When Polkadot’s token, DOT, was launched in 2020 many observers were surprised that it was in the top ten coin list within a few weeks. Clearly this was not just any alt-coin. DOT’s swift rise, though, was because of the pedigree of the team behind the project and the scope of their ideas. One of the founders of Polkadot is Gavin Wood, the co-founder and former CTO of Ethereum who also wrote Solidity, Ethereum’s programming language.
Wood’s team have developed an original multi-chain design that allows its “parachain” projects the flexibility to evolve freely and without the slow and expensive transactions that Ethereum has been hampered by. Polkadot offers a new vision of the internet, Web 3.0 – a decentralized internet of interoperable blockchains. Many see this as the third generation of blockchain technology – Bitcoin and Ethereum representing the first and second.
Overview for fast readers
- Polkadot is a highly flexible multi-chain network of blockchains, called parachains, that all specialise in different purposes.
- It solves the problem of slow and expensive transactions because the parachains work somewhat independently of Polkadot’s core relay chain.
- The native DOT token is used for governance of the protocol and can be staked for rewards.
What is Polkadot and why is it different?
The earlier generations of blockchains worked separately from one another and struggle to communicate or operate smoothly with one another. Polkadot joins the dots of blockchain technology. Not only is it highly interoperable within its own network but it can operate with external networks, like Bitcoin and Ethereum, meaning that its ecosystem has unlimited scope to build its wider network. In blockchain technology, the design of a project is often called the “architecture.” In the case of Polkadot, the architecture is particularly novel.
Polkadot’s Multi-Chain Architecture: Relay Chain & Parachains
Polkadot (like Ethereum 2.0) is a sharded protocol, meaning a great deal of the transactions occur in shards away from the main chain, and then only certain information about those transactions will later be recorded on the main chain. This spreads the load and prevents the network from getting overwhelmed. Polkadot’s main chain is known as the “relay chain” – it is the blockchain at the core of the network and it is linked to, and runs in parallel with, parachains. Certain data regarding transactions is standardized so that all the blockchains can understand it.
These parachains surround the mainchain like the spokes of a bicycle wheel. The idea is that these parachains all have different functions and offer different services to the user. Since they are blockchains in their own right they often have their own native cryptocurrency, whilst at the same time, accessing the proof-of-stake validation of transaction security of the Polkadot relay chain. This validation and security may be what draws decentralized apps and start-up projects to the network. Eventually Polkadot will act as a framework that projects can choose to be part of. This will allow developers to focus on the protocol’s functionality and less on their token.
The DOT Token
The network utilises the native cryptocurrency tokens, DOT, in a number of ways – for governance, staking rewards, payment of network fees, and for “bonding.” Bonding is the act of staking the token in order to show support for a parachain. A token may be bonded for as much as 24 months. As a cryptocurrency, DOT is unusual because its supply is unlimited. All DOT holders are part of the governance process and can vote on proposals.
Is Polkadot a direct competitor to the Ethereum network?
Yes, somewhat, but it is unlikely to be the Ethereum killer that it is occasionally referred to as. The comparison is inevitable considering Wood was such a key part of Ethereum and, just like Charles Hoskinson of Cardano, the press likes to pit him against Vitalik Buterin’s network. But it is true that Polkadot operates in the same space and also has smart contracts, DeFi, and NFTs. The network effect of Ethereum is impressive though, and its supporters say version 2.0 update also represents a third generation blockchain network.
Parachain Auctions on Polkadot and Its Testnet
Kusama is the testnet for Polkadot and shares the same codebase. It was launched in August 2019 and allows the Polkadot team to make observations and iron out any bugs in a live environment, before running parachains on its own mainnet.
Both blockchains have parachain auctions to decide which projects get places. There are approximately 100 places awarded to projects. These auctions began in June 2021, with a number of DeFi projects going live on the network.
DeFi protocols offering financial products like yield farming and staking, providing rewards for liquidity provision, are a feature of Polkadot, and no longer exclusive to the Ethereum network. It is typical that parachain projects start on Kusama and then, if successful, migrate across to the Polkadot mainnet, which also has approximately 100 parachains spaces available to its relay chain.
It may sound like something of a pipedream to create a whole new interoperable world of a blockchain-based internet but Gavin Wood and his team already have the infrastructure in place. The Web3 Foundation, set up by Polkadot’s founders, continues to expand upon its visions for a new iteration of the web and support of innovative protocols and dapps. Polkadot aims to create a way for developers to build more easily upon all blockchains, and expects to be future proof for that reason – ease of interoperability is attractive to developers. Couple that with scaling solutions that Wood says can eventually produce one million transactions per second, and Polkadot is a compelling blockchain network.