What Is Polkadot (DOT)?

Polkadot is a scalable, interoperable, and secure network protocol for the next web, built using Substrate, the modular framework that enables the creation of compatible and purpose-built blockchains by composing custom or pre-built components. Projects built with Substrate can therefore run natively on Polkadot.

Polkadot’s sharded blockchain connects several Parachains into a single network, allowing them to exchange data securely and process transactions in parallel. It facilitates upgrades automatically without hard forks, utilizing a governance system managed by DOT native token holders.

Polkadot is also currently the highest value and most secure Proof-of-Stake platform, offering estimated rewards of 13.66% per year with over $12.5 billion in staked value and more than 60% of eligible tokens staked. DOT can be staked on Polkawallet, via major exchanges like Kraken and Binance, or by using a Ledger Nano with Polkadot-JS.

Polkadot Architecture Overview

Polkadot is a sharded multichain network, coordinated by its layer 0 Relay Chain, that processes transactions on several chains in parallel, known as ‘Parachains.’ Parachains derive their security from that of the entire network, significantly improving scalability, upgradability, and interoperability, eliminating the bottlenecks of legacy blockchains, and connecting with external networks via bridges.

Polkadot uses NPoS (Nominated Proof-of-Stake) as its consensus mechanism, designed with the roles of Validators, Collators, and Nominators, to maximize chain security. Stakers interested in maintaining the whole network can run a validator node, Collators maintain Parachain nodes, and DOT holders can stake tokens to participate as Nominators.

Relay Chain

The Relay Chain is the central layer 0 of Polkadot, responsible for the network’s consensus, security, and cross-chain interoperability. It comprises a minimal number of transaction types including, governance, Parachain slot auctions, and participating in NPoS. It focuses on coordinating the system as a whole while delegating more specific functions to the Parachains.

Parachains

Parachains are the specialized shards of Polkadot that allow transactions to be processed in parallel, delivering scalability and handling most of the computation on the network. Parachains most commonly take the form of a blockchain, optimized for specific use cases, and lease dedicated connection slots to the Relay Chain, which validates the connected Parachains to maintain a shared state across the ecosystem. They share in the security of the entire network and communicate with other Parachains using Cross-chain Message Parsing (XCMP).

Parathreads

Parathreads are an interchangeable alternative to Parachains that can temporarily participate in the network on a block-by-block basis, gaining Polkadot security without leasing a dedicated slot. It allows the scarce resource of a Parachain slot to be shared among competing Parathreads, accessing resources for a cheaper pay-as-you-go style fee rather than the equivalent of a long-term contract.

Bridges

Bridges make the Polkadot system compatible with external blockchains, allowing Parachains to trustlessly communicate with them.

Validators

Validators secure the Relay Chain by staking DOT and running nodes, validating Parachains, and participating in consensus with other Validators, receiving staking rewards in return. They play a crucial role in adding new blocks to the Relay Chain and, by extension, to all Parachains, allowing parties to complete cross-chain transactions via the Relay Chain.

Polkadot pays validation rewards equally to all Validators regardless of their stake, with staking rewards then distributed pro-rata to all stakers after the Validator payment is deducted. This incentivizes the nomination of lower-staked Validators to create an equally-staked Validator set.

Collators

Collators maintain a full node for the Relay Chain and a full node for a Parachain. Collators aggregate Parachain transactions to produce new Parachain block candidates to pass to Validators for verification in the shared state of the Polkadot network.

Nominators

Nominators are other DOT holders, helping to secure the Relay Chain by staking DOT and selecting the best performing Validators in return for a share of the staking rewards.

Fishermen

Fishermen are stakers and Parachain full nodes that perform a policing role to monitor the Polkadot network for any bad behavior and report it to Validators. If they are proven correct about a report, they are rewarded but risk losing their stake if they are wrong.

Governance

The development of Polkadot is governed by three types of users:

DOT Holders

Any DOT holder can use their tokens to propose changes to the network and vote on the proposals of others.

The Council

The Council is elected by DOT token holders and responsible for both proposing changes and determining which changes are made. Council member proposals require fewer votes for approval than those by ordinary DOT holders.

The Technical Committee

The Technical Committee is composed of the development teams that are building Polkadot. It can make special proposals in an emergency and are voted in by Council members.

What Benefits Does Polkadot Offer?

Combining this infrastructure and tokenomics, Polkadot delivers several benefits to users, including:

    Limitless Scalability – Parachains connected through bridges grow the network’s utility.
    NPoS Consensus – Open and adaptable consensus mechanism to host different chains.
    Cross-Chain Functionality – Interoperable data and value transfers between chains.
    Governance Mechanism – Clearly defined community governance.
    Upgradeability – Supporting upgrades without requiring hard forks.
    Pooled Security – Connected Parachains benefit from pooled security through Polkadot’s Relay Chain, avoiding isolated smart contract vulnerabilities.
    Defi compatibility – Defi relies on composability, cross-chain communication, value transfers, and integration, all key components of Polkadot.

Top Polkadot Projects

We are witnessing rapid growth in the development of new Polkadot projects, diversified across a range of industry sectors. There is also an increasing trend for major Ethereum and other blockchain-based projects to extend support to the Polkadot ecosystem too.

    Kusama (KSM)
    Acala Network (ACA)
    Reef Finance (REEF)
    Polkastarter (POLS)
    Moonbeam (GLMR)
    Rio Chain (RFUEL)
    Mantra DAO (OM)
    Interlay (PolkaBTC)
    Polkaswap (PSWAP)
    Manta Network (MANTA)
    Exeedme (XED)
    Edgeware (EDG)
    Clover Finance (CLV)
    SpiderDAO (SPDR)
    Laminar (LAMI)
    Darwinia (RING)
    Dock (DOCK)
    Chainlink (LINK)
    Akropolis (AKRO)
    Ontology (ONT)
    Bluzelle (BLZ)
    OriginTrail (TRAC)
    Ankr (ANKR)
    Ocean Protocol (OCEAN)
    Celer Network (CELR)
    Ren (REN)

The Ecosystem to Watch in 2021

Despite the significant market cap growth of Polkadot overall, now consistently in the top five, its valuation ratio has remained largely static against Ethereum. Dan Morehead, founder of blockchain investment fund Pantera Capital and Polkadot investor, suggests it is therefore undervalued comparatively, commenting that:

    “Polkadot is only trading at 10% of the value of Ethereum, and our theory is that
    it has a much higher than 10% chance of being a competitor to Ethereum.”

With over 350 projects already onboard and development currently growing at a rate of 44% a year, Polkadot certainly has momentum on its side, so it’s not unreasonable to expect its market share to increase beyond just 10% of Ethereum as it rides the crypto and defi waves through this latest cycle.

Polkadot shuns the idea that there should only be one blockchain. It represents an era of decentralized scalability, interoperability, composability, and security, not built-out as independent protocols, but as a blockchain of blockchains to bridge the existing infrastructure, ignite new use cases, and become a hub of decentralized finance in 2021 and beyond.