Polkadot is an open-source project that offers the transfer of data aross blockchains and supports multiple chains in one network, which is enabled by the Web3 Foundation.
What goes around the crypto industry is expeditious. First, we witnessed a tremendous price spike in Bitcoin. Next, we see rapid growth in decentralized finance (DeFi) that causes Ethereum to dominate the conversation. Ultimately, savvy investors are now looking into opportunities to diversify their investment portfolio by hedging bets in tokens that could leverage market share on the Ethereum network. And what comes to mind is the Polkadot (DOT) token. Since it’s still a relatively new token, it’s expected that you’ll ask what is Polkadot and the purpose?
Polkadot is an open-source project powered by the Web3 Foundation to allow data transfer across blockchains and support multiple chains within a single network. Polkadot aims to eradicate slow communication between public and private blockchains and mainly to promote a network without forking and compromising the scalability.
As we know the interoperability issues hovering in the current blockchain landscape. Polkadot is now offering many technical advances to overcome the problem. It interacts with Ethereum applications and assets with plans to expand and integrate other blockchain platforms. The project’s end goal is to broaden the functionality that has not been achieved by other blockchains like Ethereum, Cardano, or EOS. Which allows the cross-blockchain transfer of tokens, data, and assets to set them apart from the rest. Hence, Polkadot holds great value and has been actively climbing the crypto ranks. In fact, it’s now the top 10 cryptos with over $7 billion in market capitalization.
What Is A Polkadot Token?
The Polkadot token (DOT) is a native token for the network. Polkadot, on the other hand, is a blockchain protocol that intends to incentivize a global network of computers to operate a blockchain on top of which users can launch and operate their blockchains.
Currently, there are close to 990M of DOT circulating supply, while the maximum supply of the Polkadot coin is not pre-determined. These tokens are mainly to strengthen the bonds in the network, staking and activating Polkadot’s governance and upgrades.
#What’s Unique About The Polkadot Blockchain?
By design, Polkadot operates two types of blockchains. The main network (Relay Chain) and user-created networks (Parachains.) The difference between these is that transactions are permanent on the Relay Chain. In contrast, the Parachains can be customized for any number of uses and feed into the main blockchain.
The unique design of Polkadot allows transactions to be kept secure and accurate using only the computing resources required to run the main chain. At the same time, there are added benefits of users being able to customize many Parachains for many different uses.
Here’s an overview of the Polkadot’s structure and components:
- Bridges: It’s the facilitators among the parachains, parathreads, and other blockchains.
- Parachains: They are independent chains that are capable of forming their tokens.
- Parathread: Featuring a flexible model that leverages on the independent chains to form new tokens.
- Relay Chain: To facilitate the consensus among different chains.
Overall, the Polkadot blockchain lets users perform transactions more privately and efficiently. That is because the blockchains they create don’t disclose user data to the public network. They process a more significant number of transactions, which could theoretically be more than a million transactions per second (TPS), said Gavin Wood.
Who Founded Polkadot?
Polkadot was developed by Parity Technologies in 2017 and launched in 2018 who co-founded by Dr. Gavin Wood and Jutta Steiner – both former Ethereum executives. The project is backed by the Web3 Foundation, which provides funding, advocacy, research, and collaborations.
After its inception in 2015, Parity moved away from focusing on developing node software for Ethereum, called the Parity Ethereum client to Polkadot and a related project, Substrate.
Image Credit: Polkadot Official Web
In 2018, the company launched two proofs-of-concept and deployed Polkadot’s first Parachain in July 2018. In September 2019, the network launched Kusama network. Subsequently, Polkadot was launched in a Beta state in May 2020, then enabling the token transfers in August 2020.
The Origin of Polkadot Coin
It was first released during Polkadot’s ICO in 2017 when the project raised close to $140 million. The company then held two private sales in 2019 and 2020 and raised an additional $100 million. The Parachains can mint native tokens and transfer tokens and use those to settle transactions. Though, the main Polkadot crypto is the DOT token.
However, a weakness in Parity’s Ethereum wallet has led to a hack that costs about 2/3 of the original ICO tokens frozen. To this day, the frozen tokens have not been recovered. Surprisingly, the team behind Polkadot decided to move forward with the project despite the losses.
In August 2020, Polkadot started allowing investors to trade the remaining tokens. As a result, DOT is listing on many major exchanges including Binance, Huobi, Kraken, and more. Subsequently, the coin’s market cap has skyrocketed due to high trading volumes. Currently, the Polkadot coin (DOT token) is in the top cryptocurrencies, ranking at no.7, with a market capitalization of over $7 billion.
An interesting and somewhat unusual fact about the DOT token is that it was “redenominated” by a factor of 100x shortly after trading began. That means that the total number of Polkadot coins was multiplied by 100, thus taking it from 10 million to 1 billion. As a result, every DOT holder will obtain 100 coins for each previously held old coin. The market cap was not affected by this since the newer coins are worth about 1/100 of the old ones, making token amounts more readable.
How Does the Polkadot Staking Works?
When you wonder “what is the Polkadot Coin,” it’s essential to understand its purpose and functions. The DOT cryptocurrency plays a crucial role in maintaining and operating the Polkadot blockchain.
Users who own and stake DOT gain the ability to vote on network upgrades. Each vote is proportional to the amount of DOT cryptocurrency a user has staked. As of 2020, staking DOT yields around 10%-15% annual returns on crypto exchanges.
To incentivize staking, Polkadot rewards users with newly minted DOT based on how many tokens they have staked. The Polkadot blockchain has four major consensus roles, and they all receive rewards.
These are;
- Validators: Those who secure the Relay Chain by staking dots and validating proofs from collators.
- Nominators: They secure the chain by shortlisting a list of validators and staking dots that are trustworthy for the task.
- Collectors: Mostly maintaining the shards. They collect shards transactions from users and then produce proofs for validators to validate the transaction.
- Fishermen: They monitor the network’s behavior and to report suspicious activities to the validators.
Staking is one of the three main uses for the DOT token apart from basic financial transactions for governance and bonding. The parachains within the Polkadot network be public blockchains, private blockchains, or other sources of data. The data in the parachains is accessed via specialized nodes and sent to Polkadot, similar to how decentralized oracles work. Parachains are activated by staking DOT tokens and removed from Polkadot by unstaking these tokens.
Is Staking Polkadot A Good Investment?
Typically the average staking profits for DOT is around 10-15% per annum. However, the yields are subjected to the stake pool performance, the network’s changes, the staked amounts, demands, and supply. On the contrary, DOT staking is less complex than crypto mining. That means staking is more beginner-friendly, and its yields are less dependent on your input (in terms of validating a transaction.)
Ultimately, to really know whether staking DOT is a good investment, it all depends on how much profits you intend to make and how much you’re willing to stake.
Is Polkadot Better Than Bitcoin and Ethereum?
Polkadot is often dubbed as the “Ethereum killer” although it does not intentionally set out rival Ethereum. It is easy to see why many consider the Polkadot blockchain as an improvement to Ethereum’s existing infrastructure even after the infamous Ethereum 2.0 upgrade. That’s because both Ethereum and Polkadot uses sharding to circumvent the scalability and transactional issues. But it is rather difficult to compare with Bitcoin as the Polkadot and Bitcoin blockchains project very different designs, functionality, and purpose.
Many experts see cross-chain networks as crucial in the development of DeFi and decentralized applications. In this sense, Polkadot’s structure consisting of a relay chain and a limitless number of parachains is superior to Bitcoin’s relatively rigid model of a proof-of-work consensus (PoW) and unwavering decentralization.
Another difference stems from the way both networks compensate users for incentivizing participation and adoption. Traditionally, Bitcoin has always rewarded miners despite the increasing difficulty of computational tasks. In fact, in recent years, Bitcoin mining (and subsequently – pocketing the rewards) has been monopolized by large, industrial-scale mining operations of companies or ultra-wealthy individuals who can afford the machinery, utility bills, and bandwidth.
However, since Polkadot is decentralized, there are validators where users can stake Polkadot coins and be tasked to fill different roles. Depending on the amount of DOT tokens staked, users receive more DOT tokens as a reward and can also influence the project’s development. In contrast, it does not apply to Bitcoin holders.
When it comes to processing times for transactions—Polkadot demonstrates significant advances with linearly processed transactions that can reach transaction volumes as high as 1000 tx/s. If data is flowed through Polkadot’s parachains and sent back to the main chain via the bridge, this figure rises exponentially. Again highlighting the project’s scalability and technical superiority.
Polkadot’s Relay Chain vs. Ethereum Beacon Chain
As we know, Polkadot and Ethereum 2.0 share the similarity of a sharded network. But there’s still a difference. A distinctive difference is that Beacon Chain is used for different parallel shards plug to share information with the condition that only a compatible structure can connect to the chain.
However, Relay Chain is more flexible as it accepts different shards that operate independently. Using the standard WebAssembly, validators on the Relay Chain can accept different parachains that are far more interoperable. Besides, the external chains can also connect to Polkadot’s Ecosystem by utilizing the bridges.
For example, the decentralized applications from ETH 2.0 can connect to the Polkadot ecosystem, and ETH 2.0 can’t connect to any apps developed outside of the Ethereum network.
In the end, Polkadot’s higher interoperability makes it more appealing to the users, and it critically solves the scalability issues. That means Polkadot can bridge the communication and development struggles without intermediaries at a much cheaper and faster rate without compromising the security.
How Is Polkadot’s Value Being Perceived?
Polkadot has many advantages over many existing blockchains. It already has the Ethereum 2.0 functionality integrated and a unique structure that deploys parachains—blockchain within a blockchain, also known as shards. In the Polkadot blockchain, shards send asynchronous messages between shards, and each shard has a unique state transition function (STF.)
These parachains collect and process data and “feed” it to the relay chains, which transmit processed data to other chains. A fourth component is known as ‘bridges,’ then relay the data back to the main chain, such as Ethereum, Bitcoin, Tron, or any other platform.
The value is tremendous as Polkadot essentially creates what is known as a heterogeneous blockchain. It connects several chains in a single network, allowing them to process transactions in parallel and exchange data between chains with security guarantees.
That allows any arbitrary data to traverse across Polkadot’s multi-chain application environment like real-world assets and tokens. Any blockchain can join the Polkadot infrastructure, which is basically an aggregated set of validators that leverage heterogeneous shards.
That means that the use cases for Polkadot are vastly more significant than those for any other blockchain. That includes the transaction chains, oracle chains, identity chains, file storage chains, data curation chains, IoT chains, finance chains, and privacy chains.
The Risks and Limitations of Polkadot
Polkadot is a considerably safe project that has managed to overcome significant challenges in its short lifespan. That is a true testament to the team and community behind it.
Still, there are a few risks associated with Polkadot Coin. Namely, the learning curve, which is already very steep for cryptocurrencies. The Polkadot blockchain seems to put less emphasis on user experience and has become a bit too complex for its benefit.
Its community-governed hybrid consensus is another potential weakness. Despite its best intentions, Polkadot crypto holders don’t always know what’s best for the general network.
The second risk involves money, and specifically the allocation of Polkadot’s DOT tokens. A substantial portion of investment into the project comes from China, specifically regular farmers. Many crypto enthusiasts wonder what this means approach means for Polkadot’s future and how it affects the inactive DOT holders with the insanely high inflation.
Polkadot coin (DOT) reaches its all-time high at $368.05 in Aug 2020, shortly after the project is initiated. However, the DOT’s price suffered a drastic drop to its lowest price at $2.69 in late Aug.
Since then, the DOT’s price has hovered around $3 to $8 on an average throughout the year. Though, Polkadot attempts to resume the uptrend on Jan 7. 2021, which later broke the average trading price at $10.63. However, the bears start a correction, but DOT bounced off at $8.78 a week later.
When analyzed based on the moving average and RSI indication, it suggests a possible bull trend. And DOTUSD may rise again, surpassing $30 again if it outstrips the resistance level. On the contrary, if the DOT price breaks the resistance by showing a downtrend, there might indicate a more robust correction. As of 31 Aug, DOT is trading at $27. Perhaps hitting its all-time high again may need a significant adoption of this token and it may or may not happen this year unless there is a breakthrough.
The Prognosis of Polkadot
Many experts are looking at Polkadot’s rising trading volumes to determine the future holds for Polkadot coin. At the same time, many established projects are working on being integrated as parachains on Polkadot.
In 2020, we saw the Polkadot blockchain achieve a significant milestone with the rollout of Kusama, a multi-chain network for early-stage Polkadot deployments. The new network grew the number of its validators from 700 to 900. Many expect Polkadot to follow the same trajectory, which requires the network to be run by a minimum of 1,000 validators.
That’s because a high number of validators will likely attract new users to the platform. So, it is understandable why Polkadot intends to build bridges between other blockchains in the months and years to come.
As one of the more promising projects integrated with Polkadot, Edgeware is believed to provide a sustainable ecosystem. Mainly by relying only on a few codes on hand via the separated modules within different blockchain parts. As a WASM smart contract, it can adopt different architecture with a more flexible and seamless execution. In 2021, Edgeware has seen to be a breakthrough, and since it’s already getting attention, the future is bright.
Closing Thoughts
Polkadot is an ecosystem with potentials that are yet for us to discover. While there might be drawbacks, it’s only the future to tell the story as a whole. However, in terms of competition, Polkadot coin is currently only rivaling Cosmos that share similar concepts but with a more straightforward protocol. While other projects are also working on Inter-blockchain communication, Polkadot remains ahead of the curve in many ways.
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