In this Polkadot review, we take an in-depth look at one of the most promising blockchain projects in the crypto market. With our analysis, we try to help you get a better understanding of the Polkadot blockchain and how it works. To this end, we briefly explore its beginnings and delve deep into the tech that makes this project such an appealing premise in the crypto ecosystem.
In addition to the basics, we’ll also cover one of the hot topics of the blockchain industry at the moment – the Polkadot Auction system. This should allow you to understand how this next-gen blockchain can become the foundation for the Web3 we were all waiting for.
First things first, let’s start with the basics. What is Polkadot and how does it fit into the current blockchain ecosystem?
What Is Polkadot?
Polkadot is an open-source, permissionless blockchain project created by none other than Gavin Wood, one of the Ethereum co-founders. Released in the second half of 2020, the project had been already in the making since 2016. Based with headquarters in the Swiss canton of Zug, the silicon valley of blockchains, it’s as legit as blockchain companies can get.
The Polkadot whitepaper explains the functionality of the blockchain as a “vision for a heterogeneous multi-chain framework”. But what does this mean in layman’s terms? In a nutshell, the Polkadot network sets the grounds for a multi-chain ecosystem of blockchains. These so-called para-chains (more on this later) can easily communicate with each other and process computations in tandem.
Consequently, Polkadot tries to solve the blockchain trilemma by becoming at the same time fully decentralized, inherently secure, and scalable for mass usage. It also relies on a proof of stake consensus mechanism, which makes it much more energy-efficient when comparing it to popular blockchain networks such as Bitcoin and Ethereum.
Substrate – A Powerful Tool for Building Blockchains
The Polkadot project was conceived by Parity Technologies, spearheaded by the creator of the Solidity programming language which fuels the Ethereum smart contracts. This blockchain infrastructure company previously worked on creating Bitcoin, Zcash, and Ethereum clients before moving to Polkadot.
With this experience, they created Substrate, a modular toolkit for creating blockchain on top of the Polkadot ecosystem. This highly personalizable framework allows developers to quickly deploy, update and improve parachains on the fly.
Polkadot ICO numbers
The DOT token was released through a crowd sale that took place on July 30 2020, with a price of $0.29 USD per DOT. 100 million tokens were sold, which represented 50% of the initial supply of DOT tokens.
Shortly after, reputable cryptocurrency exchanges like Binance started listing the token, which propelled its value above the $5 mark. But the real recognition came in 2021 after the Coinbase listing. Since then, the DOT price has reached a high of $50 per token, and CoinMarketCap lists its ROI as over 17.000% since the ICO.
What Solutions Does the Polkadot Cryptocurrency Bring?
To better understand our Polkadot review, let’s summarize the various solutions and features of this innovative blockchain project.
First of all, we need to point out that Polkadot is smart contract-capable which means that developers can use it to deploy decentralized applications (dApps) on its network. This makes its ecosystem a major player in the decentralized finance (DeFi) ecosystem with promising projects like the Acala network, Moonbeam, Efinity, and many others.
Moreover, Polkadot promises full scalability of its network, a feature where many of its predecessors like Ethereum have come up short. Thanks to integrated sharding and parachain ecosystem, increased traffic does not affect the speed, transaction costs, or energy requirements of the network. Consequently, NFTs created on Polkadot consume only a fraction of the electricity compared to those on Ethereum.
Another interesting aspect of Polkadot is that it allows developers to apply updates without hard forking the main chain. Consequently, developers can upgrade the network with new tech without the risk of disrupting its continuous functioning.
That being said, the team doesn’t promote Polkadot as the next Ethereum killer. Instead, they designed it to coexist with the #1 smart contract blockchain by providing full interoperability between these chains. This should, in turn, allow for the creation of an intricate cross-chain environment that improves the existing ecosystem, instead of disrupting it.
The Tech Behind Polkadot
Our Polkadot review wouldn’t be worth much if we didn’t delve into the tech of the platform. To be able to bring all of these advancements and solutions, Polkadot provides some considerable innovations regarding the way blockchains function. Unlike other smart contract platforms like Cardano (ADA) or Ethereum (ETH), Polkadot doesn’t work in isolation. Instead, it provides interconnectivity to multiple blockchains, where each one of them fulfills a different role. Here’s how this is implemented in practice:
The Polkadot Relay Chain
The relay chain is the heart of the Polkadot ecosystem. This main entity is responsible for securing the network and provides the algorithm for reaching a consensus between validators. It’s purposefully built to have a reduced number of functionalities. As such, it doesn’t execute complex computations such as dApps but instead coordinates the entire system with high efficiency.
What Are Parachains?
Parachains are secondary blockchains that can run complex computations on the Polkadot network such as DeFi apps and smart contracts. Each of these parallel blockchains can support proprietary tokens and have to validate their transactions with the relay chain. Parachains are essential in the scalability of Polkadot, as they allow for the execution of multiple transactions simultaneously. They run continuously and do not interfere with the relay chain or with each other’s work.
Worth noting is that the aforementioned relay chain has a limited number of parachain slots that can be active at the same time.
The Importance of Polkadot Parathreads
Another important element in the Polkadot ecosystem are the parathreads. These are similar to parachains as they are entities that can compute complex tasks. That said, unlike parachains, parathreads do not have a dedicated parachain slot. Instead, they share slots among a group of threads and the relay chain activates them only on a need-to basis.
Polkadot bridges for interoperability
Finally, to achieve its advertised cross-chain interoperability, Polkadot relies on blockchain bridges. These allow two different blockchains to communicate with each other, regardless of their consensus mechanism. These bridges can be of three different types, depending on their application:
- Bridge pallets – which are specific to Substrate-compatible blockchains created with the Polkadot SDK.
- Smart contract bridges – which serve to connect smart contracts capable chains such as Cardano or Ethereum to Polkadot.
- Higher-order protocols – that can be used to bridge with blockchains that don’t support smart contracts such as the Bitcoin network.
Consensus on Polkadot
In this Polkadot review, we briefly mentioned that the network relies on proof of stake (PoS) to validate blocks. However, this is an oversimplification. To cater to its parachain architecture, Polkadot uses a Nominated Proof of Stake (NPoS). To fuel this novel consensus mechanism, nodes on the Polkadot blockchain can have three distinct roles:
- Nominators are DOT token holders that choose the validators on the Polkadot network. They do this by staking (locking) their DOT with the validator of their choice and can gain new tokens for providing this service.
- Validators are entities that validate the proof provided by the collators on the network. They participate in the consensus with other validators on the network by staking their DOT tokens and those from the nominators that chose them. The network penalizes bad actors by slashing their staked DOT tokens, and with this, incentivizes honest validation.
- Collators gather the sharded transaction data from parachains and provide proof to the validators that these computations are true. To achieve this, they maintain both a full node of the parachain and the relay chain.
In a nutshell, collators collect the transaction data from parachain, and form proof that this data is valid. Then, they send this data to nominated validators that confirm the proposed transactions blocks and add them to the blockchain.
Token economics of the DOT Crypto
Before we carry on with our Polkadot review, let’s have a quick look at the token economics behind the DOT, the native token of the blockchain. Tokens have three main purposes:
- They provide governance rights to holders of the Polkadot relay chain.
- Users can stake them to participate in the validation of transactions.
- Devs can lock them to bond parachains to the relay chain.
Regarding its economics, the DOT token doesn’t have a limited maximum supply, unlike BTC for example. Instead, the circulating supply of the DOT cryptocurrency hovers around 1 billion at the time of writing (November 2021). New tokens are obtained through staking at an approximate 10% inflation rate on a yearly level.
Polkadot Slot Auctions Basics
In this Polkadot review, we briefly mentioned that the relay chain has a limited number of parachain slots. The theoretical maximum of these slots is 100, although this number is currently much lower due to technological limitations. Because of this, developers that wish to deploy an application-specific parachain need to go through a bidding process known as a Parachain Slot Auction.
What are Parachain Slot Auctions on Polkadot?
Parachains on Polkadot need to bond with one of the few available slots on the relay chain to be active in the network. To achieve this, they need to stake a number of DOT tokens for a lease period of 96 weeks. These bonded DOT cannot be used for anything else in the ecosystem until the lease period is over. The bonding is organized through an on-chain auction, and only the chains with the most staked tokens will be able to bond with the relay chain.
The community can loan their tokes to the parachain of their choosing and increase the chances that their preferred project wins the auction. In that regard, auctions are an incentive method for parachain developers to provide complete and innovative products to the Polkadot community.
Who can Participate in a Polkadot Auction?
Everyone can participate in a parachain auction, as long as you are willing to stake your DOT tokens for 96 weeks at a time. All you need to do is to purchase some DOT crypto assets and vote with them on a popular platform such as Binance or Okex.
Keep in mind that every project will have different incentive rewards for the voters. Most of them will reward you with tokens from their own blockchain, that will be redeemable after the lease period of 96 weeks. Once the period is over, the DOT tokens, together with the additional rewards, will be returned to the user to do with them as they please.
Pros and Cons of Polkadot auctions
All in all, auctions are a great passive earning method for DOT holders. It allows users to support their favorite projects and receive in-kind rewards in tokens that they hope will appreciate in value at the end of the vesting period.
On the other hand, there’s the drawback of having your DOT locked up for 2 years. Your holdings will be left to the mercy of the volatility of the market, without the hope of exiting your investment if things go sour.
Kusama – The Experimental Network for Developers
When doing research about Polkadot, you might often encounter comparisons to Kusama. This shouldn’t surprise you, as this blockchain also uses Substrate and serves as a testing ground for Polkadot’s multi-chain capabilities.
Because it boasts the same architecture as Polkadot, developers can use Kusama to test their parachain upgrades and improvements. They can experiment with Polkadot’s consensus mechanism and architecture in a real environment and optimize it.
Like its bigger cousin, Kusama also holds parachain slots auctions, using KSM tokens. That said, the barriers to entry are much lower. This means that modest projects can benefit from the robust architecture of Polkadot in their testing phase. Vesting periods are also shorter, which means that crowdloaners will get their rewards much quicker than on Polkadot.
Wrapping Up Our Polkadot review
This last parenthesis on the Kusama blockchain brings us to the conclusion of our Polkadot review. All in all, Polkadot is a revolutionary platform for creating interoperable blockchains. It boasts decentralization, scalability, and high security. Moreover, its Substrate framework effectively democratizes the creation of new blockchains that directly benefit from its robust architecture.
Let’s not forget its built-in auction system, which is a great incentive for both investors and developers. It serves as a crowdfunding mechanism for parachains and rewards investors for putting their trust in their favorite project.
While it’s still very recent, we believe that Polkadot has a bright future ahead of it. It can succeed where others were unsuccessful – creating a solid Web3 foundation for the future of the decentralized internet.