Despite only launching in May 2020, Polkadot is one of the fastest-growing cryptocurrencies on the market. The project continues several of its missions to be the ‘internet of blockchains’ through solid interoperability, innovation, scalability, security, and governance.
The price of Polkadot hit a peak in May 2021 at $49.35 but is presently valued at around $23.93. As a testament to the project’s relevance, Polkadot has firmly been in the top 10 of most traded altcoins for some time now, currently sitting in the ninth position with an impressive market cap of about $23 billion.
The concept of Polkadot is likely too complex for the layman, making it a somewhat unlikely candidate for serious investors.
This article will break down Polkadot in the simplest way possible for better understanding, diving into its history, how it practically works, and why it’s become one of the industry’s quickest-growing and most valuable cryptocurrencies.
So, what exactly is Polkadot?
The best way of conceptualizing Polkadot is thinking of it as the ‘blockchain of blockchains.’ Most cryptocurrencies operate with their own separate distributed ledgers. On the other hand, Polkadot wants all of these to communicate different data sets in a trustless, efficient, and decentralized manner.
Hence, experts technically describe Polkadot as a diverse, proof-of-stake ‘multi-chain architecture’ allowing outer and customized private and public blockchains to relay more than just tokens.
The project enables the simpler creation of a broad range of applications and services within the crypto space. The network’s native cryptocurrency, DOT, is responsible for much of its operations and is created through staking instead of traditional mining.
A brief history of Polkadot
Polkadot falls under the Swiss-based Web3, a non-profit foundation co-founded by Gavin Wood, Robert Habermeier, and Peter Czaban in 2016. Wood is the most recognized of the trio as he’s known for being one of Ethereum’s co-founders.
The invention of Solidity, the programming language used by Ethereum developers for creating decentralized applications, is credited to Wood. Through his extensive software engineering experience, he formed Parity Technologies in 2015 that built Substrate, one of the primary frameworks used on Polkadot for creating various chains.
The first mention of Polkadot came via a whitepaper published in October 2016. As with most cryptocurrencies led by non-profit organizations, Web3 supports the research and development of Polkadot. Web3 conducted Polkadot’s ICO (initial coin offering) in October 2017, raising about $140 million from investors.
This amount makes Polkadot one of the most highly-funded cryptocurrencies in history. The organization held further token sales to private investors in 2019 and 2020.
How does Polkadot work?
This section will break down the components of Polkadot that are arguably the most complex to understand. At its core, Polkadot comprises four unique elements, namely the relay chain, parachain, parathread, and bridges.
The relay chain is at the heart of the entire network, while parachains and parathreads are the independent, user-created external or internal chains. The bridges facilitate the connection between the parachains and parathreads, the latter of which are pretty similar except for a few minor adjustments.
The relay chain deals with block production, security, the interoperability of other chains, and finalizing transactions.
Polkadot employs a nominated proof-of-stake consensus mechanism whereby users need to stake or hold a specific amount of DOT to perform some vital roles, namely validating, nominating, collating, and being ‘fishermen.’
Validators substantiate data from the parachains and vote on any progressive changes. Nominators essentially select the validators through a voting system and delegate some DOT to them.
Collators are responsible for collating data from parachains for inclusion into the relay chain and storing the history of such transactions. Fishermen monitor any unscrupulous behavior on the network. Like all staking systems, DOT holders receive rewards at predetermined periods.
Why is Polkadot valuable?
Polkadot’s value proposition is quite strong. The notion of a blockchain for blockchains is nothing new and is present in several other projects, most notably Ethereum. At a fundamental level, Polkadot seeks to have blockchains operate together instead of in silos as it is presently.
The cryptocurrency wants to take cross-chain composability to levels never imagined before and allow other developers to create advanced distributed ledgers using their Substrate framework in minutes.
The point of connecting blockchains is the luxury of transferring any asset and data types efficiently, allowing for the creation of a heap of next-gen applications that wouldn’t be possible otherwise.
As an ‘internet for blockchains,’ Polkadot ensures developers the best security while providing independent and sophisticated governance. When experts evaluate how valuable Polkadot is, they often compare it to Ethereum.
Although both projects have very similar ambitions, Polkadot is considered more scalable primarily because of using a staking mechanism, unlike Ethereum, which is currently using mining.
It is one of the main reasons for Ethereum 2.0, which will transition Ethereum towards staking to make transactions more scalable. Nonetheless, Polkadot is unique in its own right and is designed quite differently from the rest that also shares identical goals of linking different blockchains.
In Polkadot’s whitepaper, the founders detail the negative stranglehold companies have on the centralized control of data which has become a valuable commodity in recent years.
Blockchain technology seeks to disrupt this process, although Polkadot’s developers acknowledge its deployment has just scratched the surface. As already discussed, the other problem nowadays is interoperability, which is also in its infancy.
There are significant design limitations Polkadot has identified as hindering large-scale embracing. Hence, Polkadot exists to enhance the true capabilities of blockchain technology in an array of interesting fields like finance, governance, data management, and the internet of things, to name a few.