A beginner's guide to Polkadot coin (DOT), the decentralised web 3.0 blockchain interoperability platform.
Polkadot is...
Introduction to Polkadot coin (DOT)
How does Polkadot work?
Polkadot (DOT) is a next-generation multichain network that links outside networks as well as customized Layer 1 protocols called "Parachains" or "Parallel Chains" which are built using the Polkadot framework.
The protocol was launched in May 2020, co-founded by Gavin Wood, who is also one of the co-founders of Ethereum, and further developed in association with the WEB3 Foundation.
He was also the inventor of the Solidity smart contract language which is now used by thousands of developers who are building on Ethereum and associated networks.
It has unique features like interoperability, scalability, security, customizability, staking, governance, and the best one - Polkadot can upgrade without any hard forks to integrate new features or bug fixes.
In this section of our Polkadot guide, we are going to explore briefly how Polkadot works and what are the different components that come together to support the operations of the Relay Chain and Multiple Parachains.
Let's start!
Hybrid Consensus
Polkadot employs a hybrid consensus algorithm that uses two distinct protocols and they work together.
It uses BABE for block production and GRANDPA provides finality.
This gives Polkadot the best of both worlds - faster block time hence quick transactions & provable finality.
Let's see how both of them work:
Polkadot Block Production - BABE
Polkadot uses Nominated Proof of Stake consensus called BABE (Blind Assignment for Blockchain Extension) that runs between the validator nodes.
It assigns block production slots to validators according to stake.
This maximizes the overall security and decentralization of the network.
Also, the cost of mining equipment setup becomes low because anyone can act as a nominator to nominate the validators on their behalf and get DOT rewards for participating in the consensus.
Key Roles:
1. Collators: They collect parachain transactions from users and produce state transition proofs for Relay Chain validators so that they can validate the blocks.
2. Validators: They accept incoming proofs from collators and perform consensus on the Relay chain to validate and create blocks.Higher the stake, the higher the chances to get selected in the validator set.
3. Nominators: These participants join hands with validators and increase their DOT stake. Since not everyone can run a full node 24/7, this is a great way to participate in consensus by nominating a validator on your behalf to produce blocks.
Validators participate in a lottery in every slot which lasts for usually 6 seconds.
There can be multiple validators chosen to produce blocks per slot.
BADASS BABE is now used in Polkadot instead of BABE that ensures the blocks are produced at regular time intervals.
Finality In Polkadot - GRANDPA
In a blockchain, a block is irreversible and final if all nodes agree and accept the integrity of the data.
POW consensus provides probabilistic finality which means that eventual consensus and finality take a long time to reach.
To solve this problem, Polkadot uses another protocol called GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement) which provides provable finality.
For example, blocks go irreversible if the process of some random Byzantine agreements is completed.
GRANDPA and Finality are two complex topics and they deserve a separate Polkadot guide section.
Since this is a basic guide, we are not diving deep into how GRANDPA works in detail.
It's vital to know its role on the Polkadot network.
Polkadot Architecture
Polkadot follows a sharded structure where there is a main chain called Relay Chain and there can be multiple parallel chains called Parachains, interconnected through the relay.
Transactions can happen at the same time on these chains achieving high scalability without compromising the security of the network.
Let's have a look at all the different components of Polkadot's architecture:
1. Relay Chain: This chain stays at the center of the Polkadot Network and validators create and validate blocks coming from different parachains (sent by Collators). Nominators safeguard the chain by selecting reliable validators on Relay. It is responsible for basic transactions like governance, parachain auctions, and participation in the consensus (BADASS BABE). Relay chain does not have smart contract functionality and all computation happens on various parachains which are also Layer 1 chains running in parallel.
2. Parachain & Parathreads: Polkadot allows a certain number of execution slots that can be used to run different processes. These slots are available in types: Parachain and Parathreads. Parachains come up with a dedicated slot and you can run heavy and time-sensitive processes on that. Parathreads are slots shared by a group so they can be used to run processes that are not required to be executed frequently. Parachain and Parathreads generate proof that is validated by the validators on the Relay.
3. Bridges: Bridges act as communication channels between parachains and the relay chain. This ensures interoperability among these chains. A bridge can be an independent chain with different protocols, customized rules & governance models. For example, if you want Polkadot to interact with the Ethereum chain, then you need a bridge. Collators are used to send data from Parachains to validators via bridges. This also improves the speed, efficiency, and decentralization of the network.
All computation is done on Parachain & Parathreads depending upon the use-case.
This is handled automatically and you can make customizations while creating your own chain.
This diagram will provide you a Top-View of Polkadot's Architecture and the role of each component:
What is Polkadot used for?
In this section of our LeoFinance Polkadot guide, we are going to check out what Polkadot is used for.
We are going to discuss Polkadot’s potential use cases and also the currently available implementations of the Polkadot Blockchain.
1. In-Relay Cross Chain Communication
Polkadot features a relay blockchain under which parachains can be hosted.
These parachains being part of the relay chain can be used to communicate with each other.
Each of these parachains could have its own smart contracts and governance models.
They can interact with each other and have completely different use cases at the same time.
In-relay cross chain communication is the prime feature of the Polkadot as it is designed for the Parachain design while keeping security and governance along with decentralization in mind.
2. Off-Chain Bridge Communication
Polkadot can be used as a bridge to connect with other blockchains.
For example, if you want to connect Polkadot to Ethereum for some specific token functionality, you can do so.
In fact, there are a number of the bridge projects currently addressing the same problem set and being used in this space.
If we were to word this so a newbie could understand, you can get Polkadot to talk to Ethereum or Solana or even other blockchains like Chainlink.
Off-chain Bridges include converters, oracles, data governance and analytics.
Even archival services can be used for this use case.
For example, Darwinia is one such project under the off-chain bridge category that is being used for the function of facilitating asset transfer across blockchains.
3. Privacy Chains under Decentralized Governance
Polkadot itself has built itself using a model of decentralized governance.
The Web3 Foundation is no longer the sole lead voter in the chain.
Now anyone can deploy a similar decentralized governance under the Polkadot chain too.
Privacy is achieved through Pooled Security on Public and Private chains.
Here your slot on the Polkadot chain is approved through community voting and governance.
Privacy is achieved through both wallet specific privacy as well as means that go beyond anonymity.
4. Decentralized Finance (DeFi)
Binance and the Moonbeam network has been working on various DeFi specific projects, built on the top of the Polkadot and Kusama networks.
Currently, the Acala network has been working on smart contracts for DeFi network to be deployed on Polkadot.
BiFrost is one such DeFi hub that has been deployed on Polkadot as well.
There are many DeFi specific finance and asset related projects that are being developed and deployed on the Polkadot blockchain.
5. dApps
Almost every modern blockchain needs to have dApps and the ability to deploy smart contracts.
Though Polkadot's relay chain does not support smart contracts itself.
However, the Plasm network has worked out on the area where dApps can be created with the smart contract feature on the Polkadot parachains.
Currently moonbeam network, Plasm network are working in this space for the development of DeFi apps and the dApps.
Substrate based app development makes it easy to access the Polkadot chain for dApp development.
6. Public and Private Parachains
The relay chain of the Polkadot has a feature to allow slot auctions for both public and private chains.
So for businesses and governments who need to make use of private chains for their own data, can choose the private option.
This feature goes through the community governance and voting model where the project in feature needs to win the auction before they can get the public or private chain allotted to them.
7. Upgradable Chains Without Hardfork
This use case for Polkadot is extremely useful to financial blockchains.
Especially when regular new changes are meant to be deployed without having to hardfork the chain every now and then.
Upgradability without a hardfork makes the Polkadot blockchain ideal for the various types of volatile data archival, finance and data specific businesses problems.
8. Asset Management
In the financial industry, asset management is one of the important features.
And this is why even Binance invests heavily into the Polkadot blockchain.
It's one of the benefits of asset transfer across cross chains allows it to be usable in many financial institutions and international asset management services.
ChainX is one such project on Polkadot that is being used for asset management.
9. Scalable Blockchain
Ethereum has opened more doors to blockchain innovation through EVM and smart contracts.
However, it poses the scalability issue due to the mining and the POW problem.
This problem has been solved by Polkadot and it focuses on faster transactions and more transactions even under load.
This makes it ideal for the scalable use of the blockchain.
10. Ecosystem for Innovative Use Cases
Polkadot has been used for a variety of new use cases, even just a few months after its testnet launch.
There are many projects and companies that are taking advantage of the highly cometitive Polkadot parachain auctions.
A few of them have even secured their place on Polkadot already.
Oracles like ChainLink have used Polkadot for cross chain bridging and we’re seeing Arweave is making use of the Polkadot in it's Perma archive blockchain.
Polkadots use-cases continue
Polkadot is designed to address some of the Blockchain industry pain points.
Every day we see many new projects moving to the Polkadot blockchain for scalability, interoperability and other useful features which are either not found in other blockchains, or found with the sacrificial cost of scaling.
We can continue to expect new features and improvements along with the decentralization, privacy and security based use cases out of the Polkadot Blockchain.
Polkadot (DOT) vs Ethereum (ETH)
In this section of our Polkadot guide, we are going to compare two blockchains - Polkadot (DOT) and Ethereum (ETH).
This section is meant to show you an unbiased comparison of each blockchain’s feature set.
The below table shows you comparison points between the two blockchains.
Polkadot vs Ethereum comparison table
| Polkadot (DOT) | Ethereum (ETH) | |
|---|---|---|
| Polkadot project started in 2016 while the Mainnet release was in 26th May 2020. | Ethereum was released in 30th July 2015 while it's project and whitepaper appeared in 2013. | |
| Polkadot has a total supply of 1.11 Billion and circulating supply of 1 Billion DOT as of now. | Ethereum has a $365,186,415,050 total number of coins while 117,046,619 coins in circulation. | |
| Polkadot makes use of the Nominated Proof of Stake (BABE/GRANDPA) consensus algorithm on it's network. | Ethereum initially was deployed with Proof of Work mining consensus but recent update has Proof of Stake consensus (Casper) algorithm which would be future of the network. | |
| Polkadot relay chain does not support the smart contracts however the parachains support the smart contracts. | Ethereum blockchain on it's all layers support the smart contracts through Ethereum Virtual Machine. | |
| Polkadot has support for NFT, dApps and DeFi applications on both it's relay chain and the parachains. | Ethereum from it's inception supported dApps, tokens, DeFi and the infrastructure for the NFTs. | |
| Polkadot has Parachains feature that allows other blockchains to become bridge and governance under the Polkadot relay chain. | Ethereum has layer 2 solutions for extending it's blockchain for additional features which includes bridge, DeFi and other use case scenario. | |
| Polkadot makes use of the Rust programming language for it's chain language. | Ethereum makes use of Solidity as it's primary language for building smart contracts and dApps. | |
| Polkadot has off-chain community governance and the web3 no longer has centralized control any more. It is decentralized and permissionless. | Ethereum 2.0 now has a decentralized community off chain governance which includes users, node owners, developers and the miners. | |
| Polkadot has it's own parachain features for the interoperability which allows it to connect with external chains. It's easy to build cross chain bridges to connect multiple chains to the relay chain or the parachains. | Ethereum requires external solutions build to connect the bridge with it's EVM for cross chain interoperability. It allows support for validators, oracles and the bridge converters. | |
| Polkadot mainnet testing has recorded around 1000 TPS speed. It is designed to scale as per the requirement and load. | Ethereum currently has a TPS of 15 to 30. It is expected to change once the ETH 2.0 deployment is completed. | |
| Polkadot has staking reward from 7% which can go upto 12% and current it is available in DOT supported marketplace and exchanges. | thereum current staking rewards are from 5% and can be staked through most of the exchanges or marketplaces. | |
| Polkadot has multiple heterogeneous parachains in it's working environment. | Ethereum has Multiple homogenous shards in it's working environment. | |
| Polkadot offer chain security through shared pool model. It also makes use of the auctions to weed out the suspicious parties making use of it's blockchain. This was there wont' be 51% type of attacks on the chain infrastructure. | Ethereum makes use of permissionless and immutable security governance which clears most of the security issues in the chain. Despite this ETH network suffered 51% attack on it's network. | |
| Polkadot blockchain was designed to solve the issues of speed and the congestion. It's parachains were designed to solve the congestion issue as it has it's own mini chains that connect to relay. | Ethereum blockchain intends to solve the security, privacy and decentralized blockchain issues along with the ability to develop dApps and external projects on it's chain. |
Should I choose Polkadot (DOT) or Ethereum (ETH)?
Each blockchain solves a different set of problems within the crypto industry.
Ethereum was designed for smart contracts and decentralised finance (DeFi), but is now facing scalability issues due to its previous consensus algorithm.
Polkadot on the other hand makes use of a single relay chain that contains parallel running parachains that have their own governance and interoperability ecosystem.
It makes use of the auctions for parachain slots.
This solves the congestion and the speed issues on its blockchain.
For an investor, the investment depends on the use case and the market adoption of those blockchains.
For developers, both these chains offer opportunities to address various pain-point use cases in the blockchain industry.
Both Polkadot and Ethereum are capable of doing each others tasks through 3rd party projects being built on them to address missing features.
Yet scalability, speed and market adoption separate their use cases.
So this is more of Polkadot and Ethereum scenario instead of one or the other scenario.
Does Polkadot have smart contracts?
Parachains on Polkadot have smart contract capabilities, but the Polkadot relay chain itself does not.
Polkadot itself is not a smart contract platform, but a network that connects heterogeneous blockchains.
Polkadot is a sharded multichain network which means that transactions can be processed on several chains at the same time.
These connected blockchains are what’s known as parachains.
As a result, scalability is vastly improved when compared to traditional smart contract blockchains such as Ethereum and the like.
So while the Polkadot relay chain itself does not technically offer support for smart contracts, Parachains that are built on Polkadot do have smart contract capabilities.
This subsection of our Poldadot guide discusses the concept of parachains on Polkadot and what this means when it comes to smart contracts.
The Relay Chain - No smart contract capabilities...
The relay chain can be thought of as the primary chain of Polkadot and does not have smart contract capabilities.
It forms what you could call the central artery of Polkadot, and is responsible for the following functions:
- Shared security
- Consensus
- Cross-chain interoperability.
As you can see, only a relatively small number of transaction types exist in the relay chain, mostly centred around interacting with the governance mechanism and participating in consensus.
The relay chain on Polkadot is designed to have the minimal functionality that you see here, instead leaving the fun stuff like smart contract capabilities to parachains.
Polkadot validators stake their native token (DOT) on the relay chain to verify transactions from connected parachains.
The relay chain’s sole responsibility is to secure and coordinate the entire system.
Parachains - Smart contract capabilities!
Parachains are independent layer-1 blockchains that feature smart contract capabilities,
Taking their name from the fact they run in parallel to one another and the Polkadot relay chain itself, each Parachain features different:
- Designs
- Tokenomics
- Functionality
- Governance
As they’re still connected to Polkadot via the relay chain, parachains are able to preserve the security that comes with it, while retaining full control.
In addition to tokens and data exchange, Parachains do not need to bootstrap their own validator communities.
Being completely separate layer-1 blockchains, this is a key scaling differential that Polkadot has against its main competitor Ethereum.
Ethereum for example has gone down the layer-2 route to scale, with blockchains such as Polygon worth a further look when you get a chance.
Final thoughts on Polkadot’s smart contract capabilities
As you can see, Polkadot’s smart contract capabilities come from parachains rather than the relay chain itself.
If you’re running a high-traffic, high-throughput dApp with a large number of users, deploying on Polkadot is extremely economical.
Polkadot offers the flexibility and freedom of having your own layer-1 blockchain, without being forced to pass gas fees on to their end-users.
Thus making dApps that run on Polkadot parachains extremely simple and user friendly.
Polkadot (DOT) pros and cons
The Polkadot (DOT) protocol provides the mechanisms to enable interoperability between various existing (and future) independent blockchains.
As you may have been able to already tell from the content within our Polkadot (DOT) guide, this is truly a step forward in blockchain technology.
In order to gain insight into its overall viability in an already crowded space, we investigate the pros and cons surrounding the project.
Polkadot pros
- Polkadot permits multiple independent blockchains to communicate with one another. The protocol permits the transfer of any type of asset or data (not just tokens) to move inter-chain. The importance of this is that it allows for interoperability of various blockchains regardless of the network the chain is created on.
- The team behind Polkadot is made up of highly skilled and qualified developers and research and development engineers.
- The team utilizes the services of several big name advisors in the cryptoverse, including Gavin Wood (co-founder of Ethereum).
- The development team is highly communicative and transparent with project progress. Likewise, the developers actively communicate with the Polkadot community readily answering questions and providing progress details.
- The team's stated goal is to develop the most adaptable type of platform available to serve all blockchains.
- The Polkadot protocol accommodates both economic scalability (by enabling the same validators to secure multiple blockchains) and transactional scalability (transactions are spread across multiple parallel parachains).
- Polkadot uses Substrate, making it very easy for developers to develop a new blockchain in minutes - allowing for faster growth of the Polkadot network.
- Polkadot is easily upgradeable as new technologies are made available without the necessity of a hard fork.
- The 'data availability' and 'validity scheme' employed by Polkadot allows chains running on the Polkadot network to retain their independent governance with the option of shared security.
- All Polkadot stakeholders have a say in network governance.
- As a result of Polkadot's technology in the area of Proof of Stake (PoS), holders of DOT coins may opt to earn interest (yield) on the coins held.
Polkadot cons
- Polkadot (DOT) is a relatively new token on the market displaying a lack of an established track record.
- Many of the use cases discussed concerning the Polkadot project have not, as of yet, been put into full operation.
- POLKADOT (DOT) faces a high degree of competition with respect to decentralized applications. Competitors include: Ethereum, Tron, the Binance Smart Chain and Cardano. Polkadot does face an uphill battle in acquiring market share in the smart contract arena.
- POLKADOT may have been the 'first mover' regarding interoperability, but very quickly other blockchains are challenging POLKADOT's dominance in this area.
Are there more pros than cons to Polkadot?
A quick review of the above shows that with respect to Polkadot (DOT), the 'pros' (in number) appear to outweigh the 'cons'.
Just because the sheer number of 'pros' outweigh the number of 'cons', this fact alone in no way implies the 'cons' should be ignored.
As with any investment decision, you must first assess your present financial condition, your overall investment strategy, as well as your tolerance for risk.
Armed with this information you should then follow a path of doing your own diligent research into the asset being considered.
With all of this information assembled you are finally ready to make your ultimate investment decision.
And finally, please remember, never invest more than you can afford to lose.
Should I buy Polkadot (DOT) in 2021?
You have read above that a certain cryptocurrency project, Polkadot (DOT), is working to solve the interoperability issues present in blockchain technology.
Based on what you have heard, you are considering investing some of your hard-earned dollars in this project.
But where do you start your decision making journey to answer the question as to whether or not to invest?
Well, prior to making any investment decision, it is critical that you conduct diligent research into the considered investment.
Reading this section of our guide to Polkadot (DOT) constitutes your first steps along this path.
However, diligent research does not mean reading one article on the subject asset to reach an informed decision.
Never rely on only one opinion, search out many.
Learn as much as you can about the project and when you have armed yourself with this information assess it with regard to your investment goals or limitations.
Then and only then are you ready to answer if you’re ready or not to invest.
In this subsection of our Polkadot coin guide, let's begin our investigation as to whether you should buy Polkadot (DOT) in 2021.
FACTORS IN FAVOR OF BUYING POLKADOT (DOT)
- Polkadot may be viewed as an ecosystem of various blockchains.
- Presently, Polkadot has over 250 applications operating on its blockchain with the projects including new cryptocurrencies, gaming applications, and decentralized finance applications.
- Polkadot provides interoperability between several blockchains allowing for both the transfer of assets and data cross-chain.
- Polkadot has finished in the top five blockchains regarding developer activity, behind Kusama (its canary network) and Cardano. This metric provides investors information concerning the overall progress of the project.
- Polkadot relies on diversification as a price driver. In addition to traditional supply and demand considerations, Polkadot relies on the applications employing smart contracts on its chain to increase price. Major price drivers for Polkadot include: Kusama, Exceedme, PolkaStarter, and PolkaSwap.
- Polkadot has entered into several exceptional partnerships, including: Celer, Ren, and Ocean Protocol.
- On a relative basis, Polkadot is more scalable than its competitors. Polkadot provides both transactional scalability (by fanning out transactions over parallel chains) and economic scalability (by enabling a common set of validators to provide security over multiple chains.
- Polkadot presently scales about 1000 transactions per second compared to Ethereum (max 30 trx/sec), Bitcoin (4.6 trx/sec), Binance (300 trx/sec), and Bitcoin Cash (116 trx/sec). Only Cardano matches Polkadot on this metric. Theoretically, Tron is the sole blockchain scaling faster than Polkadot (2000 trx/sec).
- Polkadot founder, Gavin Wood (also one of the co-founders of Ethereum) has written that with utilizing parachains and multithreading, scales upward of 1,000,000 trx/sec are possible without sacrificing decentralization or security.
- Cross-chain transfers of any type of data or asset is possible on Polkadot (not limited to tokens). Through Polkadot’s availability scheme and novel validity, interchain interaction is secure.
FACTORS AGAINST BUYING POLKADOT (DOT)
- Polkadot (DOT) faces stiff competition with respect to decentralized applications. Competitors include: Ethereum, Tron, the Binance Smart Chain and Cardano.
- While it is true that Polkadot was the 'first mover' regarding interoperability, very quickly other blockchains are challenging Polkadot’s dominance in this area. Additionally, as the cryptocurrency space grows, other smart contract chains could fork adding new attractive features to their platforms adding to the competition facing Polkadot.
Final thoughts on whether you should buy Polkadot (DOT)
This subsection has provided you, the potential investor in Polkadot (DOT), with the key elements to consider in reaching a final decision on this coin.
In reaching a final investment decision many differing opinions should be sought out.
Reliance on one research source is highly discouraged.
It is a given that every individual investor possesses a different present financial circumstance, tolerance for risk, and investment strategy.
These must be weighed in light of the factors and information above provided in finalizing any investment decision.
Please remember, this subsection of the Polkadot coin guide is merely a starting point and should not be deemed a substitute for doing your own diligent research.
And as always, never invest more than you can afford to lose.
Good luck.
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