System parachains are those that contain core Polkadot protocol features, but in parachains rather than the Relay Chain. Rather than leasing an execution core by economic means (e.g., auction), execution cores are allocated by network governance.
By hosting core protocol logic in parachains instead of the Relay Chain, Polkadot uses its own scaling technology -- namely, parallel execution -- to host itself. System parachains remove transactions from the Relay Chain, allowing more Relay Chain blockspace to be used for Polkadot's primary purpose: validating parachains.
System parachains always defer to on-chain governance to manage their upgrades and other sensitive actions. That is, they do not have their own native tokens or governance systems separate from DOT KSM. In fact, there will likely be a system parachain specifically for network governance.
In the past, these were often called "Common Good Parachains", so you may come across articles and discussions using that term. As the network has evolved, that term has been confusing in many cases, so "System Parachains" is preferred now. A discussion on this evolution can be found in this forum thread.
Existing System Chains
The Asset Hub on both Polkadot and Kusama are the first system parachains.
The Asset Hub is an asset portal for the entire network. It helps asset creators (e.g. reserve backed stablecoin issuers) to track the total issuance of their asset in the Polkadot network, including amounts that have been transferred to other parachains. It is also the point where they can transact, to mint and burn, to manage the on-chain asset.
This logic for asset management is not encoded in smart contracts, but rather directly in the runtime of the chain. Because of the efficiency of executing logic in a parachain, fees and deposits are about 1/10th of their respective value on the Relay Chain.
These low fee levels mean that the Asset Hub is well suited for handling DOT balances and transfers as well as managing on-chain assets. For example, the existential deposit for Polkadot is , while only on the Asset Hub.
Encointer is a blockchain platform for self-sovereign ID and a global universal basic income. With referendum 158 Encointer was registered as the second system parachain on Kusama's network. The functionality of Encointer adds logic to the Relay Chain that aims to bring financial inclusivity to Web3 and mitigate Sybil attacks with a novel Proof of Personhood (PoP) system for unique identity.
Encointer offers a framework that, in principle, allows for any group of real people to create, distribute, and use their own digital community tokens. Referendum 187 introduced a runtime upgrade bringing governance and full functionality for communities to be able to use the protocol.
Encointer aims to invert the Cantillon Effect, where money is issued at the bottom, and not as credit to businesses or creditworthy individuals. This way, every individual gets a universal basic income (UBI).
To resist Sybil attacks, the Encointer protocol uses a PoP mechanism to foster a unique identity system. The notion is that a person can only be present at one place at a given time. Participants are requested to attend physical key-signing ceremonies with small groups of random people at randomized locations, where these local meetings are part of one global ceremony that co-occur. Participants use the Encointer wallet app to participate in these ceremonies, and the wallet enables the management of local community currencies. Watch an Encointer ceremony in action in this video.
The protocol involves other mechanisms to protect the privacy of users in addition to the physical key-signing ceremonies.
Encointer was accepted as a system chain based on its offer of a Sybil defense mechanism as a basis for digital democracy. This can also be adapted by other chains, which can use the unique identity system to prevent Sybil attacks and use PoP for token airdrops or faucets.
To learn more about Encointer, check out the official Encointer book.
The Polkadot Collectives parachain was added in Referendum 81 and exists only on Polkadot (i.e., there is no Kusama equivalent). The Collectives chain hosts on-chain collectives that serve the Polkadot network.
Some of these collectives are the Polkadot Alliance and the Polkadot Technical Fellowship. These on-chain collectives will play important roles in the future of network stewardship and decentralized governance.
Networks themselves can act as collectives and express their legislative voices as single opinions within other networks. This is achieved with the assistance from a bridge hub.
Before Polkadot and Kusama supported their first parachains, the only way to design a bridge was to put the logic onto the Relay Chain itself. Since both networks now support parachains, it makes sense to have a parachain on each network dedicated to bridges. This is because of the execution isolation provided by parachains.
See the Bridges page for information on the latest bridge projects. Currently, a Bridge Hub parachain is in development that will be a portal for trust-minimized bridges to other networks.