Pokladot made simple
To put it simply, Polkadot is a network protocol that allows any data (not just tokens as a standard in the sector) to be moved between blockchains. Furthermore, Polkadot enables the transfer of this data and information not only on public, open blockchains but also on private blockchains.
The focus of Polkadot is to find solutions to problems related to interoperability (the ability of different blockchains to work together) and scalability.
These are the two most common and the most complex solutions to blockchain platforms; therefore, finding a unique solution to them would give a huge advantage to the hands of the project being able to do so.
Although Polkadot did not earn attention until the year 2020, the whitepaper for this cryptocurrency was released back in October 2016. This project was founded by Dr. Gavin Wood, who is one of the most influential developers in the crypto space.
In addition to being part of the team that developed Ethereum and its programming language, Solidity, Gavin Woods also founded the blockchain company Parity Technologies. Together with another developer, Peter Czaban, they were behind the creation of the Swiss non-profit Web 3.0 foundation, which is helping with the development of Polkadot.
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This company (Web 3.0 foundation) also organized the ICO for Polkadot in 2017, when they managed to raise more than $140 million. This was one of the largest ICOs to date, selling 50% of all tokens from the total supply of 10 million DOT tokens. Just after the ICO, however, came the biggest misdemeanour, when Parity and Polkadot managed to lose more than 66% of all funds raised from the ICO process (approximately $90 million).
For most projects, this would mean an immediate ending. However, the story of Polkadot continued. Fortunately for the project, they were able to offset the loss and continue their development. This was also due to the help of two more investment rounds that followed. Both were held privately, the first in 2019 and the second in July 2020.
In the second investment round, Polkadot managed to raise more than $ 43 million. This enabled the official launch of Polkadot, which took place only in mid-August of 2020 when there was the biggest uproar surrounding the cryptocurrency that has been continuing ever since.
In addition to being one of the most promising DeFi projects, Polkadot is also one of the most complicated and complex in terms of technology. Therefore, we will only briefly introduce the most important concepts you need to know if you are interested in Polkadot.
Polkadot has been built on the Substrate Blockchain Framework, developed by Parity and used by developers to create their own platforms and technological solutions. This is what allows blockchains to communicate with each other, provided that they are built on the Substrate network. Polkadot technology consists of three key concepts, which we will briefly introduce:
- Relay Chain – is the heart of the entire Polkadot network. The primary responsibility of this chain is security, consensus, and cross-chain interoperability of the whole network.
- Parachains – are separate blockchains within this network, which can have their own tokens, and their functionality can change based on what the tokens and blockchains are to be used for.
- Bridges – are systems that allow the communication of the entire network with external networks such as Ethereum or Bitcoin.
The combination of all of these three factors should solve interoperability problems. Scalability via sharded blockchains, on the other hand, will allow transactions on the Polkadot network to be processed at once (multi-parallelized transactions), which means that they do not have to be executed one after another, but rather several transactions at once.
The consensus of the entire network and its approval divides investors into four groups, each with a different role. Specifically, these are nominators, validators, collectors and fishermen. Each of these positions has a different function and rationale in the network.
Suppose you want to invest in the Polkadot project. In that case, we definitely recommend you study the differences between them, as they form the core of the consensus and, thus, the functionality of the entire network.
In the case of Polkadot, the so-called “forkless upgrades” are one of the most significant technological changes that this project aims to bring to the crypto world. The lack of need for forks is provided through a unique governance process, made possible by a transparent on-chain mechanism built directly into the Relay Chain.
It will allow participants to argue and vote on any decisions regarding the development of this cryptocurrency. In addition, each of the individual shards can modify and, if necessary, create its own governance voting system to suit the needs of a given blockchain or project so that it will not be necessary to fork the entire network.
Polkadot use cases
DeFi projects are characterized by having their governance tokens play a crucial role in building decentralized technologies. Although these tokens do not always perform many different functions, Polkadot, with its DOT token, is the best example of how many different uses a single token can have.
- Staking – the DOT token must be held by different groups of investors if they want to be part of the network and decision-making. Similarly, to Proof-of-Stake systems, the more DOT tokens owned by a specific entity, the greater the staking reward can be expected.
- Bonding – the DOT token will also be used to create new parachains. If users choose to create a new parachain, DOT tokens will be locked and will not be available for the owner until the parachain is discontinued or irrelevant.
- Governance – as is often the case with staking, the holders of DOT token will be able to vote on a variety of decisions, including network fees, auction dynamics, a protocol for parachains or improvements, and other improvements.
- Fees – users will pay to validators in DOT tokens if they want to send messages to other parachains. For comparison, DOT will work similarly to Gas on the Ethereum network (similarly, not the same).
If you are interested in the DOT token, you can get it on almost every leading cryptocurrency exchange. It can be bought on the most prominent crypto exchanges like Binance, KuCoin, Kraken, Huobi or Bitfinex. If you buy this token and keep it securely on your wallet, not on the crypto exchange, the options are using Polkawallet or more secure offline Ledger Nano X or Ledger Nano S wallets.
The tokenomics of this cryptocurrency also underwent an exciting development. Initially, this project had a supply of 10 million Polkadot coins (during the ICO). However, one of the first public votes on this network caused a 100-fold split. This decision was supported by up to 86% of all voters, meaning that the total supply of DOT tokens increased from 10 million DOT to one billion DOT.
Also read: What is Decentralized Finance (DeFi)?
During this time, the DOT token was listed on several leading exchanges. This step took place around the middle of August 2020, which was also the time when the Polkadot price started to be tracked.
However, it was this split and the associated voting that confirmed the effectiveness of on-chain governance voting and facilitated the future use of the DOT token. It’s important for the tokenomics of this cryptocurrency to keep in mind that the overall supply of this cryptocurrency is dynamic, which means that it will change over time through inflation, which is supposed to increase the total supply.
Pros and cons of Polkadot
Polkadot is often described as the “Ethereum Killer,“ which is a sentiment connected to half of the projects in the cryptocurrency world. Nevertheless, Polkadot provides several exciting technological innovations and solutions, significantly differentiating this cryptocurrency from the competition.
Moreover, Polkadot has a relatively long history, compared to other DeFi projects, and also has one of the most experienced teams in the crypto world. It also has the support of investors, who, despite the initial major mistake, which cost the project more than $ 90 million, still believe in this cryptocurrency’s potential and technology.
We have already partially mentioned the two biggest disadvantages of Polkadot in the previous paragraph. First, in addition to being just the “next killer of Ethereum,” Polkadot may have trouble with extreme competition. In addition to notable projects that already have a place in the cryptocurrency sector, such as Ethereum (ETH), Tezos (XTZ) or Cardano (ADA), competing projects include several new DeFi projects, which also have huge potential.
These include projects such as Dfinity (ICP), Avalanche (AVAX), or Near Protocol (NEAR). The disadvantage of this project is the fact that it managed to lose more than $ 90 million. This is not something that you can see in this sector every day. Although investors seem to have forgotten this misstep, they certainly have it in mind.
Should such a mistake occur again, it is almost certain that the undermined credibility of the whole project, despite its great potential, would be completely buried. But as we have already mentioned, Polkadot certainly has something to offer, especially from a technological point of view, so one can only hope that this will not happen.
Polkadot undoubtedly has great potential. It is one of the most promising DeFi projects connected to the crypto world, with a great and experienced team. However, to succeed in tough competition, this project will not only have to avoid the mistakes they made during the ICO phase but also confirm and implement the potential of their technologies, which will take time.