What is Polkadot (DOT)?

Luis Clark
Luis Clark
Luis is a personal finance expert who has been passionate and writing about crypto for more than five years.
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      What is Polkadot (DOT)?

      Polkadot is an open-source next-generation blockchain network that is built to enable independent blockchains to connect (interoperability and interconnectivity) so that not just tokens, but any data and asset can follow between without intermediaries. The Polkadot protocol is also designed to facilitate scalability and speed through the use of Parachains, which are parallel blockchains that ease the processing demand of the main blockchain. 

      The Polkadot network is powered by DOT, the native token of the protocol which serves 2 main functions within the blockchain network; Polkadot governance and Polkadot staking. Since Polkadot is a Proof of Stake platform, staking is how the network verifies and issues new tokens as DOT rewards.

      Who is the Founder?

      The Web3 Foundation which is a Swiss foundation created Polkadot to facilitate the migration to a more user-friendly and effective decentralized web. That said, the Web3 Foundation is in partnership with several entities to build the Polkadot network and aid the development of the applications and projects designed to run on it.  Some of these entities are developers from Parity Technologies, researchers from ETH Zurich and Inria Paris, as well as, crypto funds like Polychain Capital. These entities all work together to build a realization of Web3 placing the Polkadot framework at its core.  Founders of the Web3 Foundation that created Polkadot include:
      • Robert Habermeier: Robert Habermeier is the co-founder of Polkadot and has a background in blockchain research and development. 
      • Dr. Gavin Wood: Dr. Gavin Wood is the president of the Web3 Foundation and is the individual responsible for coining the term Web3.0. Dr. Gavin Wood invented the core elements of the blockchain space including Proof of Authority Consensus, Whisper, and Solidity. At Parity, Dr. Gavin Wood is head of innovation on Polkadot. 
      • Peter Czaban: Peter Czaban is the Tech Director of the Web3 Foundation where he is responsible for supporting the creation of next-generation distributed technologies. 

      How Does Polkadot Work?

      how polkadot does work

      Polkadot combines a network of heterogeneous or unrelated blockchains called parathreads and parachains. These chains are linked to and secured by the Relay Chain. The Relay Chain is also responsible for the network’s shared security. Parachains and parathreads can also connect with external networks like Bitcoin and Ethereum through bridges.

      That said, there are numerous segments involved in how Polkadot works, let’s have a look at them.

      Consensus Roles

      Various consensus roles are key to the working of the Polkadot protocol, these include:

      • Nominators: Nominators protect the Relay Chain by choosing reliable validators for staking for DOT rewards.
      • Validators: Validators also secure the Relay Chain by validating proofs from collators, engaging in consensus with other validators, and staking dots
      • Collators: Collators collect shard transactions from users and create proofs for validators to maintain shards

      Governance Roles

      There are 2 governance roles:

      • Technical Committee: This is made up of teams that actively build Polkadot. They can also propose emergency referenda alongside the council for speedy voting and implementation. 
      • Council: Members of the Council are selected by an election to represent passive stakeholders in 2 main governance aspects; Vetoing malicious out harmful referenda and proposing referenda. 

      Technology Build

      Here are a couple of vital factors that contribute to Polkadot’s technology:

      • Substrate: The network’s relay chain was developed using Substrate. A substrate is a framework for building blockchains. It is a distillation of Parity Technologies.
      • WebAssembly: The state machine of the Polkadot network is compiled to Wasm or the WebAssembly, which is an enhanced performant virtual environment. The technology is built by major tech giants such as Muddy Michelle Microsoft, Apple, Mozilla, and Google. 
      • Libp2p: Libp2p is the technology behind Polkadot’s networking. It is a flexible cross-platform framework for peer-to-peer applications that manage peer discovery and communication in Polkadot’s ecosystem. 
      • Rust, C++, and Golang: The runtime environment of the Polkadot network is coded in Golang, Rust, and C++ so that it is readily accessible to most developers.

      Transaction Processing

      Polkadot uses parachains which enable parallel transaction processing. Parachains are special blockchains that link to Polkadot but have unique characteristics and the capability to manage their governance. Now, interactions on these chains are processed in parallel, which facilitates a scalable system. This allows transactions to be spread out across the various parachains (parallelized transactions) which means more and more transactions can be spread out in the same timeframe. This is unlike the current transaction processing system for most blockchains that handle singular transactions.

      Security

      With the 2 popular mechanisms, Proof of Work and Proof of Stake, blockchains battle with each other for more resources to protect their networks. The problem here is most times blockchains are prone to attacks till they create a sizable community to support their project. 

      Polkadot, on the other hand, takes a different approach as they allow blockchains to pool their security. This means that all blockchains’ security is compounded and applied to all. What this implies is that by connecting to Polkadot, new blockchain projects can secure their blockchain from the get-go.

      Communication

      For blockchains to interact with each other they must have a common language to bridge the communication gap. This standard is set by XCM, which Polkadot uses as a cross-consensus communication programming language and format that enables blockchains of differing builds to securely exchange value, code, and data. Using XCM, apps and services that utilize the benefits and capabilities of different independent chains can be developed.

      Energy Consumption

      Polkadot’s technology takes energy efficiency into account as it does not use the Proof of Work model. Rather, it uses the Nominated Proof of Stake model which uses an infinitesimal fraction of the energy consumed by traditional blockchains. Its carbon footprint is also one of the lowest in comparison to other blockchains.

      Governance

      Every Polkadot update happens fork free through on-chain voting. DOT tokens are used for participation in governance decisions including tabling, proposals voting, and bonding. Parachains can design custom governance mechanisms, which allow for freedom without affecting other chains. 

      Polkadot’s governance model also hosts an on-chain treasury that can be used by its community to fund projects beneficial to the network. All DOT holders can send-in project funding as well as bounty proposals. They can also nominate community members for tips.

      Consensus Algorithm

      Polkadot uses GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement) consensus to secure the network as well as make it more resilient. In proper conditions, GRANDPA is capable of finalizing blocks almost instantly. But in conditions like network partition, GRANDPA is capable of finalizing huge quantities of blocks at a go once the partitions are resolved.

      Key Features of Polkadot (DOT)

      Polkadot Treasury

      how polkadot treasury works

      Polkadot Treasury is a pot of DOT tokens collected as transaction fees and through normal network operations. DOT holders can benefit from the treasury by submitting a treasury spending proposal to support their projects and activities

      Only projects and activities that benefit the Polkadot network are funded by the Polkadot Treasury. Activities that benefit the protocol which can be funded by the treasury include the following:

      • Cross-chain application development. This includes UX improvements and multi-chain infrastructure
      • Marketing activities such as paid features, advertising, and collaboration
      • Infrastructure deployment and continued operation
      • Network security operations like regular auditing and monitoring services
      • Community events and outreaches like meetups
      • Collaborations with chains that are friendly with the Polkadot ecosystem 
      • Academic and non-academic research 
      • Software development. This includes wallet integrations, wallets, clients, and client upgrades

      Polkadot has 10s of millions of DOT in the treasury which is used to fuel Web3 innovation. The treasury funds are allocated through on-chain governance. This is done in 3 ways: Bounties, proposals, and tips. The Polkadot council is responsible for the approval of treasury allocations.

      Cross-Consensus Message (XCM)

      XCM is a programming language and cross-chain consensus communication format that enables different blockchains with varying designs to exchange data, value, and code securely

      It is Web3’s native language for building new cross-chain applications and services. Polkadot created XCM to secure massaging across Polkadot-native blockchains and with external networks through bridges. XCM enables applications to span across different blockchains and access the strengths and key features of each blockchain for new interoperable use cases. Currently, XCM connects over 450 projects. 

      The language also gives instructions on how to compose, send and interpret cross-chain messages. The messages contain different types of data like instructions and assets. Once the destination chain receives the instructions in the XCM message, the chain executes the message. 

      XCM messages are sent over different channels and routes. Messages between a single parachain and the Relay Chain are sent via VMP channels. Messages between external blockchain networks and Polkadot as well as messages between 2 solo chains outside Polkadot are sent over Bridges. 

      Asides from arbitrary message passing, XCM unlocks batched transactions, reserve-backed assets, NFT staking, cross-chain tokens, and NFT transfers. It also unlocks multi-chain DAOs and treasuries, on-chain scheduling, cross-chain reputation systems, multi-chain dApps, smart contracts, and DeFi. 

      XCM brings external tokens into Polkadot and allows users to pay fees between chains in any native tokens. In addition, XCM also works between smart contracts over bridges and on different virtual machines between Substrate pallets. It also connects networks built on different consensus mechanisms. It can be used to communicate between proof-of-stake networks and proof-of-work networks.

      Weaknesses of Polkadot (DOT)

      A major weakness of Polkadot is the insecurity surrounding the DOT supplies. Since the network is still pretty new, it is yet to have a DOT-rich list and doesn’t have much information on where and who owns the DOT token

      Polkadot has also been a target of hackers who have taken advantage of vulnerabilities in the code to cause the loss of funds. In July 2017, hackers who identified themselves as the White Hat Group took advantage of a software flaw, breached the team’s wallet, and stole $33 million. Also, in August 2022, Polkadot’s DeFi Acala network was hacked by some malicious actors. The hackers minted over 1.2 billion in USD. 

      Another weakness of Polkadot is that only a limited number of parachains are available. The available parachain slots are sold out through auctions. The limited slots and auction process causes small use cases to be priced out. 

      Even though the DOT token is often trading among the top 20 digital currencies on Coinmarketcap, it is still quite new as it was only released in May 2020. This has affected its competition against other currencies in the general-purpose smart contract, Proof-of-Stake sector. Other networks in this sector such as Cosmos, Ethereum, and Cardano are already established. DOT is unable to provide huge amounts of liquidity and currently lacks the infrastructure to do so.

      blockchain polkadot dot

      How is Polkadot (DOT) Created?

      New Polkadot (DOT) is released (minted or created) as a reward for staking DOT tokens.  

      Polkadot uses the Nominated Proof of Stake model which means it incentivizes staking and rewards newly minted DOT (creates new DOT) based on how many DOT tokens the delegator staked.

      Mining Polkadot (DOT)

      You cannot mine Polkadot (DOT) as it isn’t a Proof of Work token. Rather, you receive all the benefits miners are entitled to by staking your DOT tokens as Polkadot is a Nominated Proof of Stake chain. 

      There are 4 consensus roles of the Polkadot network; validators, nominators, collators, and fishermen, and each one receives staking rewards for their various activities in securing the network. 

      That said, the average staking reward for DOT is between 10 to 15% per annum. However, the rewards depend on your stake pool performance, the staked amount, supply, demand, and network chances. The profits are determined by how many DOT you are willing to stake for future Polkadot tokens as a reward.

      Which Blockchain does Polkadot (DOT) Use?

      DOT is native to Polkadot’s core blockchain called the Relay Chain. Polkadot has other user-developed parallel chains aside from the Relay Chain called parachains. 

      How to Use Polkadot (DOT)?

      DOT is Polkadot’s native token. DOT holders can vote on protocol decisions through governance and vote for proposals by staking their DOT tokens. 

      DOT holders through governance play an active role in scheduling additional parachains and determining network fees and auction dynamics. They also determine the direction of the Polkadot network, they make decisions regarding special events like network upgrades. 

      DOT can also be used to add new parachains through a process known as Bonding. This entails the locking of DOT for a period after which it is released back to the original account once the parachain is removed. 

      DOT holders facilitate Polkadot’s consensus mechanism by delegating their tokens to the Polkadot network to perform chain functions. This enables the network to process transactions across parachains and function effectively. 

      DOT is also used to discourage involvement in any activity that can harm the network. DOT holders who engage in malicious activities face the risk of forfeiting their stake.

      How to Buy Polkadot (DOT)?

      how to buy polkadot dot
      DOT tokens can be purchased on exchanges like Binance, PolkaSwap, Kraken, 1INCH, and Coinbase. CoinMarketCap has a list of all the exchanges that support the trading of DOT Once you find an exchange that suits your need, you will need to create and verify an account with the exchange. After the verification of your account, you can proceed to fund your wallet with fiat currency through your debit card or via bank transfer.  After funding your wallet, you will be able to buy DOT tokens from the exchange.

      How to Store Polkadot (DOT)?

      You can store your DOT tokens in a wallet on the exchange where you purchased the tokens or you can move the tokens to an external wallet outside the exchange. 

      DOT tokens can be stored in the following types of wallets:

      • Software Wallets: Software wallets which are also known as hot wallets are wallets that are connected to the Internet and networks. They are not the most secure wallet option for storing cryptocurrencies because they are susceptible to malicious attacks. They are, however, a great choice for DOT holders who trade regularly. Software wallets like Metamask wallet, Guarda Wallet, and Coinbase wallet support the storage of DOT. 
      • Hardware Wallets: Hardware wallets also known as cold wallets are the most secure types of wallets. They are the best for the long-term storage of cryptocurrencies and for holding a large number of cryptocurrencies. DOT can be stored on hardware wallets like Ledger Nano X, Trezor Model T, SafePal S1, and Ellipal Titan. 
      • Exchange Wallets: These are inbuilt wallets on crypto exchanges. Most crypto exchanges that support the trading of DOT tokens have wallets where you can store the tokens. Exchange wallets are the least secure type of wallets.

      Best Place to Stake Polkadot (DOT)?

      There are several excellent options to stake your DOT tokens, but the most preferred options by the Polkadot community are Kraken, Binance, and Polkadot.js.org. However, for beginners, it is advisable to stake your DOT tokens on an exchange, not on advanced platforms like Polkadot.js.

      What You Need to Know About the Future of Polkadot (DOT)

      Various post-launch upgrades to Polkadot are still under development. This includes; the release of Polkadot’s cross-communication standard (XCM), governance improvements, the launch of parathreads, governance improvements, and upgrades to XCMP, the cross-chain message passing protocol. 

      These upgrades will bring Polkadot even closer to achieving its web3.0 objectives.

      Conclusion: Should You Put Your Money in Polkadot (DOT)?

      Polkadot is in its early stages and if you’re a risk taker, an investment in the project could pay off in the long run. But it could also fall through if a better and more innovative technology takes the spotlight from Polkadot.

      Risk in Investing in Polkadot (DOT)

      Polkadot is a cryptocurrency so price volatility is a huge risk. You could lose your entire investment if the DOT token loses its value. There’s also the risk of the project simply closing shop as certain crypto projects have done in the past. So ensure you have a high-risk tolerance and only invest money you’re willing to lose.

      FAQ

      Most frequent questions and answers

      No, DOT is on the Relay Chain, the core blockchain of the Polkadot network. 

      Polkadot enables smart contract developers to use the underlying features of the Relay Chain to create smart contracts. 

      Polkadot is edging closer to a completely decentralized network where users are in complete control.

      Similar competitors to Polkadot include the Cosmos Network (ATOM), Wanchain, and SKALE Labs.

      Yes, Polkadot is the flagship project of the Web3 Foundation. 

      Concerning transaction speed, interoperability, and scalability, Polkadot surpasses Ethereum. Polkadot can process more than 1000 transactions per second, while Ethereum on average can process 30 transactions per second. 

      Polkadot calls itself a layer 0 blockchain.

      It is a protocol that is used to connect blockchains. It allows data and value to be sent across networks that are originally incompatible.

      The Relay Chain enables the protocol to process transactions and data on different chains known as Parachains. The protocol’s architecture separates the network into individual shards or segments

      Polkadot connects a collection of independent blockchains into a unified network while Cardano is a third-generation blockchain. 

      Polkadot is important due to its ability to connect sovereign blockchains as one.

      The prevalent opinion in the crypto space is that Polkadot is more valuable than Cosmos at the moment

      Parachains are heterogenous blockchains connected to Polkadot.

      Parachains help to increase transaction speed despite scaling. 

      There are currently about 100 parachains on Polkadot.

      Yes, parachains are live on Polkadot and keep rolling out via Polkadot’s auction process. 

      How do Polkadot Parachain Auctions Work?

      Parachain slots are limited to encourage competition and the best allocation of fixed Relay Chain resources. This limitation ensures that aspiring parachains compete to outbid each other. That said, parachain slot auctions adhere to the candle auction format, which is a type of open auction where there’s no fixed close time to limit auction sniping (bidding at the latest seconds). The idea is that the candle can go off at any point. This encourages projects to deliver the best bids early on instead of using the last-hour bid. This whole process is automated on the Relay Chain.

      Parachain auctions are a means of knowing which parachains can connect to the Relay Chain to acquire the benefits of the network’s architecture and in what order. 

      No, Ethereum does not have parachains. 

      Parachain slots are a limited resource on Polkadot that exists to support DeFi projects that want to become parachains. Only a few slots are unlocked monthly. 

      Here’s one option: go to Kraken, deposit and buy Polkadot (DOT), head to Earn – Parachains, choose the project you intend to support, enter the amount of DOT you want to contribute, and select “contribute” to confirm. 

      There are currently over 300 projects being developed on Polkadot. 

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