What Is Polkadot and Why Everyone’s Going Crazy About It?
By Gabriel Negrín
Launched in May 2020, amid the economic crisis, Polkadot (DOT) has carved a niche for itself in the crypto market. Needless to say, it is here to stay.
In less than a year, Polkadot has become one of the most popular cryptocurrencies. Right now, it is competing directly against Solana and Cardano. All three are seeking to stand on the crypto podium alongside bitcoin and Ethereum.
Created by Ethereum's own co-founder Gavin Wood, Polkadot is a unique project. It has been called the "blockchain of blockchains" thanks to its multi-chain structure.
The truth is Polkadot was created with one goal in mind - to be the solution for a number of problems that other blockchains face.
What Is the Blockchain Trilemma?
A good blockchain is characterized by three elements: decentralization, security, and scalability.
However, there is a problem — As a blockchain network begins to be used more widely, it loses some of these elements. In other words, a blockchain with all of them is becoming almost impossible to achieve.
Don't get me wrong, the blockchain itself is a great technology. But since there was no predecessor to any of them, they are missing several things.
For example, Ethereum is successful because it has a convenient architecture for implementing smart contracts. Yet, many people abuse Ethereum software.
Some can't help but create meaningless projects on Ethereum. However, when these same projects congest the network, commissions increase. This ruins the party for everyone.
On the contrary, some of the other blockchains offer almost instant transactions. But the problem is that they often have nominated block validators. This opens the door to manipulation, which goes against the idea of a decentralized network.
Bitcoin, interestingly, is the blockchain closest to mastering the blockchain trilemma. Yet, bitcoin has a problem too: the scalability of the network has not been able to keep up with the pace at which its usage has expanded.
What Is Polkadot Relay Chain?
Polkadot has been created with these issues in mind, thus trying to solve the blockchain trilemma.
Polkadot is designed to operate two different types of blockchain. The main network is called the Relay chain, and this is where transactions are permanent. And the second type is the parachains, which are user-created networks.
The Relay chain is the center of everything. It is responsible for security, consensus, and interoperability between chains throughout the network.
In the same way, the Relay chain is also intentionally reduced in functionality. This reduced functionality means greater speed in processing new transactions.
Parachains are very important, but more on that later.
How Does Nominated Proof-of-Stake Work?
Polkadot has designated validators on the blockchain, but how are they chosen?
Well, Polkadot has a validation mechanism called Nominated Proof-of-Stake.
Nominators bind their participation to specific validators to be recognized by the network. In this way, they get permission to be able to mine blocks on the blockchain.
Profits and losses are shared with each nominator. In this way, any unreliable validator is immediately excluded from the system.
What Are Parachains?
Parachains are standalone blockchains hosted on the Polkadot platform. These blockchains use the computational resources of the relay chain to confirm the transactions. In this way, Parachains become fast and congestion-free.
Since there will be a lot of Parachains, each of them serves different purposes.
Parachains can be customized for a variant of different things, such as building applications.
There is a key difference between Polkadot and Ethereum. Devs in Polkadot can create their own blockchain within DOT. The potential is bigger than just creating decentralized applications.
Even better, they can take advantage of the security that Polkadot's blockchain already provides.
However, people can't just create a parachain and let it run. The teams behind the projects are nominated for an auction. And here's the reason why everyone's talking about DOT right now.
Crowdloans: The Reason Behind The DOT Euphoria
However, people can't just create a parachain and let it run. The teams behind the projects are nominated for an auction.
Here the supporters of that project must contribute their DOTs to secure a parachain slot. This is called crowd loan - people contribute their DOTs in exchange for rewards from that project.
And these parachains are launching in November. That’s why prices have gone up so much and will probably keep going up — people need DOT in order to participate in crowd loans.
The committed DOT is locked for the lease period and then people receive them back at the end of it. This means that investors would be getting money just for helping projects win the parachain slot.
Parachains are the great promise of Polkadot. It's a way to expand the network almost infinitely without sacrificing some of the three elements of the blockchain. And its success is almost guaranteed thanks to the parachains made in Kusama, DOT's canary network.
One of the biggest examples is Moonriver. Moonriver is one of the projects that won a slot in the KSM parachains. For each KSM contributed, people received about 14.5677 MOVR.
At the time of writing, 1 KSM is worth $381.63 and 1 MOVR $424.36. So the rewards for each KSM are worth about $6,181.94 - almost 17X the money invested.
And the truth is that people are not only confident of the success of DOT parachains but that their success will be even greater than that of KSM.
Polkadot became one of the main blockchains in the system. Not only because of its complete software but also because of its architecture. DOT's architecture allows the use of the network without cryptocurrencies having to compete with each other.
Polkadot is also developer-friendly. Parachains are built using Substrate. And since the Relay Chain is also built on Substrate, any parachain can easily connect to the network.