A Polkadot Review – Is this the Future Internet of Blockchains?
In 2020, the crypto market has seen the sector of decentralized finance surge to global popularity and unforeseen power. While DeFi was stealing the spotlight, the niche of sharded multi-chain networks was quietly emerging in the background. One of its front runners is Polkadot, which many consider being a worthy competitor of Ethereum.
Polkadot is only three-years-old, but it has already made considerable progress on its ambitious roadmap. This promising open-source project even has a native cryptocurrency that, at the moment, is one of the top-10 digital assets by market capitalization.
If you want to take a refreshing break from the DeFi madness, this Polkadot review might be what you need.
What is Polkadot?
Polkadot is an open-source, sharded protocol that aims to provide a decentralized platform for a wide range of trustless, permissionless operations. It has been developed to facilitate the applications that the current state of blockchain technology allows. More so, its main goal is to power the next stage in internet evolution, Web 3.0, upon its implementation.
Polkadot promises “true interoperability” between blockchains and a forkless platform where users can create smart contracts, tokens, and even new blockchains.
The Polkadot network also wants to link private and public blockchains, oracles, and other decentralized applications. It seeks to provide a user-friendly hub where individuals and institutions can interact freely while using transparent, trustless services.
The DOT cryptocurrency is the native token of Polkadot, and it has three different functions. It provides holders with governance power, and it can serve in staking and bonding operations.
Behind the Polkadot project is The Web3 Foundation, a Swiss non-profit organization operating from the “Crypto Valley” of Zug, Switzerland. The company has appointed Parity Technologies from the UK to develop Polkadot and ensure its long-term maintenance.
One of the co-founders of both the Web3 Foundation and Parity Technologies is Dr. Gavin Wood, who most people would remember as the co-founder of Ethereum and the creator of Solidity.
A Brief History of Polkadot
In early 2016, Dr. Wood resigned from his position as Ethereum’s CTO and core developer and sought other industry projects. The one that he has worked most intensely on is Polkadot, which he made public through the Polkadot whitepaper in November of the same year.
In October 2017, Polkadot announced the release of the DOT cryptocurrency through an Initial Coin Offering (ICO). During two rounds of the sale, both private and public investors bought half of the initial supply of 10 million DOT. In return, Polkadot gained almost $145 million in Ethereum.
Unfortunately, almost two weeks later, hackers attacked the multi-signature wallet holding the Polkadot funds. The developers moved quickly to freeze over $90 million, but not fast enough to stop the bleeding. More than 500 000 ETH of that amount is still locked to this day.
In the aftermath of the attack, many users voiced their concerns regarding vulnerabilities in the Polkadot code also because it wasn’t the first time that the project lost money in hack attacks. A few months before the incident, in July 2017, more than $33 million in Ether disappeared at the hand of malevolent hackers. At that time, a group of White Hat hackers managed to stop the attack before the siphoning off even more funds.
It took almost two years for Polkadot to make up for the stolen funds. In January 2019, the platform held a private funding round that resulted in the sale of 500 000 DOT at $120 per DOT. The project managed to get over 60 million USD as a result.
In July 2020, Polkadot sold around 350 000 DOT tokens for $125 per unit to earn about $43 million in a similar event. Shortly after, on July 21, the network launched the Polkadot mainnet, which provides increased security measures, more governance features for its users, and allows them to trade DOT tokens on the platform.
What is DOT cryptocurrency?
DOT is the native cryptocurrency on the Polkadot network. The token holders have the right to vote on proposals regarding the Polkadot roadmap. Also, they can use their assets in staking and bonding on the platform.
The initial supply of DOT was 10 million units. This amount was in circulation until the end of August 2020, and it used to trade at about $400 per token. However, after the release of the mainnet, the users proposed the multiplication of DOT tokens by 100. Their motivation was that it is much easier to transfer 10 DOT than 0.01 DOT.
The proposal received the necessary majority of positive votes and transformed the OLD DOT into the NEW DOT. As a result, the total amount of DOT tokens reached 1 billion, and one unit started trading for 100 times less than the original token.
At the time of this writing, DOT is the 7th-largest cryptocurrency by market capitalization. It has a market cap of $3,639,309,933 and a reported circulating supply of 904,869,778 units. One DOT is trading for around $4.
Most of the major cryptocurrency exchanges list DOT for trading, including:
If you choose to invest in DOT, you can store it in Polkawallet, which is a mobile crypto wallet, or in the Polkadot.js browser plug-in. Both options come from the issuer, but several wallet platforms are looking into solutions to provide storage support for DOT soon.
How Polkadot Works
Being a creation of Gavin Wood, Polkadot can only be described as a highly-complex network with in-depth mathematical correlations that can easily escape the untrained eye. It takes a good understanding of blockchain technology to understand the core mechanisms behind the Polkadot network. We won’t dive that deep into the topic, but we will try to provide an easier explanation of how Polkadot works.
Polkadot is a network of blockchains that relies on two fundamental elements:
- The Relay Chain – The Core Polkadot blockchain.
- Substrate – A blockchain-building tool and framework developed by Parity Technologies.
The blockchains that connect to Polkadot are known as Parachains. These chains have two possibilities to access the Polkadot ecosystem.
Firstly, if a blockchain has been built with Substrate, it can connect to the Relay Chain directly.
Secondly, a blockchain like Bitcoin or Ethereum, which have been built long before Substrate was even a thing, can connect to the Relay Chain by using a bridge.
Parachains have complete freedom to be as different from the Relay Chain as they wish. They can have their own tokens, consensus mechanisms, and even their own governance structures.
The Polkadot consensus mechanism uses two fundamental elements as well:
GRANDPA – An abbreviation of “GHOST-based Recursive Ancestor Deriving Prefix Agreement,” which is a version of the Proof of Stake (PoS) consensus mechanism, also known as Nominated Proof of Stake.
BABE – An abbreviation of “Blind Assignment for Blockchain Extension,” which is a version of the Proof of Work (PoW) consensus mechanism.
The two mechanisms function together, and they are linked by the operations of the network users, who are divided into four categories:
Let’s break them down and see what their roles are on the platform!
Users on the Polkadot network can become validators by staking DOT tokens. After being nominated through PoS, they are randomly assigned to check the transactions on the Parachains before adding them to the Relay Chain.
Every Parachain requires at least five validators, and the Polkadot network can support as many as 200 Parachains and their simultaneous operations at an optimal speed.
Each validator gets an amount of “era points” for every transaction that it certifies. The most active validators have the highest number of era points.
When a new block becomes part of the Relay Chain, the validators receive 20% of the block rewards according to their era points. The rest of the 80% of block rewards go to the Polkadot Treasury.
The Polkadot Treasury is a “stockpile” that accumulates funds from transactions for using them later as incentives in network proposals.
The validators who breach the network rules can lose as much as 30% off their stakes.
This category of Polkadot users includes the ones who nominate validators. They use DOT tokens to vote on as many as 16 validators. In return, they receive a part of the block rewards when their candidates manage to validate transactions and add new blocks to the Relay Chain.
The collators have the crucial task of creating new blocks on the Parachains that are linked to the Relay Chain. These blocks include the latest transactions that have taken place on a specific Parachain.
Any user who wants to be a collator on the Polkadot network has to stake DOT tokens before he or she can connect their blockchain to the Relay Chain to become a Parachain.
The collators’ work is verified by the validators, who decide which is the most accurate representation of the present state of a Parachain at any given time.
The Fishermen are the “police force” of the Polkadot network. They stake a small number of their DOT tokens to monitor the operations of validators and collators on the platform.
When a fisherman identifies and reports a user who has breached the network rules, he or she can gain a significant reward in DOT.
The Polkadot Governance Mechanism
Polkadot employs a unique governance system that includes three basic elements:
- The Council
- The Technical Committee
- Other DOT token holders
The Council is made of 13 elected members of the Polkadot network users who must stake DOT to be eligible for nomination. They only occupy this role for a maximum of 24 hours. During this time, they have exclusive access to the Polkadot Treasury, and they have to decide how the funds in the stockpile should be spent.
The Technical Committee is made of only 3 entities. Only those who have solid experience with the Polkadot network can become a member. Unsurprisingly, one of the members is the Web3 Foundation.
Only the Council can vote on changes within the Technical Committee.
On the Polkadot network, proposals are known as Referenda, and they are open to submissions and votes for the Council members and the rest of the DOT holders.
If there is a 100% voter turnout for a Referenda, more than 50% of them have to provide positive votes for a proposal to advance to the 30-day enactment stage that precedes implementation. However, if the voter turnout is smaller than 25%, only 66% of the votes have to be in favor of the proposal to pass.
On Polkadot, users have to be constantly active to avoid being punished by a ridiculously high rate of inflation, which can reach as high as 100% per year.
The Bottom Line – Polkadot Blockchain Review
Polkadot has wasted no time in pursuing its goal to become the future internet of blockchains. It has rapidly climbed the volatile hierarchy in the crypto space to become one of the most promising projects out there.
However, while it benefits from one of the most brilliant developers in the industry and the support of a Crypto Valley organization, the Polkadot blockchain still has a long way to go.
First off, the network promises seamless interoperability between all types of blockchains. At a closer look, we notice that only the chains built with Substrate have an easy path to become a Parachain on the network.
Secondly, Polkadot may prove too complex for many users who are new to blockchain technology. Even seasoned developers may have a tough time navigating through the mosaic of rules and mechanisms coexisting in the Polkadot ecosystem. So, until it becomes more user-friendly, it might find it difficult to expand at a quick pace.
The best part about Polkadot is that it has set its sights on the future of technology and the imminent implementation of Web 3.0. By the time we migrate to the next stage in internet evolution, Polkadot will be there to create viable links between users, organizations, and services.
All in all, Polkadot is more than just another network for cross-chain operations. It is a reminder of the fascinating, nearly limitless directions in which blockchain technology can expand.