Polkadot: A Scalable Multichain Solution


Blockchains only exist in and of themselves, they are isolated networks. Web3 has a new idea. There are several definitions out there as to what exactly Web3 is, but in a nutshell it can be described as “the next generation of the internet”. It envisages to be decentralised, and to give back control to individuals.

Blockchains play a significant role in this concept, but as is the case for every emerging technology, there are still some hurdles that they will need to overcome. Different blockchains exist for different use cases, for example, which creates a challenge when technological and economic interaction between them is needed. New chains also face the challenge of attracting enough users and a big enough network, in order to have robust security.

Polkadot tries to solve the limitations of blockchain expandability and scalability by focusing on interoperability and by sharing resources between different chains.

Key Metrics as of February 28, 2022

Total Crypto Assets Market Cap: 1.92T

Polkadot Market Cap: USD 18.63B (11th largest crypto asset by market cap)

Total Supply: 1,165,691,802 DOT*

Total Value Locked DeFi (TVL): USD 1.41B

Token distribution strategy:

  • 50% for initial investors
  • 30% allocated to the Web3 Foundation
  • 5% for private investors of the Polkadot project in 2019
  • 4% for investors that participated in the 2020 token sale

*The total DOT supply is not fixed. An inflationary model of 10% annually was designed in order to supply rewards for staking

Brief History

Dr Gavin Wood, one of the co-founders of the Ethereum project and the inventor of the Solidity programming language, is one of the masterminds behind Polkadot. He founded the Swiss Web3 Foundation in 2017 in order to develop the protocol, and, by the end of 2017, ran an ICO that raised USD 145m in ETH by selling 50% of the initial DOT supply to initial investors.

On November 6, 2017 (ten days after the ICO sale ended), approximately 66% of the sale proceeds in ETH were compromised by a wallet hack. In consequence, Polkadot launched a petition to the Ethereum community, but the funds have not been returned to this day. Despite this, the Web3 Foundation informed that the remaining funds were still enough to run the Polkadot project. In 2019, an additional private token sale took place in order to replenish some of the losses, where the Foundation aimed to sell 500,000 DOT (around USD 1.2 billion at the time).

Polkadot’s first big release was in August 2019, with the public launch of the Kusama network. Kusama has its own token (KSM), and was built to work as a “canary network” to the Polkadot network. In other words: it serves as an experimental version for the Polkadot blockchain, by having almost the same codebase, combined with low barrier entries. Kusama plays a key role by allowing changes to the Polkadot network to be tested under real economic conditions before launch.

On May 27, 2020, Polkadot’s mainnet launch began. The team opted for a staged rollout, which was finished by the end of 2021. The last great milestone was achieved in December 2021, where Parachains, one of the core functionalities and unique selling points of the Polkadot network, were launched.

Relay Chain, Parachains, Parathreads & Bridges

Polkadot is a blockchain platform that relies on a “Relay Chain”. The Relay Chain is the centre to which everything around is connected. The functionality is quite simple, in that, for example, it does not support smart contracts. Therefore, if a smart contract execution is needed, this must happen on another blockchain, leading to an outsourcing of the calculation.

So-called Parachains (short for parallelised chains) can be added to the Relay Chain. These are own blockchains that can even have own coins/tokens, but are connected to the Relay Chain. This gives them a shared consensus mechanism, which increases the Parachains’ security even if there is only a small number of users on one individual Parachain. Currently, there are about 100 slots available for Parachains, and each slot has a leasing time span of up to 96 weeks. However, the number of slots can be extended further in the future. Polkadot allocates blockchain projects into these slots in different ways:

  • Polkadot’s governance system: Parachains that benefit the network as a whole are voted on by DOT holders
  • Auctions: slots on the Relay Chain are auctioned off, following a supply and demand approach using DOT. The winner of the auction will have the total bid amount of DOT locked for the entire duration of the lease

So-called Parathreads are basically an idea for temporary Parachains, and are still under development. Parathreads are parallelised chains with no fixed slot on the Relay Chain, which can, for example, be used by smaller projects that are not able to acquire a full Parachain slot, or do not wish to do so. Parathreads participate in Polkadot security on a block to block basis, and in compensation pay a fee per transaction that it commits to the Relay Chain.

Bridges are supported by Polkadot in order to connect to blockchains outside of the network, such as Bitcoin and Ethereum. Bridges allow for communication between blockchains despite technological and structural differences. Polkadot allows for the development of bridges in general, whether of a centralised or decentralised nature, although they are still considered work in progress.

The DOT Token & NPoS

The DOT token has three main functionalities:

  1. Governance over the network

DOT token holders have control over the network by being able to vote on important events, such as updates or fixes

  1. Staking

DOT holders can stake their tokens in order to facilitate the consensus mechanism (NPoS) of the network, and earn rewards

  1. Bonding

New Parachains are added by tying up (bonding) tokens, and outdated Parachains are removed by removing tied up (bonded) tokens

Every blockchain requires a consensus mechanism in order to guarantee trust, agreement, and security to the network. Polkadot’s consensus mechanism is called Nominated Proof of Stake (NPoS), and is an extension of the classic Proof of Stake (PoS) algorithm that aims to enhance security and improve decentralisation through a process of selection and proportional representation of validators.

Current Status

Polkadot successfully concluded its first Parachain auctions at the end of 2021, and projects from several sectors, such as, DeFi (Parallel Finance, Acala), infrastructure (Statemint), and smart contracts (Moonbeam), have taken up slots.

There will be more Parachain auctions in the future and the ones still running are scheduled to conclude in March 2022. Furthermore, as of writing of this article, Polkadot is the overall 12th chain with the highest Total Value Locked (TVL) in DeFi applications (defillama.com).

This notable feat was achieved in a short time span, taking into account that the first Polkadot DeFi Parachains went live at the end of 2021. Several upgrades are currently under development, including XCMP (cross-chain message passing), and the launch of Parathreads, which will further promote growth on the promising Polkadot ecosystem.







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