What is Polkadot?
Although Polkadot has seemingly been under the radar since development on the project began over 3 years ago, it has shaken the cryptocurrency space with the official release of its ‘finalized’ main net earlier this month. In less than 2 weeks, Polkadot’s native DOT token has silently leapfrogged its way into the top 10 cryptocurrencies by market capitalization.
All manner of words and phrases have been used to describe Polkadot including the exhausted label of an “Ethereum killer” cryptocurrency. While its founder insists that Polkadot is not a competitor to Ethereum, a close-up look at Polkadot suggests that it is not only a serious competitor to Ethereum but a cryptocurrency which may just transform the cryptocurrency world forever.
Origins of Polkadot
The history of Polkadot begins with Ethereum, specifically one of Ethereum’s co-founders, Dr. Gavin Wood (PhD in Software Engineering). Dr. Wood has over 20 years of experience working as a software developer both inside and outside of the crypto space.
He coded the first functional version of Ethereum and even authored Ethereum’s Yellow Paper. What Dr. Wood is perhaps most famous for however is creating Solidity, the coding language used to build smart contracts on Ethereum.
In January of 2016, Dr. Wood left his position as Ethereum’s CTO and core developer. The exact reasons for his departure vary (even from Dr. Wood himself) but can be summed up as being due to his frustration about the slow development to Ethereum 2.0.
Later in 2016, Dr. Wood began developing a new cryptocurrency which would “deliver on the promises which Ethereum could not”. The first draft of the Polkadot whitepaper was finished by the end of 2016.
The DOT Cryptocurrency ICO
The initial coin offering of Polkadot’s DOT cryptocurrency is something which is still vividly in the memory of many veterans in the cryptocurrency space and certainly for the Polkadot team. The DOT ICO took place in October 2017 and raised over 145 million USD in Ethereum.
Half of DOT’s initial total supply of 10 million was sold in two rounds to public and private investors (2.25 million and 2.75 million, respectively). The price per DOT token for these funding rounds was 28.80$USD.
Less than 2 weeks later, over 90 million USD of the funds raised during the ICO were permanently frozen due an exploit of a vulnerability in Polkadot’s multisig wallet code. One week after the attack, the Polkadot team confirmed that they still had enough funding to develop Polkadot and pressed onwards despite the lost funds. Although there have been efforts to retrieve the funds, over 500 000 ETH are still locked.
The post-ICO debacle marked the second time the team’s wallets had been hacked because of a code vulnerability. The first hack took place earlier in July of 2017 and saw over 33 million USD of Ethereum drained before the attack was stopped by a benevolent group of hackers known as the White Hat Group. In both cases, the Polkadot team released follow up documentation detailing the hacks and how to prevent them from happening again.
In January 2019, another private funding round was held by Polkadot in an attempt to make up for the lost (frozen) funds from the DOT ICO. 500 000 DOT were sold for a marked-up price of 120$USD per DOT, raising over 60 million USD.
In July of this year, a third private funding round was held, selling just under 350 000 DOT tokens at a price of 125$USD each. This raised another 43 million USD. Added together, the total funding for Polkadot’s DOT cryptocurrency was over 250 million USD (with 90 million still frozen).
What is Polkadot?
Polkadot is a cryptocurrency project which seeks to power the decentralized future of the internet (Web 3.0). It is interoperable with other blockchains inside and outside of cryptocurrency, it allows for the creation of smart contracts and new blockchains (and tokens), it makes it possible for blockchains to exchange information, it is upgradeable (no hard forks!), and the protocol is governed by those who hold DOT, Polkadot’s native cryptocurrency.
Polkadot is a project by the Web3 Foundation, a Swiss non-profit based in Switzerland’s Crypto Valley (Zug). The Web3 Foundation commissions UK-based Parity Technologies to develop and maintain the Polkadot network.
Dr. Gavin Wood is the co-founder of both the Web3 Foundation and Parity Technologies and is consequently the main developer of the Polkadot network. Polkadot is built using Substrate, a blockchain building tool developed by Parity Technologies.
How does Polkadot work?
Polkadot is easily one of the most complicated cryptocurrencies in existence. While we would normally say that we have a way of explaining it to you in layman’s terms, but there is really no way to explain Polkadot without eventually falling into a fissure of technical language. Some components of the Polkadot network quite literally have a series of articles dedicated to explaining them. In an ironic twist, the entire Polkadot network is accessed a simple browser plug-in called Polkadot.js.
At a glance, Polkadot is an ecosystem of blockchains. The core Polkadot blockchain is called the Relay Chain. Blockchains that are connected to the Relay Chain are known as Parachains. These Parachains can have their own tokens, consensus mechanisms, and even their own governance structures.
As mentioned previously, the Relay Chain is built using Substrate. Any Parachains which are built using Substrate can easily connect to the Relay Chain. Any “external” blockchains such as Bitcoin or Ethereum require a bridge to connect to the Relay Chain.
The Polkadot network uses a hybrid consensus mechanism. The consensus on the Relay Chain is a version of Proof of Stake (PoS) called GHOST-based Recursive Ancestor Deriving Prefix Agreement (or GRANDPA for short).
Parachains attached to the Relay Chain use a version of Proof of Work called Blind Assignment for Blockchain Extension (or BABE for short). Polkadot’s hybrid consensus involves 4 key players: Validators, Collators, Nominators, and Fishermen.
Validators on the Polkadot network are tasked with checking transactions of Parachains and adding them to the Relay Chain blockchain. Validators must stake DOT to be eligible for nomination as a Validator on the network. This is why Polkadot’s PoS consensus is also referred to as Nominated Proof of Stake.
The amount of DOT required to be considered as a Validator depends on network participation and can be estimated by looking at the amounts currently being staked by existing validators on chain. This is roughly 2.7 million DOT at the time of writing. The list of validators changes every era (24 hours).
Validators are randomly assigned to attached Parachains to check their transactions. These transactions are then registered on a block on the Relay Chain blockchain which Validators generate. A minimum of 5 Validators is required per Parachain chain and there are currently around 200 Validators.
1000 Validators is the target of the Polkadot network. This is important to note because it means that the Polkadot network can support around 200 Parachains before seeing a slow down in network speed and efficiency.
When a new block containing Parachain transactions is generated by Validators on the Relay Chain, 20% of block rewards are distributed among Validators in accordance with the amount of “era points” they have accumulated.
To keep things simple, let us just say the more Parachain transactions a Validator has verified, the more era points they get. The remaining 80% of block rewards are sent to the Polkadot Treasury (more on this later).
A new block is generated on the Polkadot Relay Chain every 6 seconds (though this may go as low as 2 seconds in the future). Misbehaving Validators can see their stake slashed by as much as 30%. The amount slashed changes depending on how much the Validator has staked and all slashed funds go to the Treasury. Any Nominators who have delegated their DOT tokens to a misbehaving Validator also see a portion of their tokens slashed.
The final issue Polkadot faces involves interoperability. While the project is marketed as being extremely interoperable, in the reality this is only true regarding other blockchains built using Substrate. Any “external” blockchains such as Bitcoin or Ethereum will require a bridge to connect to the Polkadot Relay Chain. Thankfully, bridge protocols for Polkadot such as ChainX are seeing a surprising amount of growth, and there are numerous mid-cap and even large-cap cryptocurrencies built on Substrate.
Even with these concerns, it would take some Olympic level mental gymnastics to justify being bearish on Polkadot. The project is just too damn good, and it is only just getting started. The potential for growth of the network as well as the valuation of the DOT token are both angled to the moon and may just achieve enough adoption and investment to make it to Mars (perhaps even literally, someday!).