What is Polkadot? (DOT)
The Beginner’s Guide
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.
Users seeking to stay connected on the project’s current development status can follow the official Polkadot project roadmap for up-to-date details.
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.
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 Relay Chain – 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 – Parachains are custom blockchains that use the relay chain’s computing resources to confirm that transactions are accurate.
- Bridges – 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:
- Validators – Validate data in parachain blocks. They also participate in consensus and vote on proposed changes to the network.
- Nominators – Secure the Relay Chain by selecting trustworthy validators. Nominators delegate their staked DOT tokens to validators and thus allocate their votes to them.
- Collators – Nodes run that store a full history for each parachain and aggregate parachain transaction data into blocks for addition to the Relay Chain.
- Fishermen – Monitor the Polkadot network and report bad behavior to validators.
Users who stake DOT and perform these roles are also eligible to receive DOT rewards.
Three types of Polkadot users can influence the software’s development.
- DOT holders – Anyone who purchases DOT tokens can use their DOTs to propose changes to the network and approve or reject major changes proposed by others.
- The Council – Elected by DOT holders, council members are responsible for proposing changes and determining which changes proposed by DOT holders are made to the software. Proposals by Council members require less votes to be approved than those by ordinary DOT holders.
- The Technical Committee – Composed of teams actively building Polkadot, this group can make special proposals in the event of an emergency. Members of the technical committee are voted in by Council members.
What Makes Polkadot Different Than Ethereum?
Given they share a high-profile founder, there has been much speculation about what makes Polkadot different from Ethereum.
Indeed, Polkadot and the forthcoming major update to Ethereum, known as Ethereum 2.0, share many similarities in design and operation.
Both networks operate a main blockchain where transactions are finalized and allow for the creation of many smaller blockchains that leverage its resources. Both technologies also use staking instead of mining as a means of keeping the network in sync.
Research is ongoing on how transactions between the networks could be made interoperable. Parity, for example, has developed technology designed for users who may wish to deploy applications leveraging Ethereum’s code and community, but that would run on Polkadot.
Lastly, developers can use Polkadot’s development framework to simulate a copy of the Ethereum blockchain that can be used in their own custom blockchain designs.
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.
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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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