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What Is Polkadot? (DOT)
The Beginner’s Guide to Polkadot
Polkadot is a software that seeks to incentivize a global network of computers to operate a blockchain on top of which users can launch and operate their own blockchains.
In this way, Polkadot is one of a number of competing blockchains aiming to grow an ecosystem of cryptocurrencies, other notable examples of which include Ethereum (ETH), Cosmos (ATOM) and EOSIO (EOS).
However, Polkadot, launched in 2020, is among the newest, and it introduces a number of novel technical features toward its ambitious goal.
To begin, Polkadot is designed to operate two types of blockchains. A main network, called a relay chain, where transactions are permanent, and user-created networks, called parachains.
Parachains can be customized for any number of uses and feed into the main blockchain, so that parachain transactions benefit from the same security of the main chain.
With this design, the Polkadot team contends transactions can be kept secure and accurate using only the computing resources required to run the main chain. Users, though, gain the added benefit of being able to customize many parachains for many different uses.
The Polkadot team believes this design will let its users perform transactions more privately and efficiently, creating blockchains that don’t disclose user data to the public network or that otherwise process a greater number of transactions.
To date, Polkadot has raised roughly $200 million from investors across two sales of its DOT cryptocurrency, making it one of the most well-funded blockchain projects in history.
Who Created Polkadot?
Polkadot was founded by Gavin Wood (a co-founder of Ethereum) alongside co-founders Peter Czaban and Robert Habermeier in 2016.
Wood’s background is notable as he invented Solidity, the language used by developers to write decentralized applications (dapps) on Ethereum. He was also the Ethereum Foundation’s first CTO, and was previously a research scientist at Microsoft.
Wood founded a company called Parity Technologies in 2015 with Jutta Steiner. Its purpose was to implement projects wishing to build on Ethereum. It also worked on software essential to powering Ethereum, including one of two clients run by a majority of network nodes.
Parity Technologies now maintains Substrate, a software development framework primarily used by Polkadot developers who wish to quickly create parachains.
Web3 Foundation
The Web3 Foundation is the non-profit that conducted Polkadot’s token sales. Gavin Wood is also its president, and he co-founded it with Pete Czaban.
The Web3 Foundation received 30% of the funds from the token offerings, and oversees the allocation of those funds for the furthering of Polkadot development.
How Does Polkadot Work?
The Polkadot network allows for the creation of three types of blockchains:
The main Polkadot blockchain, this network is where transactions are finalized. To achieve a greater speed, the relay chain separates the addition of new transactions from the act of validating those transactions. This model allows Polkadot to process over 1,000 transactions per second, according to 2020 testing.
Parachains are custom blockchains that use the relay chain’s computing resources to confirm that transactions are accurate.
Bridges allow the Polkadot network to interact with other blockchains. Work is underway to build bridges with blockchains like EOS, Cosmos, Ethereum and Bitcoin, which would allow tokens to be swapped without a central exchange.
The Relay Chain
To keep its network in agreement about the state of the system, the Polkadot Relay Chain uses a variation on proof-of-stake (PoS) consensus called nominated-proof-of-stake (NPoS).
This system allows anyone who stakes DOT by locking the cryptocurrency in a special contract to perform one or more of the following roles necessary to its operation:
Users who stake DOT and perform these roles are also eligible to receive DOT rewards.
Polkadot Governance
Three types of Polkadot users can influence the software’s development.
These include:
Why Does DOT Have Value?
The DOT cryptocurrency plays a key role in maintaining and operating the Polkadot network.
By owning and staking DOT, users gain the ability to vote on network upgrades, with each vote being proportional to the amount of DOT cryptocurrency they stake. As of 2020, staking DOT on Kraken yields a 12% annual return.
Polkadot rewards these users with newly minted DOT based on how many tokens they are staking, with all four major consensus roles receiving rewards.
Of note for investors, however, is that Polkadot’s software rules initially allowed for the creation of 10 million DOT, with no capped supply. Rather, new DOT tokens are expected to be released in perpetuity, at a predetermined inflation rate.
A token holder vote in 2020 later changed the standard unit for DOT tokens, shifting the base unit of the currency and redenominating the supply to 1 billion DOT.
Why Use DOT?
Users may find the Polkadot Network appealing based on its focus on facilitating interoperability between blockchains.
Further, there are a variety of projects already building on Polkadot. Some examples include a cloud platform, a browser extension wallet and different types of block explorers.
DOT may be of interest to investors who want to earn rewards from staking. For example, Kraken offers a staking service that enables users to stake DOT and earn 12% annual interest.
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