What Is Polkadot (DOT)?
Polkadot is a scalable, secure, and decentralized multi-chain network for the next web, built using Substrate – a framework enabling the creation of compatible and purpose-built blockchains composed of custom or pre-built components. The network uses an environmentally-friendly proof of stake consensus algorithm. The protocol was created by the Ethereum co-founder Gavin Wood and is developed by the Web3 Foundation with the initial implementation by Parity Technologies
Polkadot seeks to enable a fully decentralized web where users are in control, delivering an interoperability protocol that uses segments, or shards, to scale the network. It can connect private chains, public networks, and oracles – facilitating a new form of the web where independent blockchains can exchange data and transactions in a trustless way.
DOT is the native token currency of the Polkadot network, the smallest unit of which is called a Planck. It facilitates payments, network governance, staking, reward incentives, transaction fees, and other bonding processes – where tokens are locked up as part of connecting new chains to the Polkadot network or taking on another role in the ecosystem.
Unlike most other cryptocurrencies, DOT isn’t limited in supply. This is designed to incentivize the network and dynamically adjust according to staking participation rates of users, inflating up to 10% per annum.
How Does Polkadot Work?
Polkadot allows funds to be sent from one digital wallet to another, using a system of public and private key cryptography. The hash of the public key is the address you give out to receive funds and the private key acts like a password, authorizing and broadcasting transactions to the network. Approximately every six seconds, these pending transactions are confirmed in a block of transactions, and together the blocks form the Polkadot blockchain.
Polkadot offers a lot more than the sending and receiving of funds, of course. Polkadot is a sharded multi-chain network, coordinated by a central Relay Chain which allows it to process data and transactions on several chains in parallel, known as Parachains. Its sharded architecture breaks up the network into individual segments, or shards. This increases the throughput of transactions by allowing them to be processed in parallel on each shard rather than sequentially across the whole network like older generation blockchains.
Multiple Parachains can therefore plug into Polkadot, gaining security from that of the entire network, significantly improving scalability, interoperability, and cross-chain functionality, eliminating the congestion, high fees, and incompatibility of legacy blockchains. Polkadot manages upgrades automatically without hard forks, utilizing a governance system managed by DOT native token holders.
To coordinate the network, Polkadot uses a Nominated Proof-of-Stake (NPoS) consensus mechanism, rewarding users for locking up DOT tokens in a process known as staking, rather than the mining reward incentives offered in Proof-of-Work blockchains like Bitcoin.
Stakers interested in maintaining the entire network can run a Validator node, Collators on Polkadot maintain Parachain nodes, Fishermen nodes police the network, and DOT holders can stake tokens to participate as Nominators, choosing to back up to 16 Validators as trusted candidates with their stake. Validators then produce new blocks, validate Parachain blocks, and guarantee finality. We’ll discuss these roles in further detail later on.
Who Are the Founders of Polkadot?
A flagship project of the Web3 Foundation, Polkadot was co-founded by Gavin Wood, one of the original co-founders of Ethereum and former CTO of the Ethereum Foundation, where he helped develop Ethereum’s Solidity programming language. Wood is also CEO of Parity Technologies,the blockchain infrastructure firm responsible for developing Parity Ethereum is one of the most widely used Ethereum clients on the network. At the same time, Wood is actively working on both Polkadot and Substrate development.
Wood was joined in co-founding Polkadot by Thiel Fellow Robert Habermeier and Peter Czaban, also Technology Director of the Web3 Foundation.
The original whitepaper was released in 2016 and following a successful $145 million fundraise a year later, Polkadot finally went live with its initial mainnet in May 2020. During this first Proof-of-Authority (PoA) phase, governance of the network was managed by the Web3 Foundation while Validators began joining the network to participate in consensus. The second Nominated Proof of Stake (NPoS) phase was then launched in June once Polkadot had a large decentralized set of Validators on the network.
By this time, governance had transitioned to DOT token holders and was no longer under the control of a centralized entity, the first act of which allowed DOT exchange listings and wallet support. A redenomination of the DOT token then took place at a 1:100 ratio, coinciding with an impressive rise that saw DOT reach the top ten cryptocurrencies by market cap for the first time.
The mainnet launch built on the success of the alpha release of its sister network, called Kusama, in 2019, described as a canary network and live proving ground for Polkadot’s technology and functionality, including its native token KSM. Polkadot’s Parachain testnet, Rococo, was then introduced in 2020 in a significant step towards implementing Parachain functionality.
Polkadot is now moving into the next stage of core infrastructure development including the Parachains auction rollout, Parathreads, and cross-chain message passing. It will then become a fully functional Relay Chain that provides security through NPoS and coordinates the system as a whole, including Parachains. More on this later.
What Makes Polkadot Unique?
Polkadot is unique among leading blockchain solutions in providing scalability through sharding, the pooled security of a central relay chain and adaptable consensus, and the interoperability of a multi-chain network. The parallel processing achieved by executing transactions in separate shards dramatically increases throughput, and cross-chain functionality enables transfers of any type of data or asset between shards.
Polkadot also removes friction for projects, providing compatibility with existing platforms like Ethereum, without having to choose one isolated blockchain network over another, with clearly defined community governance and automatic upgrades.
As Polkadot is built with the Substrate blockchain framework, other projects using Substrate can deploy custom chains quickly and easily that run natively on Polkadot. This means that you can start working on a blockchain using the framework before you are ready to deploy on the network.
Rather than being the “Ethereum killer” it is sometimes labeled, the potential of Polkadot actually lies in complementing existing blockchains, rather than competing against them. This is something already recognized by over 350 projects in its ecosystem, building out smart contracts, decentralized finance (defi), oracles, digital collectibles (NFTs), gaming, and other solutions, notably including Chainlink and 0x Protocol.
Polkadot is not itself a smart contract platform. Instead, it provides the infrastructure for decentralized app (dApp) developers to integrate smart contracts across an interoperable network of wide-ranging functionality, witnessing the largest increase in active developers of major protocols as a result.
What Gives Polkadot Value?
Polkadot is currently one of the leading staking platforms, offering estimated rewards of over 13% per annum with over $20 billion in staked value. It has a market cap of over $30 billion, and over 50% of eligible tokens staked.
By staking DOT, users can offset the inflation rate compared to just holding and yield an annual return on their investment, in addition to any capital appreciation. DOT also provides participants with the ability to vote on network upgrades and future feature sets, proportional to the amount of DOT they are staking.
Polkadot’s scalability, interoperability, and cross-chain functionality have already attracted many projects including Acala’s cross-chain defi hub and stablecoin platform; Moonbeam’s smart contract Parachain allowing developers to use existing Ethereum dApps on Polkadot; Chainlink’s oracle technology, and Polkastarter’s decentralized exchange platform, in an expanding number of use cases being brought to the Polkadot ecosystem. This contributes to the value and utility of the network and the DOT tokens required to establish, secure or interact with Polkadot Parachains over time.
How Many Polkadot (DOT) Coins Are in Circulation?
DOT has a current supply of approximately 1 billion tokens following the community governance vote in 2020 to redenominate at a 1:100 ratio from the 10 million tokens at genesis, avoiding small decimals and making calculations easier.
Due to Polkadot’s inflationary monetary policy, the number of tokens is expected to increase 10% per annum, with Validator rewards depending on the staking rate and the remainder going to the network treasury alongside transaction fees to dynamically adjust the incentive to participate in staking.
How To Use Polkadot?
Polkadot offers various utility for different entities and individuals. It enables an alternative, decentralized payment method outside of the interference of intermediaries, providing more control over your money.
DOT can also be used for speculation and investment, or as an alternative to expensive and slow international transfers. It can also contribute to an alternative financial system for the hundreds of millions of people that have access to smartphones but not a bank account, we also introducing a new opportunity for income generation or supplementation through DOT staking.
Polkadot provides an interoperable, scalable, secure, and decentralized platform that eliminates the bottlenecks of legacy blockchains and their high transaction fees, opening up use cases for projects working on defi, oracles, digital collectibles, gaming, IoT, privacy, gaming, cross-chain solutions, and more.