What is Polkadot? (DOT)

Polkadot is a blockchain protocol that provides the basis for building interconnected, specialized chains called parachains.

The founding principle of Polkadot is that all blockchains are not created equal, nor should they be. During the early years of blockchain technology’s advancement, a number of projects emerged and offered slightly different approaches to blockchain security, scaling, decentralization, and governance. The continued variety of solutions to these issues has proven that there is more than one way to accomplish the goals of web3, blockchain, and crypto.

Polkadot provides a platform on which blockchain developers can build their uniquely designed blockchain projects (parachains) using the security, consensus, and transaction settlement of its main blockchain (the Relay Chain).  Additionally, parachains can connect to other networks like Bitcoin and Ethereum through the use of bridges.

In order to provide security and governance to the Polkadot network, the DOT token is used for staking, voting, and to help choose which projects can build in its ecosystem.

POLKADOT ESSENTIALS

• Polkadot is a sharded blockchain that uses a Relay Chain as its base layer and customizable blockchains, called parachains, that connect to it and benefit from its shared security and finality.
• Built by one of Ethereum’s co-founders, Polkadot’s consensus mechanism is called Nominated Proof of Stake (NPoS), which intends to improve decentralization by selecting trustworthy validators democratically.
• Polkadot’s DOT token is used for staking, paying transaction fees, network governance, and as a medium of choosing what projects can build on the network through parachain slot auctions.

How was Polkadot developed?

Polkadot was created by Ethereum co-founder Gavin Wood, along with Robert Habermeier and Peter Czaban.

Wood previously earned a doctorate in computer science and consulted for Microsoft Research. He went on to work on Ethereum in 2014 and co-founded the project with Vitalik Buterin, Charles Hoskinson, and others. After serving as Ethereum’s first CTO, he left and founded Parity Technologies and the Web3 Foundation, who both support the development of Polkadot and its ecosystem.

Through his work with Parity, Wood created Polkadot along with its supporting software development kit (SDK) called Substrate, which serves as the basis for all parachains built on the platform.

The Genesis block of Polkadot launched in May 2020 as a Proof of Authority (PoA) network whose keys were held by the Web3 Foundation. However, after a month of demonstrating network stability it was switched to the Nominated Proof of Stake (NPoS) structure that persists today. In December 2021, the first parachain launched.

The Web3 Foundation held a token pre-sale of DOT in 2017 and raised over 485,000 ETH to support Polkadot’s development (about $144 million at the time).

How does Polkadot work?

The Relay Chain and parachains

Polkadot’s Relay Chain is responsible for operating three of the fundamental functions of the network: the Nominated Proof of Stake (NPoS) consensus mechanism, parachain slot auctions, and the network’s governance mechanism.

The Relay Chain is where the entirety of the Polkadot ecosystem is secured and where transactions are settled and verified by validator nodes. Users who do not wish to be validators, called nominators, can choose to elect trustworthy validators by delegating their staked DOT to them. Both validators and nominators are eligible to receive DOT tokens as a reward for securing the Relay Chain.

All other operations, like the smart contract functionality that powers DeFi and NFTs, are handled by highly customizable parachains that plug into the Relay Chain. Because parachains are built using Polkadot’s Substrate language, their architectures are interoperable, meaning they can exchange information with each other, and communicate through the network’s cross-consensus messaging (XCM) system.

Polkadot’s structure uses sharding, which is the splitting of a blockchain into partitioned chains (parachains) that run in parallel with the aim to increase the system’s efficiency.

Nominated Proof of Stake

Every blockchain-based system needs a way for keepers of the distributed ledger (nodes) to collectively agree on the state of the system. In other words, in order to be a trustworthy and operational network, Polkadot’s individual parts need to be able to reach a consensus.

Bitcoin famously uses a consensus mechanism built on the Proof of Work (PoW) model. Many of its blockchain successors, however, use Proof of Stake (PoS) models that require validators to lock up crypto in order to be able to process transactions and collect network fees.

Polkadot uses a variation of PoS called Nominated PoS (NPoS) to allow anyone to process transactions. In this system, nominators can nominate (through staking) which validators will have the opportunity to process transactions and validate the blockchain data, thus democratizing the consensus mechanism and the participation of its users.

Parachain slot auctions

Currently, the Relay Chain can support up to 100 parachains, a number that is flexible to change by governance vote. Parachain slot auctions function as the mechanism by which holders of the DOT token can decide which parachains will win slots.

During an auction, DOT holders can bond as much DOT as they wish to their favorite projects as a sort of bid. They bond this DOT to the network for the duration of the lease (up to 2 years), which will be returned to them once the lease ends. In return, projects that win a slot will reward their supporters with tokens (or provide other rewards), vested over the duration of their lease.

Polkadot ensures that winners of each auction are chosen through a retroactive mechanism, called a candle auction, to prevent last-minute contributions having an outsized effect on the outcome. After a project wins a parachain slot, the projects can launch their mainnet on the network.

The parachain slot auction mechanism is intended to give every project a shot to win a parachain slot, regardless of the amount of VC funding they receive.

How is the DOT token used?

DOT is used for a number of purposes on the network, including providing security for its network through validator staking. Validators stake their DOT to process transactions across its network, and they risk getting their stake slashed (or lost) if they exhibit misbehavior such as going offline or running modified software.

DOT holders can also stake DOT to vote in governance proposals to make changes to the platform. Each vote is proportional to the amount of cryptocurrency staked, and holders are rewarded with additional tokens for staking and participating.

Lastly, DOT is also used by holders to bid for parachains to secure their slot in the Polkadot ecosystem.

Token distribution

Polkadot initially released 10 million DOT. Of these, 50% were sold during the 2017 auction, 30% were allocated to the Web3 foundation, and 20% were allocated to a pre-sale of DOT. Redenomination of the supply occurred in August 2020 and created new DOT in a ratio of 100:1.

The system is also subject to inflation, which introduces new tokens into the supply. Through inflation, there is no limit on the maximum supply of DOT. Further, the inflation rate is dependent on the rate of DOT staking. If the number of staked tokens is below the ideal rate of 50%, then staking rewards increase to incentivize more staking. The opposite is true, as well. Inflation began at 10% but can be changed over time through governance voting.

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