Today, let’s talk about Polkadot.
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Often referred to as the blockchain of blockchains, Polkadot and its native token dot are among the top 10 cryptocurrencies by market cap. The platform looks to connect different crypto platforms, allowing for interoperability.
We’ll go into exactly what that means later, but all you really need to know for now is that even though there are so many blockchains out there, it’s hard or sometimes even impossible for one blockchain to talk to one another.
In today’s article, we’re going to go over Polkadot and how it’s different from other crypto platforms, as well as factors to consider before investing in Polkadot.
What is Polkadot?
So what is Polkadot? Polkadot is a web 3.0 cryptocurrency created by the web3 foundation in 2017. One of its main goals is to create a platform that bridges different blockchains. Its founders are dr Gavin wood, Robert Obermeyer, and Peter Saban. Now Gavin wood is the most well-known of the bunch as he was the co-founder of Ethereum, and he created the smart contract coding language called solidity.
The main thing Polkadot aims to solve is that there’s constantly these new blockchains and new cryptocurrencies coming to market, and each one is slightly different from the next. So Polkadot was started to tackle this exact issue. First, let’s talk about the blockchain and do a quick refresher on it because it will help you understand the rest of the article. A blockchain is a digital database that stores transactions in a readable format. As information is collected and recorded, data is added as lines into different blocks. That’s when you put all these databases or blocks together. That’s when you have a blockchain. Different projects have different blockchain architecture, so Cardano will have a different type of architecture than Solana, which is going to have a different architecture from Ethereum etc. As mainstream popularity and adoption increase, I think it’s pretty safe to say that we’re going to see the number of projects also increase, which means interoperability will be increasingly important. Interoperability is the ability of computer systems or software to exchange information.
As of early November 2021, there are over 13 000 cryptocurrencies in existence, and the main problem they’re all going to run into is that they can’t talk to each other, and if they can, it’s going to be slow and inefficient. And that’s where Polkadot will ultimately come in. Polkadot aims to be the first layer zero protocol. Which allows different types of cryptocurrencies to operate seamlessly and effectively.
Layer 0 Protocol vs Layer 1 vs Layer 2
Think of individual blockchains like Ethereum and bitcoin. They have their blockchain architecture and are their ecosystem. These are considered layer one. Then there are layer two protocols. That would be something like polygon, a crypto network built upon the Ethereum chain. Layer ones and layer twos usually work quite well with each other since layer two solutions are typically built on the layer one architecture, so it will naturally use layer one architecture and be able to communicate easily and effectively.
But an individual layer one does not work well with another individual layer one. That would be like Cardano trying to work with Ethereum or Ethereum trying to work with bitcoin. They have two completely different blockchain architectures. So that’s what actually Polkadot is aiming to be. They want to be layer zero to allow all of these blockchains to coexist and communicate with each other. So how does Polkadot achieve this by using its uniquely designed technology? Polkadot can help bridge popular applications like Ethereum and bitcoin together. Let’s say I made a token or a Humphrey coin, as you will. Maybe I’ll call it to hop coin for short to track user spending habits. I then want to sync my hump coin with a smart contract platform like Cardano well Polkadot can then act as a bridge between the hump coin and Cardano. The technology behind Polkadot is what’s special. They have what’s called a hub and spoke model. They call the hub a relay chain that uses proof of stake and connects other networks to achieve consensus. This provides security and financial incentive as people stake their dot inside the relay chain, the hub where you can pretty much get high rewards, but we’re going to talk about that at the end of this article. Now, if the relay chain is the hub, there are also spokes to that hub, which are called para chains in the Polkadot ecosystem.
How does Polkadot Work?
The parachains or spokes are customized to whatever blockchain they connect to. This allows specific use cases and functions to remain the same regardless of its two different blockchains interacting with each other. Let’s say I wanted to make a Humphrey coin to simplify this even more. And Cardano interacts with each other one of Polkadot’s parachains or the spoke would connect to Humphrey coin, and another pair chain would connect to Cardano because each pair chain can be customized for each crypto. It doesn’t matter that the Humphrey coin and Cardano are different.
Data is then moved from the Humphrey coin through the pair chain or the spoke and into the relay chain or the hub where the magic occurs. This is a super simplified example, but this is at its core how Polkadot operates. The proof of stake in the relay chain or the hub provides Polkadot with the second differentiating factor, a shared or pooled security model. Smaller blockchains might not have enough power to block a massive cyberattack. Still, by using Polkadot, they can sync or pool together their resources in this hub to provide additional security for each other. It’s kind of like a strength in numbers type of thing like my favorite basketball team, the Golden State Warriors. Although to be fair, it’s not strength in numbers. It just really strengthens Steph Curry.:)
This will give platforms that use Polkadot a lot of security scalability. Coins that rely on their security must expend much more effort to grow the value of their coin so that it’s efficiently secured against well-funded attackers. In other words, if I were to release my xyz coin tomorrow, I would need to make sure that I provide enough economic value for people to hold and save their coins; otherwise, there could be a security risk for my coin.
The alternative is I could just use Polkadot scalability to give me a boost in security from the get-go. Now there are a ton of different cool and technical aspects of Polkadots tech I didn’t cover, but I’m going to leave some resources for you guys in the description below in case you want to do more research.
All right, so let’s talk about the dot token now. Similar to how Ethereum’s native token is called ether Polkadot’s native token is dot.
Token ( DOT)
The ICO, or the initial coin offering from Polkadot, took place in 2017 and is known as one of the most successful icos in history, raising over 200 million dollars in fundraising. Polkadot’s native coin dot launched in late 2020, and currently, there sit about 987 million dot coins in supply.
By owning dot, also entitles you to control governance on the platform, which includes determining the fees of the network, the addition or removal of parachains and any upgrades to the platform as well. You can also stake dot to help the network run and get pretty high rewards. İn terms of the tokenomics dot are inflationary, which combats the large amount that’s going to be staked on the platform. A little bit of inflation is necessary to keep things in balance. If all the dot tokens are actually locked up by staking, then the supply would dry up, and the price of the dot would get too high disincentivizing future developers to get on the network.
The other thing that I want to quickly bring up is that Polkadot has a predecessor named Kusama, which is an experimental version of Polkadot.
Experimental predecessors are called canary networks, and canary networks are important because it allows developers and users to test the usability of a coin or use case before it’s released in a more live state. Anyways Kusama is the testing or staging area of Polkadot so that developers can test things before they get deployed to the real network. In terms of how much development activity is going on these days, if we look at the GitHub logs, we can see that both Polkadot and Kusama have the most commits as of November 23rd and while not all days have Polkadot and Kusama at number one and number two there are plenty of other days where it is consistently in the top of these lists.
I think this is a pretty good indicator for where development activity is, so it’s a testament to Polka dot and Kusama because that’s where the developers are gravitating towards. All right, so let’s talk about the price of Polka dot and where you can buy it.
Where You Can Buy?
Now you would think that since Polkadot is a top 10 cryptocurrency, you’d be able to purchase it on all the exchanges, but right now, for us users, you can only find it on Coinbase Gemini Kraken and crypto.com. It’s not available on FTX or Robinhood or Binance us.
Market Cap Comprasion
At the time of this article, Polkadot is trading between 38 and 42 dollars per dot token with a total market cap of roughly 40 billion dollars.
To give you guys some context around that market cap, bitcoin sits at around 1.1 trillion, and Ethereum usually hovers around 500 billion and the global gold market cap is around 11 trillion dollars. Now since Polkadot is more similar to Ethereum than it is to Bitcoin, we’ll actually use Ethereum as our first market cap example. If Polkadot achieves a market cap of around 500 billion dollars, the price of the dot token should go from the 40s to about 500 dollars per dot token. Now it’s quite difficult to say whether or not Polkadot can actually achieve this large of a market cap or how soon it can achieve it. It would take a lot for Polkadot to reach Ethereum’s market cap and the value of Polkadot seems to be comprised of all the potential value it can bring to other platforms as well. So, it’s more of a rising tide lifts all boat type of situation if the crypto market cap gets larger as a whole and Polkadot becomes the ultimate layer zero solution, then we could see it grow and play a much larger role in cryptocurrency.
Polkadot is still a relatively new altcoin in the grand scheme of things. It only started trading in august of 2020, and since dots launched, it’s almost increased already a thousand percent in value. Its all-time high was 54.98 dollars reached in November along with Bitcoin and Ethereum’s all-time high. Now since it hasn’t been around that long, it’s going to be hard to tell how it will perform in a big bear market. During the July crypto dip, for example, dot dropped from its previous all-time high of around 48 dollars to 10.98 cents which was a whopping 77 percent decrease.
That’s some crazy volatility, so basically, when you’re investing in cryptocurrency, it’s good to know how it sits among your entire portfolio. Since crypto seems to be one of the most volatile asset classes out there and, more specifically, altcoins especially, it’s important to ensure that you’re not 100 exposed to crypto unless you’re willing to stomach that volatility and you’re okay withholding or even adding to your position if the crypto market goes down.
Factors to Consider
Let’s talk about some factors to consider when investing in Polkadot. So earlier, we talked about the supply Polkadot does not have a cap on its current supply and, as I mentioned earlier, is inflationary. Now it doesn’t have a fixed inflation rate, but I believe that it was around ten annually when I read the wiki online. Now, I usually like deflationary cryptocurrencies, but I understand why Polkadot has to be inflationary if so much of the token is being staked.
The next category is diversification. Since Polkadot aims to provide interoperability to other cryptos, it could be a good value add to your crypto portfolio. Their goal gives them a unique value proposition in the crypto space. However, they are, quite young, and it’s a bit too early to tell if they're going to be the de facto layer zero protocol. However, the current Polkadot ecosystem is quite large, so it’s already a high use case of Polkadot in its current stage.
Next, let’s talk about staking because the Polka dot network relies heavily on staking. You can actually get some solid rewards for staking dot tokens. The typical rewards currently range from around 12 to 15 percent that’s better than Ethereum Solana and even Cardano’s six percent APY staking rewards.
I still recommend that you do your own due diligence and research Polkadot on your own time. Personally, I do think that the applications for Polkadot could be huge in the future, but we’re just going to have to wait and see how big of an impact it’s going to be.
Thank you!