Polkadot is an open source blockchain platform and cryptocurrency. It provides interconnectivity and interoperability between blockchains, by enabling independent chains to securely exchange messages and perform transactions with each other without trusted third-party.
Polkadot was developed by the Web3 Foundation and Parity Technologies, which was co-founded by Gavin Wood and Jutta Steiner. Recall that Gavin Wood is a co-founder of Ethereum. In October 2017, Polkadot raised over 144 million US dollars in an initial coin offering.
What is Polkadot?
First of all, let’s get to know what Polkadot is. Polkadot is a protocol that interconnects or connects blockchains. As a result of this interconnection, it creates an allowance for data as well as value to be transferred between different networks. In earlier times, Ethereum and Bitcoin were not compatible but with this interconnectivity, this gap has been bridged. Polkadot has a token called DOT which is used for governance and staking. Today, the DOT token can be bought and sold over various exchanges. Polkadot was built to be very fast and scalable as well.
It is established already that the Polkadot protocol bridges the gap between unrelated blockchains and allows transactions to be made across. This means that data as well as other values can easily flow from the Ethereum blockchain to the Bitcoin blockchain without any intermediary. To be fast and scalable, the Polkadot protocol uses many parallel blockchains otherwise known as parachains. These parachains help to ease the processing demands on the main blockchain.
How Polkadot works
The major reason or brain behind the processing speed of Polkadot is the parachains. A lot of parachains are involved and they help in doing the heavy lifting in place of the main relay chain. Bitcoin can perform up to 7 transactions per second while Ethereum performs about 30 per second. Polkadot on the other hand can perform over a thousand (1,000) transactions per second. Polkadot can handle a whole lot more. As the network is growing, more and more parachains are added and this aids in increasing the speed. It is possible as time goes on for the Polkadot network to hit the milestone of processing a million transactions per second.
It might interest you to know that blockchains can connect with Polkadot and work in parallel so that the parachains can access the network’s proof-of-stake information regarding transactions and security. Thus, in the relay chain of the network, transaction addresses are cross-checked and the data is made standard for proper understanding of all systems. This is where the security of all systems comes from.
In addition, the functionality of the blockchains is taken care of. The connected blockchains can make use of their PoS mechanism. The connected blockchains can also be in charge of changing their code or updating their code. The blockchains that are connected can also run the decentralized applications (DApps) as well as tokens that they choose. This makes it easier for the networks to preserve their security and at the same time incorporate new protocols.
Going forward, the relay chain which is the main blockchain is tasked with achieving consensus and delivering transactions among the parachains. We have earlier established that parachains are blockchains within the Polkadot network that are used specifically for certain applications. This means that each para chain is an entire blockchain on its own that has its features as well as its own logic. The relay chains are the governance layer of the network while the parachains are the user-created parallel chains. The parachains thus help individual projects to be able to create and also operate their blockchains all within the Polkadot infrastructure. These independent blockchains benefit from the security of the Polkadot network.
There is a common term in the Polkadot network known as crowd loans. Parachains are secured via para chain auction. This means that independent projects bid DOT tokens against each and the winner takes the slot. This could be quite pricey and some teams may not be able to afford it and that is where crowd loans come in.
It is important to know that every DOT holder that supports a certain project can lock their DOT. This can be done in exchange for a reward. The reward comes from the project team. The rewards are generally paid in the form of interests, mostly in the project’s native tokens. Over time, this became the go-to way for teams to secure enough funds. And as a result, we’re able to bid para chain slots. Today, many exchanges support Polkadot crowd loans. Notable among the exchanges supporting Polkadot crowd loans is Binance.
The benefits of Polkadot
It is well known that the two major issues that blockchain-based systems need to solve are scalability (this is the number of transactions per second the network can handle) and governance (this is how the community manages protocol upgrades and changes). The Polkadot network has set its sights on solving both of these problems. It does so through the following means.
Interoperability: Polkadot protocol is designed to allow applications as well as smart contracts on one blockchain to transact seamlessly with other data and assets on other chains.
Scalability: Polkadot protocol also offers the ability to run multiple parachains, each processing several transactions in parallel, thus allowing networks to obtain infinite scalability.
Shared Security: Polkadot protocol has provided security that is pooled within the network. What this means is that individual chains can leverage collective security. This means that they don’t have to start from scratch to try to gain traction and trust.
Still, on the benefits, the Polkadot framework includes a very powerful tool called Substrate. Substrate makes it easier to effectively build a blockchain from scratch. The substrate makes it easier for teams to build up the specific blockchain that they desire. Of course, with protocol connection points joining them to the main relay chain.
Another benefit is that it provides access to the blockchain world for teams that have amazing ideas but not the experience needed to build the necessary infrastructure from the scratch. This has been seen as the major reason why various teams all over the world are adopting the Polkadot network for their projects. It is indeed a powerful technology.
The DOT token explained
Polkadot (DOT) is the native token of the Polkadot network. You can think of it in the same way that BTC is the native token of Bitcoin and similarly that Ether is the native token of the Ethereum blockchain.
The primary function of the DOT token is to empower its holders to control or have a say in the governance of the Polkadot platform. The governance functions included under the governance mechanism include agreeing on the amount to be paid as network fees, addition and subtraction of the parachains, upgrades, and bug fixes on the Polkadot platform. Thus, the DOT taken allows its holders to partake in the governance of the Polkadot platform.
The DOT token is also used to improve and facilitate the consensus mechanism that supports the Polkadot platform. The platform on the other hand also relies upon those holding the DOT token to perform active roles. This is mainly for the platform to function effectively and be able to carry out valid transactions on the parachains. Those participating illegally will have their DOTS slashed and thus is a disincentive. DOT holders put their tokens at risk through staking to be able to perform these functions. In the end, they are rewarded for staking. The amount of tokens required to participate also varies with the activity being performed. It also depends on the duration or period that the token will be staked for and the total number of tokens staked.
Thus, this means that the DOT token possesses the ability to be locked away for a duration to earn a slot of para chain in the network. The locked DOT will be reserved during the lease of the slot and then given back to the account after the agreed period has finished and the para chain removed as well. Several auctions govern the parachain slot and the allocation.
Staking and bonding on Polkadot
The Polkadot network makes use of Nominated Proof of Stake (NPoS) as its consensus mechanism. This consensus encourages the token holders to participate fully as nominators or validators. Whether as a nominator or a validator, holders lock up their tokens as collateral and get rewards for staking at the end.
At the end of the stipulated duration, the system automatically pays out the rewards equally to all the validators not considering the staked amount. There are however ways that the reward calculations are done. Thus, the rewards may at the end of the day not be equal to all the validators.
We have established that the distribution of the rewards is pro-rata to all speakers ers. This is always after the validator’s commission is deducted. By so doing, the Polkadotadot network creates incentives for the nomination of lower-staked validators to be able to create an equally-staked validator set.
Thus, in staking, you are either a validator or a nominator. As a nominator, you have the power to nominate validator candidates. These should be people that you trust to help you earn rewards in the chain’s native token. The earned rewards will then be locked or bonded immediately for staking on your account. After this is done, it would effectively compound the rewards you receive overtime within the specified duration. On the other hand, you may choose to make them transferred to your account. Or even to a different account as your transferable free balance. There is a nominator guide provided on the platform to enable you to know your duties as a nominator. There are also documents about the validator roles and how to carry them out effectively.
Now we know that as a holder of the DOT token, you have the entitlement to lock your DOT tokens in support of a certain project and get rewarded for doing so. The rewards are usually distributed at the end of the agreed duration by the owners or team running the new project in the form of interests.
Determining if the Polkadot (DOT) token is a good fit for your investment portfolio depends on your personal financial circumstances and the goals that you have set. Also keep in mind that cryptocurrencies are highly volatile investments. This is what makes them riskier to invest in than other asset classes.
Therefore, the future of this token will most likely depend on cryptocurrency market sentiments as well as on the adoption of the Polkadot protocol as well as other factors. Many forecasting sites and analysts have predicted that the DOT price could move higher over the long term. Always remember and keep in mind the high volatility of cryptocurrency markets. This high volatility makes it difficult to predict prices, and as a result, forecasters can and do get it wrong sometimes.
Already, Polkadot has an all-time high (ATH) of over $50, so the next level to watch for the Polkadot cryptocurrency is $100 mark. Polkadot’s (DOT) token predictions were that the price could reach the $100 mark around the year 2025. Whether or not you believe those predictions is a decision only you can make.