What is Polkadot (DOT) Crypto and How Does It Work?

What is Polkadot (DOT) Crypto and How Does It Work?

If you utter the term ‘Polkadot,’ a couple of things strike my mind.

1. As a DC comics fan, I think of a superhero named ‘Polka-Dot man’ from the movie ‘The Suicide Squad.’

2. As someone studying the blockchain space, I recognize that Polkadot is a unique and novel project celebrated by developers.

In this post, we will answer the question, ‘what is Polkadot all about?’ from the blockchain perspective. As for movie lovers, you can watch the film to learn more about the superhero.

What Is Polkadot (DOT) Crypto?

Polkadot protocol is a breath of fresh air.

While many ‘me too’ projects are emerging, Polkadot offers valuable solutions to a number of pressing problems in the blockchain space.

Imagine if banks couldn’t interact with each other. It would create a lot of friction if users wanted to transfer money between two banks. In the same way, existing blockchain networks don’t have an inherent function to connect with other networks, creating friction.

Most blockchains are independent and don’t communicate with each other. For instance, Bitcoin, Ethereum, Cardano, and Solana have standalone networks that do not depend on each other. Similarly, the decentralized applications (dApps) built on Ethereum and Cardano are not made to interact with each other.

Thus, Polkadot comes into the picture by acting as a multichain network to connect blockchains. It is an open-source platform focusing on interoperability. And it is considered a breakthrough project within the crypto industry. It enables unrelated blockchains (like Bitcoin, Ethereum, and many others) to connect quickly and securely in a scalable manner.

Polkadot has a native cryptocurrency called DOT. It has several use cases like paying transaction fees, staking, governance, etc. As of October ’22, there are over a billion DOT coins in circulation with no supply cap.

Who Created Polkadot?

Polkadot is a reasonably new entrant in the blockchain space launched by Gavin Wood (co-founder of Ethereum), Peter Czaban, and Robert Habermeier in May ’20. But, the project’s whitepaper was released back in 2016 by Gavin Wood.

WEB3 Foundation, a non-profit organization, supports the R&D of Polkadot. The foundation raised 145 Million USD in ETH by selling DOT coins. However, the ETH wallet was hacked, and about 90 Million USD were frozen. In 2019, the foundation held a private token sale to recoup the loss.

How Does Polkadot Work?

Architecture

Polkadot has two types of blockchains.

1. Parachains

These are user-generated independent blockchains catering to specific use cases. Parachains run on the Polkadot framework and can communicate with each other.

2. Relay Chain

It is the core chain helping process transactions parallelly on parachains rather than processing in a sequence across the whole network (like earlier blockchains).

This type of parallel processing increases the throughput of the network. Hence, the Polkadot infrastructure is built to empower developers to use the network’s scalability, security, interoperability, and cross-chain functionality to create new blockchains from scratch.

Moreover, there is no necessity for hard forks to upgrade the platform, as Polkadot uses a governance system managed by DOT holders to perform the upgrades.

Consensus mechanism

Polkadot’s relay chain uses a specific type of Proof of Stake (PoS) consensus mechanism known as Nominated Proof-of-Stake (NPoS). Based on this mechanism, users staking DOT would perform one or more of the following roles. Also, if the users achieve the purpose of their roles, they receive rewards.

1. Validators

The validator node stakes DOT to verify the transactions and add blocks to the relay chain. In return, they earn newly created DOT tokens and a portion of the transaction fee.

2. Nominators

Nominators are responsible for securing the relay chain by selecting validators they trust and staking DOTs in the Polkadot network. They can select up to 16 validators and delegate their staked DOT coins to those validators. This essentially allocates their votes to them. It is a way for investors to participate in the network and earn passive income.

3. Collators

Store and aggregate parachain transaction data into blocks for adding it to the relay chain.

4. Fisherman

Supervise and report bad behavior on the network to the validators.

What Problems Does Polkadot Solve?

The main application of Polkadot is to enable a multichain ecosystem by providing interoperability. It allows applications to share data seamlessly and enables the creation of many products and services.

Being a multichain network, Polkadot handles transactions in parallel across chains. Parallel processing is a great feature to help scale the network. Also, the throughput rate would increase with more parachains in the network.

What are the Features of Polkadot?

The Polkadot ecosystem offers a lot of tools/features for developers to build their projects.

1. Substrate

Polkadot allows the creation of blockchain networks from scratch. This is done through a tool called Substrate. It enables the development team to focus on the project’s core value instead of using resources to build the underlying infrastructure.

2. Kusama

It is the experimental platform (testnet) for Polkadot where developers can test their new ideas and projects before going live on the main network (mainnet).

3. Bridges

As the name suggests, it bridges the external chains and the chains within the Polkadot network.

4. Crowdloans

Developers can create parachains, but only 100 parachain slots can connect to the relay chain. These slots are secured through the ‘parachain auction’ method. So the projects willing to plug with the relay chain need to bid DOT coins against each other to win the slot. The project owners who don’t have the required fund can resort to crowdloans. It is similar to crowdfunding, which enables remaining DOT holders to support their favorite projects by locking their DOTs in return for rewards (mostly in the form of interest payment) from the project team.

5. Parathreads

It is similar to parachains in terms of functionality but removes the need to secure parachain slots. Parathreads adopts a pay-as-you-go model that allows working when required without the need to be constantly connected to the relay chains.

Understanding: Parachains and the Relay Chain Under DOT Network

1. Parachains

Parachains are Proof of Stake networks that can run independently and can be customized by the project owners. They are networks with their own governance mechanisms and tokens. Also, they can utilize the scalability and security of the underlying network, which is the relay chain.

2. Relay chain

It’s the central chain that binds the parachains. Relay chain handles the transactions and security of those chains, enabling cross-chain interoperability. The relay chain validates data and helps in achieving consensus.

Top Projects on Polkadot

The projects built over the Polkadot offer an intriguing look into the quality of the overall platform. Some use the parachain to deliver their products or services, while others focus on improving Polkadot’s core capabilities.

Top Polkadot-based projects include:

  • Shiden (Plasm) – It is a smart contract platform supporting dApps, focusing on scalability and speed.
  • Moonriver (Moonbeam) – It is another smart contract platform focused on improving Polkadot’s capabilities. It connects Ethereum based-projects to Polkadot.
  • Bifrost – It acts as a DeFi hub, allowing users to access many DeFi features and providing multiple staking rewards and liquidity options.
  • Karura (Acala) – The network helps deploy DeFi smart contracts and enable cross-chain liquidity.

Polkadot vs. Ethereum vs. Cardano

Below is a quick snapshot highlighting the differences between Polkadot, Ethereum, and Cardano.

ParametersPolkadotEthereumCardano
Objective(s)InteroperabilitySmart Contracts and dApp platformdApp platform (typically for enterprise projects)
Consensus MechanismNominated Proof of StakeProof of Stake (moved from Proof of Work)Proof of Stake
Native TokensDOTETHADA
Key FeaturesParallel processing, and easily upgradableProgrammable blockchainAcademically peer-reviewed protocol

Is Polkadot a Good Investment?

Before answering that, let us look at the merits and risks of the protocol.

Merits

1. Market dominance

Polkadot is one of the top projects in terms of market cap.

2. Decentralized governance

Each parachain has its governance mechanism independent of Polkadot.

3. Parallel processing

Independent chains allow parallel processing of transactions, enhancing Polkadot’s scalability.

4. The rise of new applications

Interoperability expands new ideas for products and services, enabling immense value creation.

Risks

1. Competition

Polkadot is a novel project that connects different chains that are isolated. However, there is competition from other protocols like Polygon, Avalanche, and Cosmos which achieve the same goals in their unique way.

2. Security breach

The ETH wallet hacking incident affects Polkadot’s reputation. But after this incident, it has fixed the loopholes and is aggressively testing its code more than other platforms. However, it’s never great to see millions of dollars getting compromised.

It is safe to say that Polkadot can be considered a long-term investment for your portfolio. However, it can be a bumpy ride due to competition and volatility in the crypto market. So instead, you can invest in the Crypto Blue chip Coin Set, that not only invests in Polkadot but also in other top cryptos like Bitcoin and Ethereum to balance the risk.

The future for Polkadot

Polkadot had a remarkable launch and surged to become one of the biggest cryptocurrency projects by market cap in a short span of time. 

However, currently, it is not the only project focusing on interoperability, upgradability, and scalability. Thus, it is muddled with hurdles due to the competition in the market. 

Till now, it has continued to be at the top of its game by adding immense value for users, developers, and investors. Also, going forward, Polkadot has a good chance to at least maintain its market position through continuous innovation.

Conclusion

While many protocols are trying to win the title of ‘Ethereum killer,’ Polkadot is presumably the first project to dismiss the idea that there should only be one or few blockchains.

So it enhances the capabilities of the entire crypto ecosystem and paves the way for the web3 era using a hub and spoke type of architecture.

There are many interesting projects being built over Polkadot. So it will be fascinating to observe its evolution and the blockchain space as a whole.

FAQs

1. How to buy Polkadot (DOT)?

If you want to invest in Polkadot, check out Mudrex Coin Sets. It is a basket of cryptocurrencies, consisting of Polkadot and other top cryptos like Bitcoin and Ethereum. Their weightage is decided based on their market cap to help you balance risk.

2. Why is Polkadot called Polkadot?

Merriam-Webster says the word ‘Polka dot’ refers to a pattern of regularly distributed dots in textile design. Similarly, the Polkadot network is built in a way that the overall structure represents Polka dot-like formations.

Polkadot architecture

3. Are DOT and Polkadot the same?

No. Polkadot is a blockchain network, and DOT is the native cryptocurrency of that network. Polkadot acts as a multichain network connecting blockchains. On the other hand, DOT helps pay transaction fees, staking, and handle governance within the Polkadot network. As of October ’22, there are over a billion DOT coins in circulation with no supply cap.

4. Is DOT a coin or token?

A crypto coin refers to any cryptocurrency with its own blockchain rather than running on another blockchain. In other words, crypto coins are native to their own blockchain. Whereas crypto tokens aren’t native to a blockchain. They are built on another blockchain, using the underlying smart contract functionality to offer various services. 

Since Polkadot (DOT) operates on its own blockchain, it is a coin.

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