Polkadot

What is Polkadot (DOT)?

Polkadot is often referred to as the ‘blockchain of blockchains.’ It is a third-generation blockchain that exists as an open-source, sharded multichain protocol that allows other blockchains to interoperate.

As such, DOT is often called a layer 0 blockchain. It provides the framework for purpose-built layer 1 blockchains to network and move any sort of data and asset type from one to the other. The protocol can allow the sharing of information between public and private chains, oracles, and permissionless networks in a trustless manner.

Polkadot was designed with the vision of allowing individuals to regain ownership of information from third parties as part of the full realization of Web 3.0, which intends to protect user interests.

When Was Polkadot Launched?

Polkadot’s genesis block was launched in May 2020, following the release of its codebase on the Kusama testnet in 2019. Beginning as a proof-of-authority network, it evolved into proof-of-stake in June 2020 as validators began to join the network.

With validators in place, the governance of the chain was moved to the hands of DOT holders. This allowed the rollout process for the parachains that make Polkadot a multichain network to begin before the turn of 2021.

Who are the Founders of Polkadot?

Polkadot was created following the release of its whitepaper, written in 2016 by Dr. Gavin Wood. He was also the co-founder and CTO of Ethereum as well as the author of its yellow paper. In 2017, Dr. Wood co-founded the Web3 Foundation, which carries out research and development of decentralized web technology, including DOT. He also co-founded a company called Parity Technologies which played a key role in the core development of Polkadot.

Alongside Dr. Gavin Wood, who coined the term Web 3, cryptography researcher Robert Habermeier and fintech expert Peter Czaban are also credited with Polkadot’s founding.

How Does Polkadot Work?

At its core, Polkadot uses a central chain, called the ‘Relay Chain’, which is responsible for the network’s shared security, consensus, and cross-chain interoperability. The Relay Chain’s main responsibility is to secure the system, so all validators stake DOT on it and confirm transactions coming from the connected parachains.

How is Polkadot Secured?

The entire network of interoperable layer 1 parachains is secured by the Polkadot Relay Chain, which uses a Nominated Proof-of-Stake consensus mechanism. Essentially, validators stake the native token DOT to be able to confirm transactions, while nominators back validators with their tokens.

Similarly to most proof-of-stake protocols, these staked tokens ensure chain security by making it prohibitively expensive to misbehave and rewarding those that follow the protocol.

What Makes Polkadot Unique?

Polkadot’s functionality as a layer 0, or a protocol forming the foundation for the interoperability of other chains, sets it apart from other blockchain projects.

Many chains allow the use of non-native assets and other tokens. However, Polkadot bridges purpose-built chains, allowing us to create an ecosystem where chains optimized for different purposes, called parachains, can transfer information to and from each other.

What are Parachains?

Parachain is the name given to the layer 1 blockchains that are independent of and yet run in parallel to each other atop DOT’s Relay Chain.

Each parachain may and often does have its own design, purpose, function, governance, and economy but connect to Polkadot to share the security of the entire network.

Parachains can benefit from the free exchange of any information between each other and process transactions in parallel. In turn, this increases the total transaction throughput of the Polkadot network.

What are Parachain Auctions?

When a project wishes to become a parachain on Polkadot and lease a slot on its Relay Chain for a period between six months and two years, they need to win a parachain slot auction.

Bids are placed using the native token, DOT, and, by participating in the auction, the project teams promise to vest the DOT they bid for the duration of the desired lease. This DOT is then reserved and can’t be used for anything including staking.

Once connected to Polkadot by leasing a parachain slot, the parachains themselves have full access to the network’s computing power and don’t need to pay any kind of fees. As such, the cost of becoming a parachain is often viewed as the opportunity cost of locking away the DOT and not being able to stake or otherwise use it.

How is Polkadot Upgraded?

Most blockchains are upgraded via hard forks that create two separate transaction histories and can often divide communities, for example with Bitcoin Cash and Ethereum Classic.

Polkadot, however, uses forkless on-chain upgrades.

The Polkadot network’s on-chain governance system adds new features and optimizations as well as fixes bugs while maintaining network consensus. This same capability extends to parachains built using the Substrate blockchain framework.

Substrate is a technology created by Parity Technologies, a company co-founded by Dr. Gavin Wood and former Ethereum Head of Security Jutta Steiner.

How is Kusama Related to Polkadot?

Kusama functions as a canary network for Polkadot, or an experimental testnet that allows developers to battle-test projects before gaining access to Polkadot.

Kusama shares an almost identical codebase to Polkadot and provides an environment for projects to deploy and experiment on.

How Much Polkadot Is In Circulation?

There are close to one billion DOT in circulation at the time of writing, but the token economics of Polkadot’s design mean that this figure will change over time.

DOT’s initial supply was 10 million, but DOT holders voted in 2020 to redenominate Polkadot by a factor of 100 in a manner similar to a traditional stock split. This simply meant that the supply changed to 1 billion and all balances were similarly adjusted.

DOT is inflationary, meaning that there is no maximum supply. By design, the inflation rate was around 10% for the first year based on an ideal staking rate of 50%. Since the launch of parachains, this interest rate dropped to less than half of that figure.

The DOT generated via this inflationary model goes partly to validators, with the rest being sent to the Treasury. These Treasury funds are used to ensure the smooth operation of the network and fund projects via on-chain treasury funding proposals.

How Do You Buy Polkadot?

As one of a set of so-called blue-chip cryptocurrencies, Polkadot is one of the easiest to purchase and is typically available on almost all exchanges. You can also purchase it in peer-to-peer transactions as well as on decentralized exchanges.

If you’re purchasing DOT on a centralized exchange, all you’ll need is an account at a CEX and it should be available across most, if not all, trading interfaces. If purchasing on a DEX or peer-to-peer, you’ll just need a working Polkadot wallet.

Is It Possible to Buy Polkadot Instantly?

No blockchain is truly instant, but they do reduce transaction times to far below what is possible within the legacy financial system. While fiat cash transfers tend to take days to actually settle, even the ‘slow’ blockchains can settle transactions in a matter of minutes.

Polkadot, thanks to its multi-chain design, can process transactions in parallel across its many chains, in a manner similar to multithreading. This can eliminate bottlenecks and offers parallel processing power with the potential for millions of transactions per second.

However, currently, that TPS figure remains in the thousands as the network slowly ramps up. As such, depending on network congestion, peer-to-peer and DEX transactions may take a few seconds.

Purchases on a CEX, meanwhile, may seem instant although there is no actual transfer of any funds, fiat or DOT. Instead, as users make trades, their account balances simply get updated.

How Do You Store Polkadot?

Wallets are where all cryptocurrencies are stored, and Polkadot is no different. There are several types of wallets you could use to store DOT, including:

• Cold wallet. These wallets are offline and do not connect to the internet, ensuring that their keys are safe from hackers or other bad actors. Typical cold wallets can come in physical form like paper, specialized hardware, or simply a device that stays offline.
• Hot wallet. Unlike cold wallets, these do in fact connect to the internet. While not as safe as cold wallets, hot wallets tend to be more convenient and are often found in the form of software like browser plug-ins or desktop clients.
• Exchange wallet. Users don’t actually hold their DOT within their exchange accounts. Account balances are only reflected via the CEX’s internal bookkeeping, whereas the tokens are held in the exchange’s wallet. To take custody of your tokens, you must withdraw the DOT from an exchange account into your hot or cold wallet.

Polkadot Energy Consumption

According to the Crypto Carbon Ratings Institute, Polkadot is the least electricity-intensive network among the top cryptocurrencies.

Even among proof-of-stake cryptos, which are far less energy-intensive than proof-of-work blockchains like Bitcoin and (currently) Ethereum, Polkadot’s consumption is very low.

Figures published in 2022 by the Institute put Polkadot’s electricity consumption at just 70,000 kWh, less than 7 times the annual consumption of an average US household. In contrast, the report puts Bitcoin’s energy consumption at over 89 billion kWh yearly.

As a further point of comparison, a report by Galaxy Digital estimated the annual energy consumption of the global banking system to be north of 263 billion kWh.

Is DOT a Good Investment?

One of the most important factors when investing in a cryptocurrency is to identify the actual utility of a token. Many blockchains have native tokens without clearly defined use cases, but Polkadot’s DOT token has several.

The primary use of the DOT token is for staking. This is the game-theoretic mechanism by which the entire Polkadot network is secured, and stakers are generously rewarded for doing so.

On top of that, DOT is also used to auction off parachain slots, and locking them away further reduces the supply of the DOT token.

Finally, DOT holders play the biggest role in the governance of the network, enjoying total control over the protocol. This allows them to decide on upgrades, fixes, and the handling of exceptional events.

This is a further incentive for the purchase of DOT. That said, it is for the investor to judge whether these use cases—with their implications for increasing demand and tightening supply—outweigh the inflationary nature of Polkadot’s native token.