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17 February 2021

An introduction to Polkadot

Sara (Sara Bala) Frei

Sara (Sara Bala) Frei

Sales Execution Trader at Crypto Broker AG

About the author

Today we take a look at the DOT token, native to the Polkadot blockchain, which is one of the many tokens we analyse in our sector reports.

A brief introduction to Polkadot

Polkadot is a new generation blockchain protocol that simplifies cross-chain communication and interoperability by bringing multiple blockchains securely and seamlessly into one network. Its aim: to be a framework for all blockchains.

  • Sector: Smart contract
  • Category: Infrastructure
  • Token type: Native
  • Token usage: Vote, Payment
  • Consensus algo: Proof-of-Stake

 

Polkadot (DOT) is the native token of the Polkadot blockchain. It is a sharded blockchain, meaning it connects and enables several blockchains to run independently and together in a single network. These blockchains can process transactions in parallel and exchange data between chains with security guarantees, transferring all types of messages between them, across public, open permissionless blockchains as well as private, permissioned blockchains.

The project was started by Ethereum co-founder Dr. Gavin Wood, with the ambition of challenging Ethereum’s dominance.

  • Polkadot is a “layer 0” solution that is below layer 1 solutions such as Bitcoin, Ethereum, and other altcoin blockchains. Polkadot was built using the Substrate framework, an open-source framework that lets you build blockchains in minimal time and offers interoperability and versatility.
  • It operates with a nominated proof-of-stake (NPoS) system allowing all native token (DOT) holders to participate in securing the network by staking their tokens, done by nominating, validating, confirming a transaction, and finally adding a new block.
  • Slots: the current goal is for Polkadot to support up to 100 parachains. To get on the Polkadot network, participants have to apply to lease one of their “slots” using DOT tokens for a fixed-term deposit (of up to 2 years). The lease’s effective cost is therefore just the opportunity cost. At the end of the parachain’s lease, the deposit is returned. The parachain then is auctioned and only if participants submit a bid and win an auction, can they build on the blockchain.
  • Architecture: At the centre of the Polkadot blockchain network is the Relay Chain. It is responsible for the network’s shared security, consensus, and cross-chain operability.
  • The Relay Chain is surrounded by sidechains called parachains and parathreads (Polkadot shards) that are used to communicate and exchange data or tokens. The only difference between the two is that the parathreads have a pay-as-you-go model, which is cheaper for blockchains that do not need continuous connectivity to the network.
  • 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.
  • Parachains and parathreads are connected to bridges, which in turn allows connection to external blockchains like Ethereum and Bitcoin.
  • One important perk of using Polkadot is its pooled security: the fact that all parachain transactions are collated into relay chain blocks ensures that instead of competing with other chains for processing resources, a chain’s transactions are secured by all validators in the network.
  • Scalability: Polkadot can process transactions across multiple chains simultaneously. This parallel processing capability gives Polkadot scalability that other chains lack. It allows the creation of custom chains that can quickly connect to the network.
  • Forkless: Upgrades are approved or disapproved through Polkadot’s transparent on-chain governance system thus it can be upgraded to integrate new features or fix bugs without hard forks. This capability enables Polkadot to adapt easily to changes as better technologies become available.
  • Polkadot and Ethereum 2.0: Polkadot is often compared to Ethereum 2.0. Both use sharding to deal with issues of scalability, latency, and transactional throughput.
  • Ethereum offers developers a way to program, execute, and test dApps using smart contracts. Smart contracts are about anyone being able to use and deploy transactions and applications quickly and reliably.
  • Polkadot, on the other hand, gives dApp developers the ability to create their own blockchain that can communicate with other ledgers. Polkadot’s goals are around chain upgradability, governance, interactivity. Its aim is to facilitate interactions that are much more about off-chain, than on-chain cooperation. Interoperability sets Polkadot apart from other blockchains like Ethereum.
  • Ethereum 2.0 / ETH2 / Serenity aims to address scalability and security. It does this by abandoning Proof of Work (PoW), which is energy intensive, to adopt the more efficient Proof of Stake (PoS). Ethereum 2.0 promises up to 100,000 transactions per second, as opposed to 30 transactions with Ethereum 1.0. By adding sharding to the mix, Ethereum 2.0 also can increase the efficiency of its resource usage. The new system accomplishes this by breaking data verification tasks up among sets of nodes and each will be responsible for verifying just the data it has received, allowing for parallel processing.
  • Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralised — and more secure than others (most PoS networks have a small set of validators). Ethereum 2.0’s beacon chain, the first stage in the release of Ethereum 2.0, went live at 12:00 pm UTC on 1 December 2020. The beacon chain introduced staking, paving the way for the shard chain upgrades to follow. This chain will conduct and coordinate the expanded network of shards and stakers.
  • Blockchain in China: In November 2020, Chinese government-supported and funded blockchain infrastructure provider Blockchain-based Service Network (BSN) integrated Polkadot, Oasis, and the China-based public chain project, Bityuan, into its network. The goal of the BSN is to mimic the concept of the internet and to provide a publicly available framework to build blockchain applications that share digital assets and data in a trusted network.

If you are a professional investor curious about the world beyond the top 5 tokens and would like to learn more or about investing and trading this or other tokens, please contact us.

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