What is Polkadot? It is over five years old platform, which finally reached mainstream attention in 2020. Polkadot has a famous founder with a focus on interoperability solutions. This article is the Polkadot beginner’s guide. We’ll walk you through the history and the technology of Polkadot step-by-step.
Polkadot is solving the interoperability problem
First, we’d take a broader look at all cryptocurrencies and categorize Polkadot. This will help you understand the project better. We divide cryptos into three main categories: currencies, platforms, and tokens.
The best-known currency is Bitcoin. This category also includes Litecoin, Bitcoin Cash, Dash, and other similar coins. Currencies are designed to be digital P2P money. They don’t offer much (if anything) besides functioning as digital money.
The king of platforms is Ethereum. These are entire ecosystems, which host smart contracts and distributed apps (Dapps). You can think of platforms like iOS or Android. They provide a framework for software developers to build apps. Other known platforms are EOS, Tron, Zilliqa, and Elrond.
Tokens are built on these platforms and they don’t have a blockchain of their own. Tokens are mostly either utility tokens or governance tokens. They play a role inside a specific application or use case. DeFi coins, such as Aave, Uniswap, or Chainlink, are great examples of tokens.
There is no doubt that Polkadot is a platform. Even if this is a case, analysts don’t really see it competing against Ethereum or EOS. Polkadot doesn’t try to be a “world computer” for smart contracts. It is focused on solving the interoperability problem.
Below is a Polkadot presentation from the official Youtube channel.
There is a term often used for networks like Polkadot – the internet of blockchains. One should remember that Polkadot is not the only project trying to connect blockchains. Cosmos, AION, and ICON are probably the best-known examples of projects with similar goals.
Polkadot has also a native token with a similar name. The ticker is DOT. The Polkadot token has two major functions: it is used to pay transactions (gas fees) and it is also used in governance (staking).
Next, we’ll dive into the history of Polkadot.
Polkadot is founded by Gavin Wood
Even if Polkadot has reached wider publicity in 2020, this project goes back many years.
The founder of Polkadot is one of the most famous names in the industry, Gavin Wood. He is one of the original founders of Ethereum, which is nowadays the only truly significant project in the industry after Bitcoin.
Gavin Wood was the CTO of Ethereum when the project was launched. There weren’t many developers working for Ethereum back then, and Wood was one of the core ones. He has also written the Ethereum yellow paper and created Solidity.
All Ethereum smart contracts are written in Solidity, making it the most popular programming language in the crypto world.
Gavin Wood is certainly a name any crypto enthusiast knows. His involvement is one of the main reasons so many people are interested in Polkadot. See Gavin Wood talk about Polkadot in the video below.
Gavin Wood left Ethereum already in January 2016. The public opinion is that Wood was frustrated with the development process of Ethereum 2.0, which is far from done even today.
Wood started to work with his own vision of how Ethereum should have become. He published the Polkadot white paper in October 2016.
Around this time, a development company called EthCore was also established. It included other former Ethereum team members with Gavin Wood. This company was later renamed Parity.
In 2017, Web3 Foundation was established in Switzerland. This is a non-profit organization overseeing Polkadot development. It is not a big surprise that Web3 Foundation chose Parity to build the Polkadot ecosystem.
Web3 Foundation was also behind the Polkadot ICO in October of 2017. This was in the middle of the ICO boom, and the name of Gavin Wood helped to raise 145 million dollars for the project. This was a much larger sum than the average ICO raised.
Despite a promising ICO, things derailed fast. Most of the ICO funds were lost due to hacking of the Polkadot multi-sig wallet. At the time, this was over 500,000 ETH meaning over 90 million dollars. The case is known as the Parity wallet hack.
Polkadot had already suffered a similar attack earlier in 2017, where over 30 million dollars were lost.
The team continued development despite these huge setbacks. This was the right decision since Polkadot has since raised more money and built a working product. The team got over 100 million dollars in 2019 and 2020 through private funding rounds.
Polkadot was pretty much hiding in the shadows until the summer of 2020. It was barely mentioned in social media and there was no major interest. This all changed when the Polkadot MainNet was released. The MainNet was first run by the Web3 Foundation and decentralized in July of 2020.
Gavin Wood wrote the following tweet on July 21st.
— Gavin Wood (@gavofyork) July 21, 2020
The Polkadot token had been pretty stable in 140-150 dollars from 2019 to the halfway of 2020. When the MainNet was launched, the token price went over 300 dollars before crashing 99%. There is a good explanation for that.
Since Polkadot is run by its users, they decided to cast a vote and change the distribution of the DOT token. In practice, a new DOT token was launched with a 1:100 ratio to the old one. That is why the price seems to have crashed so much.
Polkadot is now one of the top 10 currencies in the market, which makes it difficult for any investor to ignore the project!
Relay Chain and Parachain
As mentioned earlier, Polkadot is not really competing with Ethereum despite being in the platform category. Polkadot is building an architecture, which enables different blockchains to connect with the Polkadot ecosystem and each other. It’s not just about building bridges, but also about security and efficiency.
The Polkadot architecture is quite complicated, so it might take a while for you to fully understand it. We don’t go too deep in this article since we try to keep the information simple enough for anyone to understand. There is more information on Youtube and Google for those, who want to go deeper.
There are two key elements in the Polkadot network: the relay chain and parachain. The image below will help you understand the structure. Source: Polkadot white paper.
The relay chain is like the master blockchain of the Polkadot network. It powers the whole ecosystem and provides security. A parachain is like a side chain, which is compatible with the relay chain. All services and apps wanting to join the Polkadot network will create their own parachains.
Parachains can connect to each other and send information. Every parachain is connected to the relay chain, where all transactions are sent to be finalized.
Each parachain has its own validator nodes. These are called as collators in the Polkadot ecosystem (see the image above). Collators send all the transaction data from their own parachain to the relay chain, where it’ll be validated and added to the Polkadot blockchain.
Check the video below to learn more about the relay chain and parachains. The video should start at 12:43.
The validators inside the relay chain are the ones ultimately responsible of the Polkadot architecture and blockchain. Each validator has a certain parachain to watch over, but these responsibilities are changed constantly as a security measure.
Polkadot Bridge, Substrate and Sharding
If you reading this article and thinking of sharding right now, you are not far off. The Polkadot architecture might feel similar to Zilliqa and Elrond, which have implemented sharding technology.
Polkadot is sometimes titled as a “sharded blockchain” as well. There is a significant difference, though. When we talk about sharding, it means a blockchain is split into smaller shards to enhance the scalability.
In the Polkadot ecosystem, one shard is basically a blockchain of its own. And each shard is called a parachain. Polkadot is therefore a network of blockchains.
Every parachain is compatible with each other because they’re built with Substrate. This is a framework created by Parity. It provides developers an easy-to-use toolbox for building a blockchain.
The vision of Polkadot is that each parachain could be optimized to a certain use case. A parachain can have unique feature and its own token, which other parachains don’t have. Substrate provides the framework for all this.
The image above is Polkadot’s Twitter background. The big ring in the picture is the relay chain, where all parachains are connected.
What about interoperability with other blockchains? This is where the Polkadot Bridge comes into the frame. If you scroll up and look at the picture of Polkadot network in the relay chain & parachain chapter, you’ll see a parachain bridge there in the bottom.
Polkadot has created XCMP, Cross-Chain Messaging Protocol, which enables external blockchains to connect with Polkadot parachains. You can read more about this from the Polkadot Wiki.
This cross-chain messaging is still far from reality. So far, the project has been working with Ethereum. Before this direct bridge is operational, Polkadot encourages other projects to build their own parachains and make the connection that way.
The Polkadot consensus: GRANDPA and nodes
Let’s dive a bit deeper into the Polkadot consensus mechanism and how all the different nodes work. This is a complex system compared to your typical blockchain project.
Polkadot is using a Proof of Stake consensus, like all other 3rd generation platforms as well. Only Ethereum is still running the old Proof of Work consensus, but ETH 2.0 version will see Ethereum move to a PoS consensus too.
The PoS variant used by Polkadot is called GRANDPA. This has nothing to do with an old man, but it comes from the words GHOST-based Recursive Ancestor Deriving Prefix Agreement. This allows the Polkadot blockchain to reach instant finality on transactions, meaning no confirmations are needed.
If we look at the nodes, there are four different types of operators in the network: a nominator, a validator, a collator, and a fisherman. Let’s go back to this Polkadot architecture image, we looked at already earlier.
The nominator is an operator running in the relay chain. The task of a nominator is simply to pick relay chain validators, which are the gatekeepers of the Polkadot blockchain. You can become a nominator by staking enough DOT tokens.
Validators were already described earlier. These are the nodes collecting the transaction data from parachains. Validators are in the relay chain and you can see the Validator swarm in the picture above. You have to stake DOT tokens to become a validator.
A collator has the same role as a validator but inside a parachain. It is collecting the transaction data from the parachain it is located in and send this information to relay chain validators. These transactions might also come from an external blockchain, which is connected to this parachain.
Fishermen are like the police inside parachains They make sure that collators aren’t doing anything unorthodox. Look at the image above and you’ll see collators and fishermen in the top left corner.
In the future, Polkadot will expand to a tree-like structure, where each relay chain has other relay chains with more parachains connected to them. The consensus mechanism becomes extremely difficult in a system like this.
The governance system is one of the biggest reasons so many crypto enthusiasts are interested in Polkadot. This is due to the fact Polkadot is doing something different.
Blockchain projects have been traditionally run by a fintech company, which is in control of the development work. The founder of the project is often a God-like figure, who has a lot of power and influence.
Some projects have created a system, where the holders/stakers of its token will vote on the development. Such organizations are often referred to as DAO (Decentralized Autonomous Organization). Dash is probably the most famous one of such.
We should add that dozens of new DAOs have been born in the DeFi boom of 2020. Many DeFi protocols have a voting system in place, where the token holders can decide on many details. This is how Polkadot wants to operate as well.
Polkadot has a built-in voting system in its relay chain. All DOT holders can be part of this. You can read more detailed information on the voting system from the Polkadot Wiki.
There’s one interesting feature included which you can see from the picture below (source: Polkadot Wiki).
The longer the period you lock your DOT tokens, the more weight your vote has.
There are two types of operators in the Polkadot governance: council members and the technical committee. Council members represent passive DOT token holders. They can make referendums and also use a veto to block harmful referendums.
The technical committee consists of teams, which are actively developing the Polkadot ecosystem. It has the power to make emergency referendums to fix critical bugs in the system.
This system got publicity in August 2020, when DOT holders voted to split the token price 1:100, meaning from around $300 to $3 at the time of the voting. This was the first distributed vote in the network and the 21st of August was named Denomination Day.
We should also remember, that each parachain can create its own governance model.
Investing in Polkadot and Kusama
Polkadot moved out of nowhere to the top 30 list of cryptocurrencies in the summer of 2020. It has kept going even further, and the DOT token is now firmly in the top 10. Quite a meteoric rise, which has a lot to do with all the technical features and the name of Gavin Wood.
As mentioned earlier, Polkadot is not the only blockchain capable of interoperability. It is, however, the only very strong player in this niche. The market cap of Polkadot is far bigger than all other interoperability players put together.
We should also mention Kusama, which is presented by Chico Crypto in the video below starting 1:43.
Kusama is described as “a canary network for Polkadot experiments”, which means sort of a TestNet. Projects can create a parachain first to Kusama and test how the governance and all features are working before moving to Polkadot.
Kusama has also its own token, KSM, which has gone up hundreds of percent in 2020. This is much more than just a Polkadot playground. You can read more about the project at kusama.network.
Polkadot’s token (DOT) is an interesting investment due to many use cases. It is not only used to pay transactions, but there are different types of nodes, which require DOT tokens to be staked. This will remove DOT tokens from the market and help to push the price higher.
One should also note that you need a boatload of DOT tokens to run your own parachain.
If you are interested in Polkadot, learn how ICON, AION, and Cosmos work as well. Then you’ll see if Polkadot has real advantages over its competitors.
No one has any idea how this interoperability niche is going to develop. Could Polkadot reach a similar status here as Ethereum has in the general platform category? It’s difficult to say. Only time will tell!
Polkadot price and how to buy Polkadot
It wasn’t really easy to buy Polkadot before the summer of 2020, which was one reason why so few people were interested in it. The situation has changed after the MainNet launch. Now, the DOT token is available in several strong exchanges.
We recommend buying Polkadot from Binance, which is the leading cryptocurrency in the market. You can deposit funds with your credit card or via bank wire transfer.
There are several different alternatives for a Polkadot wallet. Polkawallet and Trustwallet are great options for mobile. Atomic Wallet is a free desktop wallet. Check all Polkadot wallets from here.
We also recommend checking the Polkadot review by Coin Bureau, which you can find below. This Hashoshi interview goes also through the Polkadot project.