Powered by the DOT, the network’s native coin, the Polkadot ecosystem tries to resolve many of the limitations that blockchains currently hold, such as scalability and security.
The project was conceived in 2016, but it took several years to materialise. The DOT token first appeared on the market in August 2020, and its ultimate recognition was granted in June 2021 when Polkadot was listed on Coinbase.
Polkadot is deemed innovative for several reasons. Generally, the unique properties of blockchains are decentralisation, speed, and security in a trustless environment. While most blockchains offer one — or a few — of these distinguishing traits, their current architecture is not designed to support all of the features at once.
Ethereum, for example, is the most popular DApp platform. However, it is currently not very scalable and has extremely expensive fees, especially when traffic on the site is high. On the other hand, EOS secures fast and zero-fee transactions at the expense of decentralisation.
All of these networks are isolated from one another, with little to no information exchanged. Think of different banks, for example, that were not allowed to cooperate – we would be unable to transfer money smoothly from one bank to another.
Think of emails; because of their interoperability, we can transfer information from a Yahoo account to a Gmail account. Currently, a lack of interoperability is preventing the mass adoption of blockchain technology. Polkadot aims to address this issue.
What is the Polkadot network in crypto?
Polkadot (DOT) is a blockchain with a core network — the relay chain — via which other blockchains connect and communicate. By hosting blockchains, the relay chain also handles their security and transactions, allowing for smooth cross-chain interoperability (communication between different blockchains) to function seamlessly.
As a matter of fact, in addition to transmitting DOT tokens across blockchains, Polkadot also allows them to communicate and exchange actual data.
Thus, interoperability is the major issue that Polkadot attempts to address. Instead of separate entities that operate independently, blockchains should be integrated into a single ecosystem where information and money can be exchanged securely in a scalable way.
While private blockchains have somewhat different technical protocols from public blockchains, Polkadot even resolves the communication between these two distinct types of networks.
Polkadot’s flexible and adaptive network design facilitates building new technology on top, allowing developers to benefit from the scalability, interoperability, and security offered. Therefore, Polkadot’s network also represents a significant breakthrough for developers and entrepreneurs looking to build a new blockchain from the ground up.
When trying to create a new blockchain, developers build a unique state machine and a consensus algorithm, which is difficult to implement and takes a lot of effort and time. Polkadot’s fundamental architecture aims to address this by eliminating the need to build blockchains from scratch.
A blockchain built within Polkadot uses the Substrate modular framework, which allows users to plug in the features they require while also letting them update as needed. Furthermore, it enables developers to tailor the chain design, choose specific components that suit their requirements, and bridge blockchains with other networks, including Ethereum and Bitcoin.
History of the Polkadot network
The network’s name is already unique: A polka dot pattern on fabric is composed of an array of large filled circles of the same size. The circles probably symbolise the different blockchains and the overall pattern, the Polkadot crypto world.
Polkadot’s history is closely associated with Ethereum. Its founder is Dr Gavin Wood, who previously served as Ethereum’s chief training officer and core developer. He developed its smart contract programming language, Solidity. The lead developer left Ethereum in 2016 to build a more sharded blockchain, and he published Polkadot’s white paper in October of the same year.
Wood co-founded the EthCore Blockchain Technology Company while still at Ethereum, which later became Parity Technologies. The company developed important blockchain infrastructure technology, such as the Substrate development framework and the Polkadot network.
Wood also co-founded the WEB3 Foundation in 2017, a non-profit organisation established to support the research and development of Polkadot and oversee its fundraising activities.
In July of the same year, the first adverse event occurred within the organisation. A hacker exploited a vulnerability in Parity’s multisig wallet code and stole 153K ETH (about 33 million USD at the time) from three different wallets.
In October, the foundation hosted the initial coin offering, raising $145 million in less than two weeks, making it one of the largest ICOs up to that time.
However, only a few days after the token sale, Parity Technology was hacked again. The ICO smart contracts were compromised, and 66% of the funds raised ($150 million) were frozen. The event was irreversible and inevitably slowed down the project’s early development.
In the following months, the WEB3 Foundation team managed to raise enough funds through a private sale to continue to meet its development goals, and by 2019, everything was back to normal.
How does Polkadot work?
Polkadot provides a core network, the relay chain, and parallel blockchains called parachains. Let’s take a closer look at the network’s architecture, the system’s technical components and how they interact.
The relay chain’s protocol determines the network’s shared security, consensus and cross-chain interoperability. It is the engine that keeps the whole infrastructure together, connecting other network participants and providing transaction finality.
The relay chain was designed to provide minimal functionality. Smart contracts, for example, are not supported, and the chain’s primary responsibility is to coordinate the entire system, including parachains.
Parachains is an abbreviation for parallelized chains. They are sovereign blockchains with their own tokens and governance and offer their specific use cases.
However, parachains use and take advantage of the relay chain’s security and interoperability for the finality of transactions. The use of the relay chain allows parachain’s system to run smoothly, allowing developers and users to focus on other specific goals like privacy or scalability and their particular applications.
In essence, parachains get to enjoy one of the network’s most significant benefits: using Polkadot’s established security and fast and scalable transaction speeds.
Parachains need to lease slots that are limited to one hundred in Polkadot to participate in the network. Because of its limited space, parachain’s slot allocation may become quite competitive and challenging to obtain. There are three ways to gain a slot allocation:
The parathreads have similar functions to parachains. However, they run on a pay-as-you-go model, allowing them to work when needed without being connected to the relay chain at all times.
Parathreads participate temporarily without the need to lease a parachain slot. Parathreads will have a slower block time than parachains but have the same level of security and interoperability features. Also, depending on the relay chain’s slot availability and needs, any blockchain can switch between being a parachain or a parathread.
Finally, bridges allow parachains and parathreads to communicate with external networks like Bitcoin and Ethereum, thereby further expanding the Polkadot blockchain’s interoperability. Bridges can, eventually, enable different tokens and coins to be swapped without the need for a central exchange.
Governance
Governance in a blockchain is how transaction and block verification rules are decided upon, implemented, and enforced. It is the integration of the norms and the code, the people and the institutions that facilitate the existence of a given organisation.
Polkadot’s governance is based on the proof of stake protocol, the primary goal of which is to ensure that the majority of the stake can always control the network. Polkadot uses a nominated proof of stake (the NPoS system), in which nominators back validators with their stake as a sign of trust in their good behaviour.
If nominators choose a bad validator, they risk losing their stake, the main difference with the more generic delegated proof-of-stake (DPoS) system used in EOS, for example.
Several on-chain voting mechanisms, such as referenda with flexible super-majority thresholds and batch approval voting, must agree on protocol changes.
Polkadot’s multilayered governance mechanism allows the implementation of protocol updates without the need for hard forks.
Governance roles: GRANDPA
Governance in a blockchain is achieved through consensus, a method for agreeing to a shared state of affairs. For the blockchain to continue to build and move forward, all nodes in the network must agree and reach a consensus.
Polkadot takes a different approach to consensus mechanisms by introducing GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement), which provides Polkadot with a more secure, scalable, and resilient network. Specifically, it allows networks to pool security. The added protections are then combined and applied to all.
Consensus roles
Nominators – Nominators are responsible for securing the relay chain by selecting trustworthy validators and staking dots in the ecosystem.
Validators – Validators, too, must secure the relay chain by staking dots, validating proofs from collators, and participating in consensus with other validators on the network.
Collators – Collators must maintain shards by collecting shard transactions from users and producing proofs for the validators.
Fishermen – Fishermen are entrusted with monitoring the network and reporting bad behaviour to validators. Both collators and any parachain full node can perform the fisherman role in the Polkadot network.
Roadmap — the five development phases
Polkadot adopted a multi-phase rollout strategy for its mainnet launch. The Genesis block of its relay chain with staked validators was launched in May 2020 during Phase 1. Polkadot was initially operated as a proof-of-authority (PoA) platform, which means that network was managed by six Web3 Foundation validators.
Most users were able to claim their tokens from the Ethereum contract, stake tokens and declare their intent to validate transactions and nominate validators.
The second phase, which began in June 2020, included the implementation of the nominated proof-of-stake with the first validator election. The phase licensed DOT owners to claim validator slots and unlocked staking rewards.
Phases 3 and 4 in late July 2020 enabled Polkadot’s governance system. The Council and Technical committees were elected for the first time, and public proposals were accepted.
In August 2020, the final phase approved balance transfers of the DOT token. The current phase involves shaping the rollout of parachains tested and optimised on the Kusama and parachains testnets. Polkadot governance can enable parachains and begin their slot lease auctions once the entire process has been finished.
Tokenomics
The DOT token is what powers the network, being Polkadot’s native coin. It is used for payment of network fees, for governance voting and validating rights, and for interoperability.
DOTs are used to pay transaction fees when messaging or exchanging data between two blockchains on the network. Payments of DOTs are also used to vote on protocol updates or fixes.
Nominators also bond their DOTs to a dedicated validator they are backing. Bonding tokens help to increase the network’s attack cost and allow DOT holders to earn newly minted tokens as staking rewards.
Substrate — the development tool
Substrate is Polkadot’s powerful development tool that significantly simplifies the process of creating a new blockchain. It is designed to help developers build their unique blockchain while connecting to the relay chain and enjoying its security, speed, and efficiency. The design allows developers to focus on adding value to their projects rather than spending resources and funds on developing infrastructure from the ground up.
Polkadot is compatible with all chains that use Substrate, providing easy access to the interoperable ecosystem of parachains, applications, and services.
The pioneers of the blockchain industry who created Substrate envisioned a system that could overcome the limitations of previous-generation networks and intended to provide developers with a building tool that avoided developing and optimising a blockchain from its foundations.
Although synergetic, Polkadot and Substrate are not dependent on each other. Polkadot parachains can be built and maintained with alternative software options than Substrate, whereas chains made with Substrate do not need to be connected to Polkadot or Kusama.
Kusama — the experimental development platform
KUSAMA is a Polkadot testing development platform where developers may test new ideas and projects before releasing them to the public.
Kusama has a lower economic barrier entry than Polkadot; therefore, launching a parachain or becoming a validator is much easier and requires less staking of DOTs.
The drawback of using Kusama is that the less rigorous governance parameters grant smoother and faster upgrades. On the other hand, Kusama is up to four times faster than Polkadot. Token holders have seven days to vote on a referendum, followed by an eight-day validation period, after which the referendum will be ratified on the chain.
Nonetheless, this speed rate comes at the expense of stability and security, which means stakeholders must keep vigilant to keep track of all proposals, referendums, and upgrades. At the same time, Kusama validators are frequently required to update on short notice.
Polkadot vs Bitcoin
Polkadot network and Bitcoin are somewhat different in the functionality and goals they aim to achieve. While Bitcoin is on its way to becoming the first worldwide, decentralised payment network, Polkadot aspires to become a multi-chain platform that allows interoperability between blockchains to leverage token, data and communication exchange.
A Polkadot business looks for a blockchain network protocol to enable arbitrary data to be transferred across blockchains. A Bitcoin business, on the other hand, is interested in an innovative payment network and a new kind of money powered by blockchain.
From a technological perspective, the main difference is in the mining process and consensus algorithm. Bitcoin uses proof-of-work, and Polkadot adopts a nominated proof-of-stake that we’ve seen earlier in this guide.
Polkadot vs Ethereum
Ethereum is a smart contract platform and strives to be a blockchain for distributed finance. On the other hand, Polkadot offers a structure for building specific blockchains easily and the ability to connect different networks.
Both platforms are designed for developers who want to create decentralised apps and aim to improve scalability through parallelised execution. However, Ethereum attempts it with shards, while Polkadot does so through parachains and parathreads.
From a technological perspective, Ethereum, like Bitcoin, is currently running on proof-of-work consensus. However, the future 2.0 version upgrade will transform it into a proof-of-stake system, which will likely be different from Polkadot’s NPoS.
Polkadot vs Cardano
Both Cardano and Polkadot were designed to address some of the inherent limitations of Ethereum. They also both share a history with Ethereum since they were both conceived by prominent contributors to Ethereum.
Cardano (ADA) is a third-generation blockchain platform focused on the development of DApps. It is the first proof-of-stake blockchain platform to be founded on peer-reviewed research and developed through evidence-based methods. It integrates cutting-edge technologies to provide security and sustainability to decentralised apps, systems and societies.
On the other hand, Polkadot is a multi-chain application ecosystem, blockchain, and cryptocurrency. The network was designed to facilitate cross-chain interoperability, with the ultimate goal of powering next-generation DApp development.
The future for Polkadot
Considering the numerous advantages it offers entrepreneurs, developers, users and investors; it looks like Polkadot’s future development will be interesting to follow.
DOT serving as the protocol’s governance token and for staking to secure the network or bond new chains shows that the project aims at incentivising usage by rewarding participants. Indeed, staking DOTs has become one of the most valuable incentives in the crypto space, with an annual yield of 10% on average.
The platform’s robust and reliable network, as well as its roadmap adherence, contribute to a promising scenario for the project. Polkadot is one of the most innovative blockchain breakthroughs in terms of both technological and economic value, and the next few months will be critical in determining the network’s actual capabilities.