21. Polkadot – Decentralized blockchain and DOT cryptocurrency
Polkadot is a super protocol. It allows users to make transactions and transfer data more efficiently than previous, incompatible networks, which include even Bitcoin or Ethereum.
It is fast and highly scalable. In addition, it has its native cryptocurrency – token DOT. It is used for staking and managing the ecosystem Polkadot. In today’s lesson, we will discuss in detail how the project works and what are its advantages. Undoubtedly, Polkadot stands out in the cryptocurrency market.
Polkadot – how did it start?
It all starts in 2016 when Gavin Wood, co-founder of Ethereum, published the white paper Polkadot. In 2017, Wood and his collaborator Peter Czaban founded Web3 Foundation – a non-profit organization dedicated to development of Polkadot. The co-founder of the project is also Robert Habermeier, who has experience in research and development of blockchains.
Polkadot network developed in many phases. The initial version of the ecosystem was launched on May 26, 2020.
Polkadot is a multichain network that generates arrangements of interoperable blockchains that collaborate and communicate with each other. It allows users to transfer any data – not just cryptocurrencies – between blockchains. It’s a developed multi-chain environment where we can do cross-chain registers and calculations.
Polkadot can connect private, public, and oracle chains. We get a new form of network in which blockchains that are independent of each other exchange data and make transactions without unnecessary control. As a result, we can build an application that takes data from a private blockchain and uploads it to a public one. For example, a private school blockchain could send evidence to a smart contract verifying the previous work experience of the applying teacher.
The project is unique in the cryptocurrency industry. Why? We’re rushing to explain. As you know, most blockchain, it works completely on their own and are 100% self-dependent. They do not communicate with each other, and the dApps created on them do not interact with the main chain.
In the case of Polkadot, it’s the other way around. As a multichain network, it connects other blockchains with each other. Users and developers who use this ecosystem have the opportunity to build their own blockchain that can easily interact with others. All thanks to the interoperability of the project. For example – as a network explorer on one blockchain, you invest in Cardano shares, and from a separate blockchain, you get information about its current prices.
What’s more – Polkadot takes care of transaction validation and security in such an extensive network. This is another benefit for developers. All contracts take place in the relay chain of the network. As a result, you can focus on your blockchain and project. You do not need to build the entire transaction validation system. Doesn’t that sound beautiful?
Benefits of building blockchains in Polkadot
The design exists to connect many together at the same time blockchains (parachains). Here are some basic benefits we will get by building our blockchain on a layer one blockchain:
- Primarily scalability. Thanks to the fact that the Polkadot ecosystem allows you to process transactions in several chains at the same time, each “side chain” receives more computing power.
- High security in economic and network terms. Each of the blockchains is copied to a secure infrastructure.
- Tall cooperation with the others parachains. All of them are in the same language.
- Any online updates, no forks required. Polkadot owes this to its multichain architecture and on-chain management mechanism. This means that management decisions are made publicly on the blockchain.
Polkadot – action
The network operates on two types of blockchains:
- Relay chain – the central chain of Polkadot. Transactions are processed in it. It is designed to provide minimal functionality. Its main and basically only purpose is to manage the system as a whole.
- Parachains – we will devote a separate lesson to them, so today we will focus on the basic explanation. These are parallel blockchains that run on the Polkadot framework. They can communicate with each other.Parachains are their blockchains and are designed specifically for their use. If you are curious, how parachains work, you can take a look here.
The ecosystem is based on a Nominee Proof-of-Stake consensus mechanism. Nominated Proof-of-Stake is developed by Polkadot. How does it work? The user who contributes value to the string can choose either a nominator or a validator.
If you decide to be a nominator, you nominate your trusted validator to verify transactions. However, if the nominated delegate is staking behind a malicious validator, they may lose their cryptocurrencies. Each nominee can select up to 16 validators to stake behind. Then Polkadot will distribute their staking equally between the validators selected by it. Nominators and validators receive a block reward when the validator adds transactions to the blockchain. Complicated? Let’s summarize:
- Validator – validates data in parachain blocks. Participates in consensus and votes on changes to the network.
- Nominee – takes care of the security of the Relay Chain by selecting trusted validators. He is responsible for delegating the DOT to the validators, thus giving them their votes.
- Collators – nodes, containing the history of each parachain. They aggregate transaction data into a block and add it to the Relay Chain.
- Fisherman – “protection” of the Polkadot network. They report inappropriate behaviour of validators. They also wager their DOTs and are eligible to receive rewards in the project’s native cryptocurrency.
Projects at Polkadot
Polkadot is made to connect with other projects. Its ecosystem includes:
- Oracles. The main provider of information for Polkadot is Chainlink. It connects the Polkadot blockchain with an external system. This allows smart contracts to use data from the outside world.
- DeFi, i.e. decentralized financial services. The main project on the network that offers a stablecoin integrated with dApps is Acala.
- Bridges. From previous lessons – connections between two blockchains. This allows users of the system to transfer their assets between them. Bridges on Polkadot include both Interlay and Snowfork.
DOT is the native cryptocurrency of the project. It is used to manage the protocol, but at the same time it can be used for staking. It is also supposed to secure the network and connect new chains.
At the beginning of the project, just four months after the launch of DOT, it was the seventh largest cryptocurrency with a market capitalization of USD 3.7 billion.
You can get DOT cryptocurrency on most popular cryptocurrency exchanges. Polkadot has an inflationary monetary policy. As a result, the number of DOTs is expected to increase by 10% annually. Some interesting facts about this cryptocurrency:
- By staking DOT, you balance the rate of inflation.
- You can get an annual ROI without maximizing your capital.
- With DOT, as we mentioned, you can vote to upgrade the network.
- Polkadot, as a leading staking platform, offers a profit of over 13% per year.
- DOT is an alternative to expensive and slow international transfers.
- Most of the available wallets support this cryptocurrency.
Writing about Polkadot, it is impossible to mention, at least in a few words about Kusama. He is the younger brother of Polkadot. To put it simply – a testnet for the web. Before any new feature appears in Polkadot, it is tested on Kusama’s blockchain. Thanks to the tests carried out on this network, Polkadot has a 100% reliability guarantee.
Polkadot vs. Cardano vs. Ethereum
Cardano and Ethereum are also blockchain platforms on which we can build our own projects. Let’s compare them and take a look at the differences:
|Native cryptocurrency – DOT.||Native cryptocurrency – ADA.||Native cryptocurrency – ETH.|
|Use of NPoS as a consensus mechanism.||PoS as a consensus mechanism.||PoW as a consensus mechanism.|
|Multi blockchain system architecture.||A single blockchain.||The first blockchain where developers could create their projects.|
|High level of scalability and speed, thanks to the ability to connect to 100 parachain.||Not a highly scalable project, and its development is based on long-term research.||Low scalability, slow transactions and high gas fees.|
Based on such a short table, you can already see how Polkadot stands out from other projects and how unique it is.
Polkadot – flaws and problems
All that glitters is not gold. Such an ideal design also has several disadvantages. The first one is the limited number of parachains. It is estimated that the Polkadot network will serve about 100 of them. Of course, it will take a few weeks or even years. Currently, parachain slots are auctioned or leased for up to 96 weeks. So we can see that Polkadot is designed for projects with large capital.
To manage the ecosystem, you need a little more money. As we said, DOT is a management token. They want a stake in management, you block DOT, make a proposal or vote. However, you are not 100% guaranteed that your tokens will be returned to you.
It is the companies and people who have the most DOT, i.e. invested a lot of capital, that have a significant impact on the project.
Investing in Polkadot – is it worth it?
We’ll tell you what we always say. Before any investment decision, do your research. We would like to add that despite its intriguing character, Polkadot is still in the early stages of development. If you are focused on profit, treat it as a long-term investment, which we recommend you count in years, not months.
The future of the project
Polkadot will be a very attractive ecosystem for developers. Its benefits will be available to individual programmers, as well as small companies and large corporations. An innovative approach, as well as many advantages, is an intriguing and even ideal solution for the entire cryptocurrency market.
It is worth mentioning that Polkadot is still a young system. It will be a long time before developers launch all its features and show its potential. Will Polkadot be a dangerous rival for Ethereum, as some crypto industry experts speculate? We are not to judge, but we will follow its development with commitment.
Polkadot is a revolutionary project. Implementing a multi-chain network solves many problems (scalability, high fees) that e.g. Ethereum cannot handle. The ecosystem has next-generation blockchain, which provides us, the users, with the ability to use a fully decentralized network.We will mention here that Polkadot is not an enemy of Ethereum. He is also not his executioner, as some claim. This is a modernization that will bring a lot of good to the entire cryptocurrency industry. We look forward to further development of the project.