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Polkadot DOT: An Ecosystem of Connected Layer 1 Blockchains

By 2sats | 2sats | 8 Jan 2022

*obligatory not financial advice*


What is Polkadot?

Polkadot is a blockchain that aims to become an interoperable ecosystem of various side blockchains. With Polkadot each side chain or parachain can be its own project with its own features and specific utility but still remain connected via the main chain or relay chain. This relay chain itself doesn't support smart contracts but it provides all the parachains with security and handles the consensus and finality of the entire ecosystem.

Polkadot was founded by Dr. Gavin Wood, who is also a co-founder of Ethereum. In order to be more scalable, Polkadot doesn't just run all applications on one single chain like ETH does it currently. Instead it utilizes parachains that each can run their own applications and can be specialized for their use case and can have their own features like privacy or scalability solutions. All of the parachains can run their transactions in parallel, kinda like sharding works, and they all connect to the relay chain to achieve finality and a consensus across all of the chains. The ecosystem is highly scalable because not only can each chain be built to suit a specific use case better but it also processes its own transactions and the validators of the relay chain only need to verify proofs that they create.

The parachains themselves can communicate and bridge to each other via the relay chain, this not only allows them to bridge their tokens and coins to each other but they can also share their transactions and data. This allows Polkadot to become an "Internet of Blockchains" similar to Cosmos or Avalanche, because every parachain is its own layer 1 chain that are all connected with each other. The relay chain has 100 "slots" that parachains can plug into to become part of Polkadot. There will also be various bridges to external blockchains like Ethereum and Bitcoin.

Parachains have only recently started to be built and the first "Parachain Slot Auctions", that determinate which chains can become part of Polkadot, ended in Q4 of 2021. Most parachains that have won the auctions are smart contract blockchains that are compatible with the Ethereum Virtual Machine or have a strong focus on DeFi.

The project also has a sibling called Kusama that is its own blockchain that serves as the test net of Polkadot. It has its own cryptocurrency called KSM and is successful connecting several parachains.

Fun Fact: Polkadot raised $140 million in ETH during its ICO in 2017, but about $98 million were accidently lost forever. The founders claim that this didn't hurt the development.



The DOT coin

DOT is the native cryptocurrency of Polkadot. Validators of the relay chain need to stake DOT to run a node. Holders of the coin can also delegate them to a validator to earn staking rewards. The rewards are new coins, meaning that there is an inflation that the stakers are earning. The coin also gives the holders and validators governance rights over the network.

But the main utility of the coin is that is can be used for "bonding". For a parachain to stay connected to the relay chain, it needs to bond enough DOT. Should it become outdated or not be useful anymore the coins could be removed to kick the chain off the network. This has enabled a new type of ICO called Slot Auction, where developers can offer the new cryptocurrency of their projects to people that delegate them the necessary DOT to bond it for a few months or years. The great thing about such auctions is that the participants don't lose their DOT, they only freeze their coins for some time and should the parachain fail to get enough DOT they will get their coins back immediately.

At genesis there were 1 billion DOT. 58.4% was sold to investors in multiple sales, 11.6% was kept aside for future fundraising and 30% went to the Web 3 Foundation that is developing Polkadot. The supply was mostly sold to investors and is circulating, but the developers still also control a lot of the supply. There is an inflation rate of roughly 10% that the stakers are earning, so you should definitely stake it should you hold DOT to protect the value of your investment.

As more parachains launch and bring value to the Polkadot network and more people start to use applications on it there will be more demand for the coin. The network is well respected in the crypto world and its ecosystem is growing rapidly. The Parachain Slot Auctions are also a new way of investing in new projects. DOT has an advantage over its competitor ATOM, because the coin actually has a demand and is necessary to keep the parachains connected. However, Cosmos and Avalanche are solid competitors.

DOT can be bought at almost every major exchange like Binance and Coinbase. Binance also supports Polkadot Slot Auctions, which makes it easy to invest in them if you are a beginner and don't want to make a mistake. Polkadot has a native wallet that can run on smart phones, computers and internet browsers.





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