Polkadot operates a sharded blockchain structure consisting of a central Relay chain and up to 100 shard chains, known as parachains. Projects can compete to lease a parachain in an auction, for which they can also run a crowd loan to raise funds in the native DOT token. The auction and crowd loan processes introduce an additional gamified element to the Polkadot ecosystem dynamic.
The Relay chain uses Polkadot’s consensus protocol, called Nominated Proof of Stake, in which a pool of validators stake DOT for the chance to validate blocks and earn rewards. Validators are selected by the process of nomination, whereby users delegate their stake to a chosen validator to nominate them for inclusion in the pool.
There is no cap on the maximum supply of DOT, and new tokens are minted according to the protocol’s staking mechanism, which adjusts the inflation rate (typically around 10%) depending on the amount of staked DOT. The initial supply was one billion tokens at the launch of the Relay chain in May 2020, and the supply is on course to reach 1.5 billion by 2025.
Polkadot Price Charts
Like many platform cryptocurrencies, DOT’s price is linked to demand for block space on the Relay chain since it is used to pay transaction fees. Demand for staking DOT can also exert an influence on price.
However, the price of DOT and demand for staking are also linked to the parachain auction and crowd loan process as part of the DOT tokenomic design. The crowd loan process enables holders to lend DOT to projects for the duration of the parachain lease. During this time, their DOT is locked and cannot be used for other functions.
In requesting crowd loans, projects are effectively asking holders to forego staking rewards, so they must be able to offer competitive rewards in return.
However, the staking algorithm also adjusts to increase the rate of DOT inflation (i.e., increase staking rewards) if levels of staked DOT begin to drop. The parachain lease process introduces a unique dimension to Polkadot tokenomics and should be considered in any fundamental analysis.
The historical price patterns of DOT, together with a relatively strong correlation with the broader crypto markets, also offer scope for technical analysis.
DOT Price and its History
DOT was first issued as a pre-mainnet ERC-20 token in 2017, and several token sales funded the development of the project over the coming years. When the Relay chain launched on mainnet in August 2020, the new native DOT set an initial trading value of $2.69. It went on to achieve two new highs – around $48 in May 2021, and $55 in November 2021.
During the same time as these two price peaks, the cryptocurrency market was also in very bullish territory. Indeed, Bitcoin’s 2021 highs came in April and November. Therefore, it’s difficult to attribute the DOT price peaks to any fundamental factors linked to the project’s development. Polkadot’s first parachain auctions took place in December 2021, which could account for a small, brief price recovery on the way back down from the all-time high.
DOT prices fell below $10 in mid-2022, and until the crypto market recovery in early 2024, the token traded at a price range of $5 to $10. Following the news that the US Securities and Exchange Commission had approved Bitcoin ETFs, which lifted the digital asset markets as a whole, DOT posted a new yearly high above $11.50.
Due to its popularity, DOT has at times been ranked in the top ten cryptocurrencies by market cap. However, it has more recently fallen into the top twenty, with tokens from such as Cardano and Avalanche proving to be close competitors.
In April 2024, Gavin Wood announced a new upgrade for Polkadot called JAM, which is designed to bring an Ethereum-like smart contract application layer to the Polkadot platform, eliminating the need to operate a full parachain. Developments such as this could increase demand for DOT in the long term if the upgrade is successful enough to attract a mass user base.
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Conclusion
- Polkadot is a blockchain protocol designed to be scalable and interoperable, which uses DOT as its native cryptocurrency.
- Demand for DOT is driven by use cases, including staking, payment of transaction fees, and lending in crowd loans for the leasing of parachain slots, which are sharded chains in the Polkadot network.
- Since trading began in 2017, ADA prices peaked at $3.10 in 2021 following the successful launch of smart contract functionality. However, prices have largely performed in line with the broader crypto markets since the high.