Cryptocurrencies
03
Jan
polkadot

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What is Polkadot (DOT)?

Polkadot (DOT) is a cryptocurrency and a Layer 0 blockchain. Gavin Wood, one of the founders of Ethereum, also founded Polkadot. Relay Chain is at the heart of Polkadot’s architecture. Each application has a parachain, which can also be customized to its needs. Parachain auctions started in November 2021.

Polkadot’s test network (canary network) is called Kusama. Polkadot 2.0 is the most critical update in the history of Polkadot. Polkadot is an exciting project in the world of crypto.

What is Polkadot (DOT)?

Polkadot (DOT) is a cryptocurrency and a Layer 0 blockchain. Its goal is to solve the problem of fragmented blockchains and enable communication between them. In addition to Polkadot, a few other Layer 0 category projects exist on the market, such as Cosmos.

Polkadot’s solution to the blockchain interoperability problem is an environment where each application gets a blockchain. These are called parachains. Each parachain connects to other parachains via the Relay Chain, which provides consensus, security, and data transfers for the entire ecosystem.

Polkadot’s validators are responsible for the security of the Relay Chain. They also stake the DOT token, the native token of the Polkadot ecosystem.

Basic information about Polkadot:

FeatureInfo
Founder Gavin Wood
Category Layer 0 (Interoperability)
Ticker DOT
Circulating supply 1.4 billion DOT
Max supply Unlimited
All-time high (date) $55.00 (Nov 4, 2021)
All-time low (date) $2.69 (Aug 20, 2020)

You can find an up-to-date Polkadot price here: Polkadot (DOT) price.

The DOT token also functions as a governance token. Token holders have the right to participate in the development of Polkadot and vote on technical details and new updates.

It is good to note that DOT does not have a maximum supply. Polkadot’s inflation varies depending on the ratio (percentage) of staked tokens, but inflation is never more than 10% annually.

The history of the Polkadot

Gavin Wood is the founder of Polkadot. He was also one of the core members of Ethereum when the project was launched. Wood was Ethereum’s CTO and one of the early developers. And that’s not all. Gavin Wood has also written the Ethereum yellow paper and developed the Solidity programming language, which is used to program Ethereum’s smart contracts.

Below is a picture of Gavin Wood.

gavin wood

Gavin Wood and Ethereum parted ways in January 2016. According to popular opinion, Wood became frustrated with the development of Ethereum 2.0, which is still in progress today. Wood began working on his vision of what Ethereum should be like. This is how Polkadot’s white paper was born in October 2016.

Around the same time, Gavin Wood founded the EthCore development company with a few other former Ethereum members. The company became later known as Parity. It is responsible for building the Polkadot platform.

The Web3 Foundation was established in 2017. It is a non-profit association in Switzerland that guides the development of Polkadot. The Web Foundation has financed hundreds of projects built on the Polkadot ecosystem.

The foundation also organized Polkadot’s ICO in October 2017. Gavin Wood’s name brought the project a massive pot of money, no less than 145 million dollars. This is many orders of magnitude higher than the average ICO pot at that time.

The project immediately suffered a massive blow, as most of the funds were lost due to a hack of the multi-sig wallet used by the developers. The funds were more than 500,000 ETH, worth about 90 million dollars then. The incident is known as the Parity wallet hack.

However, the team continued its development work despite the massive setback. This paid off, and the investors had faith in the project. In 2019 and 2020, Polkadot raised hundreds of millions of dollars in new money through private funding rounds.

Polkadot was hidden from the general public until the summer of 2020. That’s when the project released its MainNet, i.e., the production version of its blockchain. In addition to the MainNet release, another significant event is the start of the parachain auctions. This process was finally set in motion in November 2021, with the first parachains launching in December 2021.

The next significant step is Polkadot 2.0, which the founder, Gavin Wood, introduced in the summer of 2023.

Polkadot’s Relay Chain

Relay Chain is at the heart of Polkadot’s architecture. It is not a smart contract platform, so no dapps are built. In the Polkadot architecture, each app gets a blockchain. These app-specific chains are called parachains.

The Relay Chain could also be called the “master chain,” and parachains can be considered sidechains. The Relay Chain secures the entire Polkadot ecosystem and continuously validates parachain transactions.

Polkadot uses the Nominated Proof of Stake (NPoS) consensus algorithm. It resembles the popular Delegated Proof of Stake (DPoS) solution.

polkadot npos

The basic idea of ​​both DPoS and NPoS implementations is the same: the blockchain is maintained by a fixed number of validators who stake the native token.

In Polkadot’s model, the selection of validators works slightly differently than in a typical DPoS architecture. In addition, DPoS solutions often have only a few dozen validators, while Polkadot has hundreds.

Becoming a validator requires sufficient support (stake) from the voters, who are called nominators. Each nominator has to lock at least 120 DOT tokens. It can then stake the tokens to up to 16 different validators. Each validator must stake at least 350 DOT tokens.

With Polkadot’s Nominated Proof of Stake, nominators select up to 16 validators they trust, and the network will automatically distribute the stake among validators in an even manner. Polkadot uses tools ranging from election theory to game theory to discrete optimization, to develop an efficient Validator selection process that offers fair representation and security, thus avoiding uneven power and influence among validators. Another key difference in Polkadot’s Nominated Proof-of-Stake in that nominators are subject to loss of stake if they nominate a bad validator. (Source: Polkadot)

In Polkadot’s model, the network administrators (validators) also risk losing some of their tokens if the party they vote for is hostile. The equivalent is not used in DPoS solutions.

Each parachain still has its validators, called collators in the Polkadot architecture. They send the parachain transaction data to Relay Chain’s validators, who validate it on the Polkadot blockchain.

Therefore, the validators inside the Relay Chain are responsible for maintaining the entire architecture. Each validator is responsible for the data of a particular parachain, but these responsibilities rotate randomly. This ensures that specific validators cannot accept incorrect data in cooperation.

Polkadot’s parachains

Each application has a parachain, which can also be customized to its needs. Parachains also have their native tokens, i.e., they are fully-fledged smart contract platforms.

Each parachain is linked to the Relay Chain. The picture below illustrates the Polkadot architecture. It has six parachains (A, B, C, D, E, F), and the gray ring in the middle is the relay chain.

polkadot parachains

Polkadot’s infrastructure allows for a maximum of 100 parachains to be created. There are also three different types of parachains: the common good parachain, parathreads, and the “ordinary” parachain.

  • A common good parachain is a general-purpose parachain that provides essential functions to the entire ecosystem. For example, it can be a bridge between Polkadot and Ethereum. Approximately 10-20 such slots are reserved for them. Each common good parachain is selected individually through Polkadot’s governance mechanism.
  • Parathread is practically the same as parachain, but they are sold to those willing to pay a fee. There are also approximately 10-20 parathread slots.
  • Parachains are auctioned. There are approximately 70-80 parachains available for developers.

All Polkadot parachains are compatible because they are built using the Substrate architecture. Substrate is a tool created by Parity that makes it easy to build a blockchain in Polkadot’s ecosystem. It can be compared to Cosmos’ SDK, the competing solution.

Polkadot created the XCM protocol, which enables parachains to communicate with each other. The Polkadot Wiki contains more information on the subject.

Parachain Auctions and PLO

Parachain auctions started in November 2021. The first parachains went to Acala, Clover, Moonbeam, Astar, and Parallel projects.

As mentioned earlier, only a limited number of parachains are available. Theoretically, there are 100 parachains, but parathreads and common good parachains must also be included. Parachains are claimed through an auction, where the DOT token serves as a means of payment.

A parachain auction works like a typical auction. Anyone can participate and stake their DOT tokens for their desired project. The project that collected the most DOT tokens wins the auction. The candle auction model is used, where the auction ends randomly instead of at a fixed date and time.

This video from the Coin Bureau channel goes through Parachain auctions in depth.

auction

Auctions are also associated with the term PLO – Parachain Loan Offering. It is practically a crowdfunding mechanism. An individual project can only gain a limited number of DOT tokens, so it can attract investors using PLO.

PLO works by locking DOT tokens in an account of a project that wants to win the auction. If the project does not win the auction, the investor gets his token back automatically. If the investor manages to bet the winning horse, his token will be locked for a leasing period, which is 96 weeks.

What is the benefit of this for the investor? Since each parachain has its native token, the PLO investor gets the native tokens created in the parachain of the winning project. The more DOT tokens you invest, the more you get for yourself. When the leasing period ends, the PLO investor gets his DOT token back.

Someone might see PLO as a risk-free investment, as invested DOT tokens are never borrowed or lost. In addition, the winning project’s native tokens will be added to the account as a bonus. The real risk, of course, is the 96-week lock-in. If Polkadot no longer appeals to you as an investment and you want to sell your DOT tokens one day, they are locked.

Note: The auctions described in this paragraph will be removed with the Polkadot 2.0 update.

Polkadots vs. Kusama

Polkadot’s test network (canary network) is called Kusama. Although Kusama is linked to Polkadot on paper, it is an independent blockchain. It also has its native token, KSM. Before the launch of Polkadot MainNet, the differences between Kusama and Polkadot were described as follows.

Kusama and Polkadot are independent, standalone networks built on very similar codebases, but Kusama has faster governance parameters and lower barriers to entry. While Kusama is wild and fast, Polkadot is more conservative, prioritizing stability and dependability, with slower, more methodical governance and upgrade processes. Kusama is great for bold experimentation and early-stage deployment. Polkadot is designed for stable execution of risk-averse, high-value applications.

All other blockchain projects have also testnets. Their idea is similar: to test new updates to the ecosystem. However, due to Polkadot’s novel infrastructure, Kusama’s role is even more critical.

Kusama offers projects a platform to test their operations and convince potential Polkadot investors. This makes it easier for new projects to get investors’ support in the parachain auction. It is also good to remember that Kusama has parachain auctions.

The problem with traditional Testnet is that it is challenging to test particular functions without any value mechanism. Only “play money” is used on testnets, not real money. Testing how staking and other administrative functions play out isn’t easy in such an environment.

Kusama offers a solution to this problem, as it is a test network that is only on paper. The market value of the KSM token is currently over one billion dollars. Therefore, Kusama combines the good aspects of a traditional test network with a production-ready network.

However, it is worth remembering that Kusama acts as a springboard for projects in Polkadot. It does not compete with other smart contract platforms and would not be particularly valuable without the success of Polkadot.

Polkadot 2.0

Polkadot 2.0 is the most critical update in the history of Polkadot. It consists of several updates that change Polkadot’s core functions and improve the system’s scalability. Polkadot 2.0 also brings positive value drivers to the DOT token. Let’s go through the most essential points of Polkadot 2.0.

The most important innovation is a concept called Agile Coretime. Its purpose is to replace the parachain auctions described above.

agile coretime

Agile Coretime brings an entirely new kind of marketplace. It aims to solve two significant problems:

  1. The entry of new projects into the Polkadot ecosystem
  2. System resource usage

New projects find it difficult to enter the Polkadot ecosystem due to the high threshold of parachain auctions. In the new marketplace, each project can buy system resources (core time and block space) as needed, allowing for gradual growth.

Another problem is the distribution of resources (computing power) evenly between different parachains. This is neither optimal nor efficient. In the future, each parachain can acquire only the resources it needs and increase them one step at a time.

Agile Coretime is expected to improve Polkadot’s transaction capacity up to tens of thousands of transactions per second. You can read more about it on Polkadot’s website.

There are also benefits for DOT token holders. The DOT token is used as the currency of the new marketplace, and most of the tokens used for resource acquisitions are burned. Polkadot implements a token burn mechanism that is somewhat similar to that of Ethereum. The more the DOT token is used, the more it is burned.

Polkadot 2.0 also includes an update called Asynchronous Backing, which improves the data processing of parachains. Changing the processing mode from synchronous to asynchronous enables transaction prioritization. The update is expected to drop Polkadot’s block time from 12 seconds to 6 seconds.

Polkadot as an investment

Polkadot is an exciting project in the world of crypto. It wasn’t until the MainNet release in the summer of 2020 that Polkadot came to the fore. Since 2021, DOT-token has been firmly in the top 15 ranking list of cryptocurrencies.

An investor needs to understand the change in Polkadot’s competitive landscape. Traditionally, it has not been a direct competitor to Ethereum, Solana, Cardano, and other smart contract platforms. “Layer 0,” or the “internet of blockchains,” which is Polkadot’s category, is considerably narrower.

However, the situation has changed with the growing popularity of Layer 2 solutions. Ethereum now plays a somewhat similar role to Polkadot’s Relay Chain. Ethereum is the “master chain” to which the Layer 2 blockchains are linked. A similar development can also be seen on other smart contract platforms.

Of course, these implementations have differences. For example, Polkadot’s parachains can have different native tokens. In addition to this, parachains link to each other differently than Ethereum and Layer 2 levels.

Layer 2 solutions do not directly replace Polkadot’s implementation, but the market situation has undoubtedly changed since Polkadot’s MainNet launch in 2020.

If we look purely at the Layer 0 sector, Polkadot’s market position has remained strong. There is no reason to underestimate the competition coming from Cosmos, but even now, Polkadot is almost three times larger in market capitalization.

The Polkadot 2.0 update will play a significant role in Polkadot’s near future. It also makes the DOT token a more attractive investment. The Agile Coretime concept can also attract institutional investors.

If you want to invest in Polkadot, there is a detailed beginner’s guide on the topic: How to Buy Polkadot (DOT). The article will guide you through purchasing the DOT token from the Binance exchange.

Antti Hyppänen

Antti Hyppänen is the founder and editor-in-chief of AboutBitcoin.io. Antti has written articles about cryptos since 2017. He follows the crypto market every day of the year and is responsible for the daily operations of AboutBitcoin. Antti is not a maximalist regarding any cryptocurrency but looks at the industry objectively. Antti’s investment profile is “buy & hold,” i.e., he does not trade or use leverage. His crypto portfolio consists of mainly Bitcoin and Ethereum. Antti also follows macroeconomic events. In addition to cryptos, his interests include gold, silver, and the US stock market.