If you ever stop to look at the coins topping the charts in the cryptocurrency market, you may be surprised to see a new name there this past few weeks. Now in fifth place, where it has been holding steady for a few months now, is the coin known as DOT or Polkadot.
What is Polkadot?
Polkadot is a relatively new blockchain protocol which was designed to connect blockchains together. There are currently hundreds of different blockchains, and new ones are launching every single second, which will eventually overwhelm users. Polkadot aims to stop this by creating a platform to bring the functionality of all blockchains to one location and allow them all to communicate with one another. This will solve a number of the scalability issues currently being seen in other blockchains.
Polkadot functions on a mechanism known as “sharding” which basically means that transactions can be processed in parallel. And because of its unique interoperability features, Polkadot can be updated without forking, which is not a common feature of most blockchains, and makes the process of updating this one very convenient. Developers use chains, referred to as a parachains, to specialize the blockchain to their own unique uses. The framework for building these parachains is called Substrate, and users can use it without having to be part of the Polkadot blockchain network. Not only that, but developers are able to use functions which exist on other blockchains in the development of their own app, such as smart contracts (Ethereum) and the UTXO transactions which Bitcoin is built on. This makes it extremely convenient for developers to build technology to suit their exact needs.
The Polkadot blockchain is very complex and has many moving parts which keep it functioning. Besides the parachains built, and used, by different developers, there is also the relay chain which is the communication chain between all of the parachains. This relay chain serves as a main hub for all of the activity which is happening on the platform. There is also a “lite” version of parachains available for developers who don’t necessarily want to sink a ton of money into a huge project just yet. These lighter chains are called parathreads. The way Polkadot interconnects with other blockchains is through bridges, which function a bit like smart contracts between different blockchains.
Polkadot is run on a proof of stake mechanism, meaning the blockchain is backed by stakers who put money forward to guarantee transactions. There are also nominators, who choose which stakers get to stake tokens and when. Polkadot also has a couple of unique players in the mix, those known as collators, which collect proof of transactions. There are also fishermen who monitor the network for security purposes and make sure everything within the system is functioning smoothly.
The History of Polkadot
Polkadot was developed by two former Ethereum executives, Gavin Wood and Jutta Steiner under their new incorporation Parity Technologies. Parity was actually formed many years ago, in 2015, for the purpose of working on the Ethereum software. However, this didn’t last long and they phased themselves out of the project in 2017 in order to begin working on their own projects. The concept for Polkadot was first introduced to the public in the middle of 2018, and the ICO for the DOT coin for the blockchain was held in May 2020. As of the writing of this article, the technology is still in development and has not yet launched or been released to market.
What is DOT Used For?
Mostly, DOT is used to make transactions on the Polkadot blockchain for those who wish to develop and use it. But, Polkadot is also a bit like a security in that token holders also have complete control over the protocol. So instead of giving the power to miners like most chains do, Polkadot instead gives the power to those who hold the DOT tokens. These holders will also be the ones who vote on blockchain fixes or protocol upgrades. One of the roles of the previously mentioned fishermen, is to find stakers who are misbehaving and ban them from the system, thus ensuring the staking protocol in Polkadot is fair to all stakers.
Of course, all of this sounds great, so great, that you probably aren’t surprised to find out there are already other blockchains in this space. The blockchain Cosmos in fact, was specifically designed for the exact purpose that Polkadot was designed for. Additionally, the pending upgrade of Ethereum moving it to the 2.0 version, will create many of the changes within the Ethereum platform that Polkadot is based on. And once Ethereum 2.0 is launched, it too will be based on a similar proof of stake system. This has been brought up to the developers who claim Polkadot, while technologically similar, is superior in terms of availability and the ease of validity. Since Polkadot hasn’t launched yet, it’s a bit difficult to compare at this time. However, DOT is currently much more popular than the ATOM coin which backs Cosmos (it is currently in 25th place on CoinMarketCap), and there seems to be more people backing the Polkadot project as a whole.
Investing in Polkadot
If you believe in the technology which Parity is creating, then Polkadot may not be a bad investment for you, however, in general terms, it is a very risky investment. Polkadot is a risky investment because not only is it a cryptocurrency (which in general are considered high risk) but it’s also a cryptocurrency for a product which hasn’t yet launched. Think of it as the same as investing in a company which has no proof or history of sales. Some people still choose to invest in these companies, obviously, but they acknowledge the risk when doing so. And if you think you would like to invest in Polkadot, you must acknowledge these same risks—and who knows how long it will be until the product officially launches. One thing that Polkadot does have going for it are developers who have experience bringing the Ethereum blockchain to market, and making it functional. As to if having these two developers on board will be enough to bring Polkadot to success, there is simply no way to tell just yet.
Please remember that investing your money in anything, whether it be cryptocurrency, stocks, or fiat currency, has inherent risk and you are advised to discuss any important financial decisions with someone you trust.