What is Polkadot?

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robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Just a year after launch, Polkadot is now one of the largest cryptocurrencies by market cap. As of May, 2021, Polkadot, also known by its ticker, DOT, is the fifth largest cryptocurrency by market capitalization, with each of the 939 million DOT in circulation worth $37. That amounts to a market of $35 billion.

Polkadot is different than Bitcoin, the original cryptocurrency created in 2008 by the pseudonymous developer, Satoshi Nakamoto. 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).

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However, Polkadot innovates on Ethereum in a few major ways. First, it’s far cheaper and quicker. Next, it’s more environmentally friendly (although Ethereum is set to catch up). And finally, it can connect with other blockchains.

This final point is a real gamechanger 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.

What are blockchains?

Before diving into the details, here’s a brief primer on all things blockchain. 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”).

Polkadot was created by Dr. Gavin Wood, one of Ethereum’s co-founders, as well as Robert Habermeirer 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. Polkadot partially launched in 2020 and is yet to roll out some of its features.

How does Polkadot work?

The Polkadot blockchain is really like a network of blockchains that’s 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; it’s more of a main chain connecting lots of other blockchains and coordinates the Polkadot network as a whole.

The smaller blockchains that connect to the Relay chain are called “parachains.” These are independent blockchains that run their own tokens. Polkadot plans to launch several parachains in 2021.

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 connect 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.

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. 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.

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 exchange (an automated cryptocurrency exchange 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 exchange. But if Polkadot manages to pull it off and make it convenient to use, such a service could replace regular cryptocurrency exchanges.

How can you mine Polkadot?

The Polkadot blockchain will process transactions through something called nominated proof-of-stake. This is how you “mine” Polkadot, 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 a large proportion of 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 May, 2021, consumes a similar amount of power as the Netherlands, according to Alex de Vries, founder of Digiconomist, a site that tracks the energy consumption of cryptocurrencies.

Proof-of-stake is growing in popularity. Etheruem, Polkadot’s main rival, plans to move to a proof-of-stake chain in 2021. Rivals Algorand and Tezos already implement proof-of-stake chains.

How can you buy Polkadot?

The main way to buy it is through a cryptocurrency exchange, such as Binance or Kraken. These are similar in practice to a crypto version of, say, Robinhood or Fidelity or Charles Schwab. The cryptocurrency exchanges 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 on Binance. As of May, 2021, this accounted for about 20% of all trading volume. USDT, or Tether, is a so-called stablecoin that is pegged to the US dollar. In fact, four of the top ten pairings for DOT use USDT. Other popular pairings are for Bitcoin, BUSD (Binance’s own US dollar-pegged stablecoin), and directly for US dollars on crypto exchange Kraken.

To buy DOT from a crypto exchange, you’ll first have to sign up. For this, you’ll likely have to submit some form of identity verification, such as a driving licence or passport. 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 outright, or a crypto that is paired with DOT.

Note that crypto trading on exchanges comes with a few risks; crypto exchanges 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 exchange responsible for 70% of all Bitcoin transactions in 2014, was suddenly hacked for 850,000 bitcoins. Most of that stolen Bitcoin is yet to be returned to customers.

But even as the crypto exchange straightens out—in April, 2021, Coinbase launched on the NASDAQ, a true sign of legitimacy—things are still murky. In May, 2021, reports surfaced that crypto exchange Binance, one of the largest in the world, was the target of a money laundering and tax evasion probe from the U.S. Internal Revenue Service and the Department of Justice.

Popular crypto brokerages Robinhood, Coinbase, and PayPal do not yet support Polkadot. Perhaps understandably: The coin is just a year old and major features, such as parachains and parathreads, are yet to be implemented.

The price of Polkadot is, like many cryptocurrencies, volatile. However, it has increased massively since its launch. In August, 2020, a single DOT coin was worth about $3. At its peak in the bull run, which started in October 2020 and continued for the first half of 2021, DOT rose as high as $49.69. Not bad for a coin that launched a year before. The success of Polkadot’s rollout of more advanced features will no doubt shape the future price of the coin.

Last Updated June 29, 2021

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