Overview
Polkadot is an open-source blockchain network designed to enable various separate, siloed blockchains to become interconnected, application-specific sub-chains called parachains. Each chain built within Polkadot uses Parity Technologies' Substrate modular framework, which allows developers to select specific components that suit their application-specific chain best. The Polkadot network is the entirety of all parachains that plug into a single base platform known as the Relay Chain. This Relay Chain does not support application functionality but instead provides security to the network's parachains and contains Polkadot's consensus, finality, and voting logic. The network aims to offer advantages of scalability, upgradeability, transparent governance, and cross-chain composability over other projects. With Ethereum fees through the roof but layer 2 solutions and the Eth2 merge on the horizon, this is DOT's time to shine and really steal away some of Ethereum's momentum and entrenched network effects.
Polkadot Strengths
- Parity Technologies' Substrate modular framework offers developers the flexibility to select specific components that best suit their application-specific chain.
- Polkadot allows developers to launch chains and applications leveraging a shared security model, without having to worry about attracting enough miners or validators to secure their own chains.
- Polkadot’s parachains can use bridges to connect with external networks like Bitcoin and Ethereum
- Polkadot has already raised nearly $200 million, become a top ten coin by market cap, and started to be integrated with other networks, like Chainlink.
Polkadot Weaknesses
- A limited number of parachains are available and slots are sold via auction, which may price out some smaller use cases.
- Hackers have exploited code vulnerabilities twice, draining millions of dollars before being stopped.
- Polkadot is competing with many other general-purpose, smart contracting, Proof of Stake blockchains like Tezos, Cosmos, and Cardano, to name a few, with industry-leading Ethereum already showing entrenched network effects.
Important Links
Use Case
Polkadot is an open-source platform with low barriers to entry that connects and protects autonomous economies under its shared security umbrella. Polkadot attempts to address three core problems:
- Interoperability: At the moment, blockchain networks like Bitcoin or Ethereum exist independently and function with no communication or interoperability between one another. Polkadot is designed to enable smart contracts on one blockchain to easily interact with data and assets on other blockchains.
- Scalability: Currently, most blockchain transactions are processed sequentially on network nodes which creates bottlenecks and limits transaction speeds. Polkadot is designed to remove these bottlenecks by allowing several parachains to run simultaneously through one relay chain, each parachain processing multiple transactions in parallel.
- Security: In current blockchain networks, chains compete with each other over security resources. Conversely, Polkadot pools security within the network, allowing individual chains to leverage pre-existing collective security as opposed to previously having to start over to gain trust. This allows independent blockchains with differing degrees of security finalities to strengthen their individual weak points by pooling their security resources and delegating it to the Polkadot relay chain.
Polkadot’s native network token is DOT which assumes various distinct roles. In governance matters such as determining network fees, auction dynamics, and scheduling additional parachains, DOT token holders control the network’s direction. DOT holders, like in other blockchains, are responsible for making decisions around special events such as network upgrades to the Polkadot platform.
Another function of DOT is it allows for the addition of new parachains by locking up DOT in a process called Bonding. In bonding, DOT is locked for a period of time and then released back to the original account after the parachain is removed.
Technology
The Polkadot network facilitates cross-chain communication and enables interoperability by connecting multiple blockchains into one unified network. Each Parachain built within Polkadot uses the Substrate modular framework that supports developers building applications within parachains to fit their specific needs. The Parachains connect to the overarching Relay chain that secures the network’s parachains and maintains Polkadots consensus, transaction finality, and voting logic. A critical differentiator of Polkadot is that it allows developers to launch chains and applications leveraging a shared security model, without having to worry about attracting enough miners or validators to secure their own chains. Polkadot also has capabilities for Bridges that allow Parachains to connect and communicate with external networks like Ethereum and Bitcoin.
Polkadot is predicated on what it refers to as a “hybrid consensus,” which separates block production from finality. This unique consensus allows new blocks to be produced at a rapid pace while the slower finality agent may operate separately, thus avoiding interference with transaction execution times.
Polkadot is a sharded blockchain. Sharding is database partitioning that spreads the computational and storage workload across a peer-to-peer (P2P) network so that each node isn't responsible for processing the entire network's transactional load - allowing networks to scale more efficiently. Shards on Polkadot operate as separate blockchain networks with transactions and data exchange across the sharded network executed in parallel with security guarantees.
Beginning in phase 2 (2018) of the network rollout, Polkadot began using Nominated Proof of Stake (NPoS) as its consensus method. There are a limited, known number of validators and the set number is decided by onchain governance. Inclusion in the active set is determined by a validator’s total self-bonded and delegated stake. The minimum stake required to get in the active set varies and depends upon other validators and their stakes. In NPoS, each elected validator has equal say in consensus and receives equal rewards. Blocks on Polkadot are published around every six seconds.
Economics
At the genesis of the network, a total of 10 million DOT were created as a native token. The initial supply was later redenominated by a community vote that increased token account balances by 100x. The following allocations were established during the initial raise:
- 50% allocated to DOT token investors
- 8.4% allocated to the 2019-20 private sale investors
- 11.6% retained by the Foundation for future fundraising efforts
- 30% allocated to the Web 3 Foundation to develop and build out the network infrastructure
Polkadot raised 3,982.07 BTC in a private sale in July 2017- worth around $43 million at the time. DOT tokens were listed for $125 at the time of sale. The sale was also not available to any Chinese or American citizens due to regulatory concerns.
Polkadot has raised a total of $183.7M in funding over 9 rounds. Their latest funding was raised on Jul 27, 2020 from a Initial Coin Offering round. Polkadot is funded by 11 investors. Kenzi Wang and IOSG Ventures are the most recent investors.
Polkadot does not have a fixed total supply but instead will use a yet-to-be determined inflationary model to supply the rewards for the proof-of-stake (PoS) system. Inflation is designed to be ~10% in the first year with an ideal staking ratio of 50% (half the supply used for staking). If these ideal staking conditions are met, 100% of the inflation goes to the validators as payment for securing the network. If the staking rate is greater than or less than 50%, then the validators receive fewer rewards, and the difference is sent to a treasury fund. The amount of DOT staked currently sits at ~60% and is therefore slightly above the ideal staking ratio.
Within the network, a staker will also receive transaction and slashing fees based on an adjustable parameter via governance. It is originally suggested that 20% will go to block producers and the other 80% will go to the treasury (instead of burning) to better control inflation/deflation.
Governance
Within the Polkadot ecosystem, DOT token holders control the direction of the network. Governance functions controlled by DOT holders include determining fees on the network, auction dynamics, and the addition of new parachains. The Web3 Foundation continues to use the proceeds from the initial DOT sale to fund network initiatives and support projects building on Polkadot with the Polkadot Ecosystem Fund.
Additionally, there are two different DOT treasuries that exist within the Polkadot ecosystem. The first consists of 3 million DOT (30% of the initial supply) that were allocated to the Web3 Foundation to help fund research and development during the initial token sale. The second is an on-chain treasury controlled by the Council.
The on-chain treasury collects funds through transaction fees and slashing bad actors. Network participants can petition for a portion of the treasury by submitting a spending proposal which requires the proposer to deposit collateral with the submission that gets burned if rejected. If approved, the request enters in a list of proposals that clears every 24 days called the ‘budget period.’ The Council is incentivized to spend from the available funds because if the treasury ends a budget period without issuing all of the funds, a percentage of the remaining DOT is burned.
Parity Technologies, with oversight from the Web3 Foundation, built the Polkadot blockchain and Substrate framework and controlled much of the process during the project's early stages. This centralized control remained intact through Polkadot's mainnet launch and beyond. In July 2020, control over the network was opened to the blockchain’s proposed on-chain governance system which takes into consideration token holders, validators, a Council, and a Technical Committee. These network parties are now the primary participants responsible for upgrade submissions and approvals.
Polkadot is working towards a future on-chain governance system that gives decision-making power over members voted in by network stakeholders called the Technical Committee. This will allow active DOT holders and Council members to propose codebase changes by bonding a minimum amount of DOT to the network to ensure some economic buy-in.
Vulnerabilities
Since Polkadot has a very limited history of being a live project with active users and is still a work in progress, much of the criticism surrounding the project stems from these issues. Polkadot is competing in a crowded space of general-purpose smart contracting Proof of Stake blockchains like Tezos, Cosmos, Cardano, NEAR, Solana, soon to be Ethereum 2.0, and many others. It remains to be seen which project(s) the market will adopt but for now, all are playing catch up to Ethereum which has the industry’s only meaningful adoption. Fortunately for Polkadot, it has plenty of funds for development and a highly respectable team but as for now, VC-funded, Ethereum-competitor chains have yet to gain meaningful adoption.
In a crowded smart contract space, every project is competing for developers. In Polkadot’s case, there are a couple obstacles in attracting developers and projects to build on a parachain architecture. One such obstacle is that to launch an application on existing parachains the functionality must already exist on a current parachain, creating a chicken-or-the-egg dynamic. Another issue is that launching a parachain requires upfront capital in the form of DOT thus pricing out some smaller, more experimental use cases.
Additionally, Polkadot still has much to prove as it remains a somewhat incomplete project. Part of this is delivering on useful projects and meaningful decentralization from the Web3 Foundation and Parity group. Up until recently with the latest mainnet release, all DOT nodes were controlled by a Proof of Authority consensus network in a centralized manner.
From a technical perspective, Polkadot has suffered no known critical bugs since mainnet launch. The post-ICO multi-sig wallet hack marked the second time the team’s wallets had been hacked because of a code vulnerability. The first hack took place earlier in July 2017 in which ~$33 million was drained before the attack was stopped by a group of hackers known as the White Hat Group.
