What is Polkadot?

Within a year after its launch in 2021, Polkadot rose to become one of the largest cryptocurrencies by market cap. As of August, 2023, Polkadot, also known by its ticker, DOT, was the twelfth largest cryptocurrency by market capitalization according to CoinMarketCap.

The Polkadot ecosystem is different than bitcoin. DOT has more in common with Ethereum, a blockchain that allows for smart contracts — self-enforcing bits of computer code that automate transactions when certain conditions are met. (Want to take out a loan or trade crypto without relying on any intermediaries? Smart contracts allow you to do that).

However, Polkadot innovates on Ethereum in a coulpe major ways: it’s far cheaper and quicker, and it can connect with different blockchains.

That second difference is a real game-changer for the crypto market. Blockchains, as complicated and revolutionary as they are, have a tough time communicating with each other. Polkadot makes interoperability a lot more manageable. It also manages to connect “public” chains like Bitcoin with “private” chains that business consortiums use to process transactions.

Blockchains, explained

Blockchains are, at their core, decentralized payments networks. Instead of relying on a central bank to mint currencies and a vast network of bankers to validate transactions, blockchains strive for complete decentralization.

No central banks! No intermediaries! Instead of large institutions calling the shots, a vast network of interconnected computers process transactions according to irrefutable rules coded into the blockchain. These transactions are processed in batches (“block…”) and strung together on a public ledger (“…chain”).

How Polkadot works

The Polkadot was created in 2020 by Dr. Gavin Wood, one of Ethereum’s co-founders, as well as Robert Habermeier and Peter Czaban. They run Polkadot through the Web3 Foundation, of which Wood is also president. As well as co-founding Ethereum, Wood also created the programming language that Ethereum uses: Solidity.

The Polkadot blockchain is really like a network of different blockchains that are split into four separate parts. First comes the “Relay Chain,” the main blockchain that uses DOT as its currency. The Relay chain, launched in May 2020, doesn’t support smart contracts and decentralized applications; it’s more of the main chain connecting lots of different blockchains and coordinates the Polkadot network as a whole.

The smaller blockchains that connect to the Relay chain are called “Parachains.” After years of research and development, parachains finally went live on December 18, 2021. This is one of the most awaited network upgrades on the Polkadot ecosystem. Parachains are independent blockchains that run their own tokens. They share and benefit from the flexibility, scalability, interoperability, and governance of Polkadot.

This is, so far, fairly similar to the principle of the Ethereum blockchain, which uses ETH as its main currency and supports an unlimited number of separate smart-contract-powered tokens, each of which connects to the main Ethereum blockchain.

The difference is that parachains actually perform a lot of this computational work themselves while simultaneously remaining connected to the Relay chain at all times. In addition, while Ethereum smart contracts must follow Ethereum’s logic, Polkadot’s parachains can do whatever they like, so long as they can communicate with the Relay chain.

Five of the biggest players in the Polkadot ecosystem won the first five parachain auctions (in order: Acala, Moonbeam, Astar, Parallel Finance, and Clover Finance). On Dec. 18, 2021, all five parachain projects went live on the Polkadot network. After that, as of March 30, 2022, seven more parachain auctions have been completed. Ultimately, Polkadot will offer 100 parachain slots. The remaining slots will be allocated in batches over the coming months.

Polkadot also takes things a little further. The third part of the network is “parathreads.” These are technically similar to parachains, but are cheaper and operate through a “pay as you go” model. As the Polkadot ecosystem can only support 100 parachains, parathreads will increase the number of applications that can operate on the Polkadot network by pooling them to share parachain slots. A parathread might use some of the computing power assigned to a parachain as necessary. It’s an economical way for smaller blockchain projects to pool resources together instead of spending millions on buying a whole parachain slot and getting your assets frozen for up to 96 weeks.

The final component of Polkadot is the “bridge,” which allows these parachains and parathreads to work with other blockchains, such as Ethereum, Bitcoin, or Tezos. For instance, imagine you wanted to use your Bitcoin in a smart contract on Polkadot. Now imagine that you want to trade that Bitcoin for Ethereum on a decentralized trading platform (an automated cryptocurrency trading platform that runs on smart contracts) that is based on Polkadot.

Polkadot’s bridge would let you send that Bitcoin to Polkadot, which would then convert it to a Polkadot-compliant version of Bitcoin called PolkaBTC. You could then sell it for PolkaETH, and then convert that PolkaETH to real Ethereum. It’s complicated, sure, and likely to be far more unwieldy than using a regular cryptocurrency trading platform. But if Polkadot manages to pull it off and make it convenient to use, such a service could replace regular cryptocurrency trading platforms.

Polkadot governance

Polkadot uses sophisticated techniques that stand out from many other previous coin-voting systems. Polkadot governance is based on the concept of stake-weighted voting, in which DOT token holders vote with their stakes to modify the system parameters like changing the base code, updating the runtime, updating balances, and much more.

All Polkadot network upgrades must be approved by a stake-weighted majority. The Polkadot DOT token is at the center of low-friction and direct engagement with suggestions made by the community. In addition to voting, DOT holders can boost the weight of their vote by locking the Polkadot token for prolonged periods.

How to mine Polkadot

The Polkadot blockchain will process transactions through something called nominated proof-of-stake. This is how you “mine” new DOT tokens, and it’s the way the blockchain processes transactions. To process transactions on a blockchain, lots of different computers have to approve transactions. It’s a way of ensuring that someone doesn’t, say, process the same transaction twice to fool the network — known as the “double spend” problem. This is what is known as its consensus algorithm.

On the original blockchain, Bitcoin, a vast network of miners expend a lot of computing power to process these transactions. As the network grew more and more each year, so did the amount of computing power required to maintain the Bitcoin network and process the growing number of transactions. Since many Bitcoin miners are powered by fossil fuels, this whole process is terrible for the environment and incredibly wasteful.

One solution, employed by Polkadot, is proof-of-stake. This allows those with the largest amount of coins to validate transactions. The idea is that big bagholders are perfect for this, since corrupting the network would crash the value of all of their tokens. The advantage of proof-of-stake is that it’s not so bad for the environment because you don’t need to spend money on containers full of very powerful (and expensive) computers. For their work, proof-of-stake miners (also known as “bakers”) are rewarded with freshly-minted coins.

The disadvantage to proof-of-stake is that the rich keep on getting richer. The new face of finance thus seems to mirror the rampant inequality of the old financial system that crypto sought to replace. It’s a sacrifice that a lot of environmentally conscious crypto developers are more than willing to make. Bitcoin, as of March 2022, consumes around 204.50 terawatt-hours (TWh) per year, more than a country like Thailand and Poland, according to Alex de Vries, founder of Digiconomist, a site that tracks the energy consumption of cryptocurrencies. Right now, the average energy consumption of a single Bitcoin transaction is around 2165 kWh, which can power more than 1.4 million Visa transactions.

Proof-of-stake is growing in popularity. Ethereum, Polkadot’s main rival, moved to a proof-of-stake chain in 2022. Rivals Algorand and Tezos implement proof-of-stake chains as well.

How to buy Polkadot

Crypto trading platforms

The main way to buy and sell Polkadot token is through a centralized cryptocurrency trading platform. Cryptocurrency trading platforms run matching engines that let you buy and sell crypto from other users and place complex trades.

The most popular market for Polkadot is the USDT pairing. Bitcoin is another popular pairing, and you can also trade directly for US dollars on some crypto trading platforms.

To buy DOT from a crypto trading platform, you’ll first have to sign up. For this, you’ll likely have to complete the know-your-customer (KYC) and other verification procedures. Upon approval, you’ll either have to deposit some of the cryptocurrency that DOT trades against or deposit regular money and then use that to buy DOT tokens outright, or crypto that is paired with DOT.

Note that buying and selling crypto on cryptocurrency trading platforms comes with a few risks; crypto trading platforms hold money on your behalf and could be hacked or shut down at any point. This has happened several times: the most notable incident was when Mt. Gox, a crypto trading platform responsible for over 70% of all Bitcoin transactions in 2014, was suddenly hacked for 850,000 bitcoin.

Crypto brokerages

Some popular crypto brokerages do not support Polkadot. You’ll mostly find top digital currencies like Bitcoin on these platforms. But there are brokerages that let you buy and sell Polkadot tokens directly with fiat currency.

Decentralized platforms

If you like to use decentralized crypto trading platforms then you can use PancakeSwap to buy and sell the BSC version of the DOT token (not the real version). Confused? As PancakeSwap is built on the BSC network, not on the Polkadot network, you’re not going to get the real DOT but a BSC version. This method is preferable only if you love DEXs and don’t like to involve a central authority.

Increasing growth and popularity of Polkadot

The price of Polkadot (DOT) is, like many cryptocurrencies, volatile. However, it has increased a great deal since its launch. In August 2020, a single DOT coin was worth about $3. At its peak, DOT rose as high as $53.88 in September and November of 2021. By August of 2023, however, the price had dropped back down to $4.55.

Polkadot is also making partnerships with some of the huge names in the industry. Europe’s largest telecom provider by revenue, Deutsche Telekom, partnered with Polkadot and invested significantly in Polkadot (DOT) token. T-Systems, a subsidiary of Deutsche Telecom, will run multiple Polkadot validators to increase the network’s security.

Due to low transaction fees and high processing speed, the number of companies accepting the Polkadot token increased rapidly. You can buy watches from Pita Bar in Barcelona or buy fashion accessories from Heir-Max in Nashville using DOT tokens. You can buy gift cards using Polkadot with Coinsbee to shop on Amazon and other popular websites. There are also many Polkadot payment gateways like NOWPayments which allow individuals and businesses to accept Polkadot payments instantly.