, and the potential for upgrades to the underlying network's technology.

If this plan reminds you of Ethereum (ETH -0.46%), you're on the right track. Polkadot is often seen as a rival to the Ethereum ecosystem, but the network also ties directly into Ethereum by connecting that system to other blockchains.

The first parachain slot auction starts on November 11 and ends one week later. The winner will be onboarded in mid-December, giving the winning project access to the Polkadot network and opening up the freshly launched token for its own open-market trading.

Those who committed Polkadot and/or Kusama tokens to voting for a losing project will have their tokens refunded in short order. Tokens promoting the winner will be exchanged for the new project's tokens or, in some cases, refunded up to 92 weeks later. Meanwhile, Polkadot keeps running more auctions on similar timelines.

It's a complicated auction system, but the ball is most certainly rolling now. Polkadot and Kusama tokens will benefit directly as the winning parachains enter the public market and start running transactions on the Polkadot blockchain network. The Enjin Coin's upside is less obvious, since that token isn't an intrinsic part of the Polkadot network's core functionality. Still, even third-party tokens like this pre-launch Polkadot client should reap the benefits of a fully operational network with a thriving universe of Polkadot-based parachains.

The Polkadot token has now gained 1,015% in 52 weeks. Kusama notched a 1,220% gain over the same period, and Enjin Coin have enjoyed a 2,030% one-year return. Of these three, Polkadot strikes me as an investable token that plays an active role in a burgeoning blockchain network.

Kusama is less interesting due to its testing role in the same ecosystem -- Kusama's real-world utility should fade out long before the production-level Polkadot token reaches its peak. As for the Enjin Coin, I honestly don't know enough about the Enjin network and its NFT ambitions to have an opinion on its token yet.

For what it's worth, you can buy and sell both Polkadot and Enjin Coin on Coinbase and other popular cryptocurrency trading platforms today, but Kusama is not an option.