The following article is for the sole purpose of providing educational information on the topic mentioned in the title. I am not a financial advisor, so you should use this article only as additional help in your personal research on the subject.
As the evolution of blockchain technology advances, numerous new ideas are emerging that seek to change – for the better – the current state of the crypto ecosystem. One idea that stands out as offering innovative solutions to bring about such a change is, Polkadot.
So what is special about Polkadot?
Polkadot’s goal is to develop a blockchain model that will allow cross-communication between a multitude of different blockchain networks thus achieving blockchain interoperability while increasing speed and efficiency in managing a plethora of transactions.
In a previous article, we already talked about Cardano, a project still in development that seeks to solve some of the most important problems in the crypto world; in this new article, we’ll talk about Polkadot, a more recent project, that is just as promising.
Polkadot is a blockchain network with its own cryptocurrency that already stands out among the most popular initiatives in recent times, managing a market capitalization that already exceeds USD $35 billion, surpassing other more well-known assets in the market such as Litecoin and Tron.
Today, you’ll learn everything you need to know about this promising blockchain, issuer of the DOT cryptocurrency, which has already earned the nickname “Ethereum killer.”
What is Polkadot?
Many developers call it “the blockchain of blockchains.”
Polkadot is a proposal that seeks to serve as an interconnection point between all types of blockchain networks, both public and private, to allow the portability of information.
It has two types of networks, the main network, called Relay Chain, and an indeterminate number of secondary networks called Parachains and Parathreads that users can create to use for whatever purpose they can think of.
This model allows cross-communication between different types of blockchain networks so that they can all be integrated under the Polkadot umbrella.
In this way, the network is presented as an ideal platform to develop any project based on blockchain, including cryptocurrencies.
Polkadot also has its native DOT token, which serves different purposes within the network, but mainly to give the users who possess it, the power to decide democratically on the path that the platform will take.
After a year of publicizing the project to a small number of stakeholders, in mid-2017, Wood and a group of co-founders, created the Web3 Foundation with the idea of managing the project in conjunction with Parity Technologies.
In October 2017, the pre-sale (ICO) of the DOT token was launched, which was very successful at the time. The initial offering was 5 million tokens at a base price equivalent to USD $30 at that time. The assets were sold on the third day of the pre-sale campaign, capitalizing around USD $150 million.
Two months later, the digital currency quadrupled in value, turning that capital into about $600 million.
Although this initial launch wasn’t exempt from problems, including funds being frozen in Parity Wallets from users, Wood stood firm and went ahead with the project, which today is more stable.
What does Polkadot crypto do?
From the beginning, Polkadot’s goal has been to become a network with the same base characteristics of Ethereum, but at the same time, to offer a solution to its weakest aspects through a series of unique features.
For this, Gavin Wood thought of implementing a whole series of new technologies and consensus protocols specifically to achieve the original goal.
The Polkadot network then seeks to fulfill two fundamental objectives:
1.- Acting as a protocol for sending and processing data.
The idea is that the network can receive information from other chains, process it, and send it back to its origin. This makes it possible to make Polkadot a scalability option for any other type of blockchain.
2.- Operating independently of other chains.
Polkadot must allow the creation of secondary chains with their own characteristics and for specific purposes, such as the execution of smart contracts or the creation of cryptocurrencies and decentralized applications (dApps).
Meeting these objectives, Polkadot becomes a scalability option for large networks such as Ethereum or any other that needs it, also allowing the interconnection of different blockchain ecosystems on the same network.
Given the above, the Polkadot project plans to offer the following to the crypto ecosystem:
To facilitate exchanges and transactions of data and assets between public and private blockchains, smart contracts, dApps, oracles, and other Web3 technologies.
Polkadot has validators that ensure the correct operation of multiple chains (parachains) to process higher volumes of transactions in parallel and simultaneously.
Polkadot acts as an additional security protocol independent of the protocol of any other network. This provides an additional collective security layer, something especially useful for individual chains where security may not be its strongest feature.
How does Polkadot work?
To allow the interconnection and exchange of data between different blockchains, Polkadot has four well-defined levels or layers:
This is Polkadot’s main blockchain. This is what allows connecting different parachains and facilitates the exchange and transactions of data, assets, and more between them. The Relay Chain is the heart of interoperability between chains, as well as shared security.
Parachains are individual blockchains that run in parallel to the Relay Chain. They can be very different from each other, presenting unique characteristics in architecture, governance systems, tokens, etc. Parachains also allow the execution of transactions in parallel, which makes Polkadot a very scalable and secure system.
Parathreads are very similar to parachains, only they are pay-as-you-go. They are a good option for blockchains that don’t need a continuous connection to the main network.
Bridges are the technology that makes it possible for parachains to connect and communicate with other external blockchains, such as Bitcoin or Ethereum. This is a breakthrough in the crypto world as in the past, independent blockchains were unable to communicate with each other.
And to make all this work properly, Polkadot has a new type of internal network organization in which we can highlight four main elements:
Polkadot has a group of validator nodes that are in charge of verifying, validating, and informing the network about the authenticity of the information contained in each block that makes up the blockchain. These blocks are previously created by the following group…
Nominators are specialized nodes that are in charge of taking the transactions from the network to group them and generate the metadata and the information of block structure, which is necessary so that the validators can verify the information and include it in the transaction log of the blockchain.
In this way, nominators are responsible for creating secure links between validators and the entire network operation process.
These nodes help validators to keep a complete history of each specific parachain they work on. Collators must keep updated the information necessary to create new blocks within the parachain, information that will then be passed to the validators to be included in the Polkadot registry.
Since in Polkadot there are several sub-chains that are part of a larger structure – this is known as sharding – the network has a system designed to prevent malicious users from compromising the proper functioning of the protocol.
In this sense, fishermen are nodes responsible for looking for duplicate transactions or any other type of illegal transaction within the network, in exchange for a reward.
These are the four fundamental pieces that are responsible for ensuring that the entire process of generation, verification, validation, and issuance of blocks in the Polkadot blockchain and parachains works correctly, and all running in an asynchronous and parallel way, which guarantees a high-speed network.
Nominated Proof of Stake: the consensus in Polkadot
The harmonious interaction and operation of the above elements are possible thanks to the consensus protocol known as Nominated Proof of Stake or NPoS. This is a slight variation of the Proof of Stake (PoS) protocol in which validators must provide infrastructure and maintenance for the network.
Validators are in charge of producing new blocks, validating them and ultimately guaranteeing overall security.
Of course, validators need an incentive in the form of tokens that motivates them to comply with the rules, because if they don’t, the system will punish them by taking away part of their tokens.
Validators must be in the active set, taking turns to be able to propose, validate and add new blocks.
On the other hand, nominators are the ones who own the tokens that will contribute to the economic support of the network, “nominating” up to 16 validators of their choice with their tokens, also equally distributing the rewards obtained by the validators in the active set they nominated.
Nominators are also subject to penalties for misconduct on the part of one of their nominated validators.
In this consensus mechanism, the system grants a reward to the active group of validators, from which the commissions of each validator are deducted, and the rest of the rewards are distributed among the nominators according to their participation.
And what about smart contracts and tokens in Polkadot?
Polkadot doesn’t offer native support for smart contracts. This prevents the creation of native tokens or dApps on the network. This work corresponds to the parachains, which are extensible and modular, have the ability to create layers of abstraction for the execution of such applications.
This remarkable characteristic allows isolating the impact of resource consumption front these applications, only in the parachains in which they are executed, freeing the rest of the network of that workload, improving at the same time, the general performance.
This modular system also makes the design, programming, distribution, and execution of all kinds of functions in the Polkadot network much easier without the need for native smart contract support.
DOT: the foundation of Polkadot’s economy
Similar to what happens with Ethereum and its Ether, Polkadot uses its native token DOT, as food to keep the entire network running smoothly. DOT has basically three functions:
First, it serves as a mechanism for decentralized governance of the protocol; the DOT token gives validators voting power with which they can participate in the decisions and future evolution of Polkadot.
Second, DOT is also used as a staking system, linking and encouraging validators to act honestly within the network, since there is a financial interest in the verification process.
Third and last, DOT serves as a means for adding, modifying or removing Polkadot parachains, something that offers great flexibility and maintainability to the network.
Is Polkadot better than Ethereum?
Both Ethereum and Polkadot are networks with their respective currencies based on blockchain technology.
While Ethereum integrates smart contracts and allows the development of dApps, Polkadot is a decentralized protocol that, in addition to allowing the integration of smart contracts and dApps, also allows interoperability between different blockchains.
In Polkadot’s case, this fixes a couple of issues related to overall network performance and the communication and exchange of data and assets between different types of blockchains.
On the other hand, the advantages we have just mentioned about Polkadot, are problems that Ethereum is currently facing, but that it plans to solve in its next updates.
In plain theory, Polkadot is certainly superior to Ethereum, but at this time, it’s just theory. Meanwhile, Ethereum has been around for years.
Only when in the not too distant future both Polkadot and Ethereum 2.0 meet face to face on the market and fully operational, it’ll be seen which project is truly superior.
Pros and cons of Polkadot
Advantages of Polkadot
- Offers great flexibility for developers who want to create new specialized chains (parachains)
- Allows both secondary chains and dApps to be integrated into a shared security model quickly and easily
- Allows connection with other external networks, both public and private
- It is currently listed as one of the top big blockchain interests evidenced by its large market capitalization
Disadvantages of Polkadot
- Polkadot isn’t alone and must compete with other big players with Ethereum being the one that has the most advantage
- Some network vulnerabilities such as smart contract bugs which ended up freezing hundreds of millions of dollars of funds in multiple wallets
- Time is still needed for the development of the project to be 100% finished, which can work against it.
The future of Polkadot
Today, many investors and developers believe that Polkadot has what it takes to become the benchmark in the crypto space in the future.
It’s important to consider that at this moment, the majority of Polkadot’s supporters are developers, who see great enthusiasm about the great possibilities that this network will offer to integrate the entire blockchain ecosystem in one place.
Many investors share the same enthusiasm as developers, and while many of them are active in Ethereum, if they see a sustainable evolution and adoption of Polkadot in the near future, it’s very likely that a large number of investors will switch to Polkadot.
In this sense, it’s worth highlighting the question whose answer most people want to know right now:
Is Polkadot a good investment?
The movements of the entire crypto space are highly dependent on the movements of Bitcoin; you just have to observe how the recent massive institutional adoption of BTC triggered a rice in price in BTC along with numerous digital assets (altcoins).
Due to this, many investors now see more sense in owning other assets in addition to or rather than owning DOT.
However, many know that Polkadot’s multi-chain proposal is the future towards which the crypto world is heading – there are already near 200 projects under development in Polkadot – so this ambitious project shouldn’t be ignored.
There is no doubt that Polkadot, with all its unique features and the great support it is receiving from developers, is gaining a lot of momentum in the crypto ecosystem.
Right now, there are an increasing number of projects under development around Polkadot, all of which are gaining in value. This appears to be positively influencing DOT’s value, and that’s something investors are closely watching.
Most likely, when the project is completed, it’ll end up taking a strong position in the market in this fierce blockchain war.