What is Polkadot (DOT)?
Polkadot is software that aims to encourage a global computer network to run a blockchain on top of which users can launch and operate their own blockchains.
As such, Polkadot is one of several competing blockchains aiming to grow an ecosystem of cryptocurrencies, other notable examples of which include Ethereum (ETH), cosmos (ATOM) and EOSIO (EOS).
However, Polkadot, released in 2020, is among the newest and introduces a host of new technical features towards its ambitious goal.
For starters, Polkadot was designed to run 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 fed into the main blockchain so that parachain transactions benefit from the same security as the main chain.
With this design, the Polkadot team asserts that transactions can be kept secure and accurate using only the computing resources needed to run the backbone.
Users, however, gain the added benefit of being able to customize many parachains for many different uses.
The Polkadot team believes this project will allow its users to conduct transactions more privately and efficiently by creating blockchains that do not release user data to the public network or otherwise process a larger number of transactions.
To date, Polkadot has raised nearly $200 million from investors in two sales of its DOT cryptocurrency, making it one of the best-funded blockchain projects in history.
Who Created Polkadot?
Polkadot was founded by Gavin Wo (an Ethereum co-founder) alongside co-founders Peter Czaban and Robert Habermeier in 2016.
Wood's track record is remarkable when he invented Solidity, the language used by developers to write decentralized applications (dapps) on Ethereum.
He was also the first CTO of the Ethereum Foundation and was previously a research scientist at Microsoft.
Wood founded a company called Parity Technologies in 2015 with Jutta Steiner. Their goal was to implement projects they intended to build on Ethereum.
He also worked on essential software to power Ethereum, including one of two clients run by a majority of network nodes.
Parity Technologies now maintains Substrate, a software development framework used primarily by Polkadot developers who want to create parachains quickly.
The Web3 Foundation is the non-profit organization that has driven sales of Polkadot tokens. Gavin Wood is also its president, and he was a co-founder with Pete Czaban.
The Web3 Foundation has received 30% of the funds from the token offerings and oversees the allocation of these funds to promote the development of Polkadot.
Why Does Polkadot (DOT) Have Value?
Cryptocurrency DOT plays a key role in the maintenance and operation of the Polkadot network.
By owning and staking the DOT, users gain the ability to vote on network updates, with each vote being proportional to the amount of DOT cryptocurrency they stake. As of 2020, DOT staking in Kraken produces an annual return of 12%.
Polkadot rewards these users with newly minted DOT based on the number of Tokens that they are staking, with all four of the consensual main roles receiving rewards.
However, for investors, it is important to point out that the rules of the Polkadot software initially allowed the creation of 10 million DOTs, with no supply limit.
Instead, new DOT tokens are expected to be released in perpetuity, at a predetermined inflation rate.
A token holder vote in 2020 later changed the default unit for DOT tokens, changing the base currency unit and changing the supply to 1 billion DOT.
Polkadot Price (DOT)
How Does Polkadot Work?
The Polkadot network allows the creation of three types of blockchains.
relay chain — The main blockchain Polkadot, this network is where transactions are finalized. To achieve greater speed, the relay chain separates the addition of new transactions from the act of validating those transactions.
This model allows Polkadot to process more than 1.000 transactions per second, as per the 2020 test.
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 such as EOS, Cosmos, Ethereum and Bitcoin that would allow the exchange of Tokens without a central exchange.
To keep your network in agreement on the state of the system, Relay Chain Polkadot uses a variation of the proof-of-stake (PoS) consensus nominated-proof-of-stake (NPoS) consensus.
This system allows anyone who bets DOT, blocking the cryptocurrency in a special contract, to perform one or more of the following functions necessary for its operation:
- validators — validate data in parachain blocks. They also participate in the consensus and vote on proposed changes to the network.
- fishermen — Secure the relay chain by selecting trusted validators. Nominators delegate their DOT staking tokens to validators and thus allocate their votes to them.
- Collators — Executed nodes store a complete history of 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 staking DOT and perform these roles are also eligible to receive DOT rewards.
Three types of Polkadot users can influence software development.
DOT holders — Anyone who acquires DOT tokens can use their DOTs to propose changes to the network and approve or reject key changes proposed by others.
The advice — Elected by DOT holders, board members are responsible for proposing changes and determining what changes proposed by DOT holders are made to the software. Board members' proposals require fewer votes to be approved than those of ordinary DOT holders.
The Technical Committee — Composed of teams that are actively building Polkadot, this group can make special proposals in case of an emergency. The members of the technical committee are voted on by the members of the Board.
What Makes Polkadot Different From Ethereum?
Given that they share a high profile founder, there has been a lot of speculation about what makes Polkadot different from Ethereum.
In fact, Polkadot is the next major update to Ethereum, known as Ethereum 2.0, sharing many similarities in design and operation.
Both networks operate a main blockchain where transactions are completed and allow the creation of many smaller blockchains that leverage your resources.
Both technologies also use staking rather than mining as a means of keeping the network in sync.
Research is ongoing on how transactions across networks can become interoperable.
Parity, for example, has developed technology designed for users who want to deploy applications leveraging Ethereum's code and community, but would run on Polkadot.
Lastly, developers can use the Polkadot development framework to simulate a copy of the Ethereum blockchain that can be used in their own custom blockchain projects.
Why use Polkadot (DOT)?
Users may find the Polkadot Network attractive based on its focus on facilitating interoperability between blockchains.
In addition, there are a variety of projects already built in Polkadot. Some examples include a cloud platform, a browser extension portfolio, and different types of block explorers.
DOT may be of interest to investors who wish to earn rewards from staking. For example, Kraken offers a stakeout service that allows users to staking DOT and earn 12% annual interest.
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