Polkadot: All You Need to Know and how you can benefit from it

What is Polkadot
Written by Rory Ovedje

Polkadot is a blockchain for blockchains. It was founded in 2016 by a former Ethereum co-founder, Gavin James Wood, he is an English computer scientist, co-founder of Ethereum and creator of Polkadot and Kusama.

Why is Polkadot referred to as a blockchain for blockchains? It’s an interoperability blockchain protocol. It can connect networks of diverse blockchains into a single ecosystem. Polkadot aims to help software developers, and startups, make efficient use of blockchain as a technology. In other words, you can build on Polkadot while connecting assets to or from other blockchain networks.

Polkadot provides scalable and customizable blockchains. It claims to allow for speedy transactions, cross-chain communication, transparent governance, and offers an easy way to upgrade blockchains.

How Does Polkadot Work?

How is Polkadot a blockchain for blockchains? What are the blockchains under it called? 

How do they connect?

Read on, let’s find out.

Meta Protocol

You can refer to Polkadot as a blockchain for blockchains because of the underlying protocol; a meta protocol. A meta-protocol is a protocol on which you can place basic protocols. A basic protocol is created to serve particular functions and is difficult to alter. Examples are smart contract protocols. 

A meta protocol sits under protocols like a foundation defining the capacity of the protocols on it. Like fertile land, it can accommodate an estate, a farm, artificial water bodies like wells, a mall, or a skyscraper. It remains as abstract and flexible as possible.

The meta protocol used for this project is the Web Assembly protocol. The Web Assembly protocol is a meta protocol designed through the collective contributions of Google, Mozilla, and Microsoft. It had undergone lots of interactions and was deemed a good foundation to build a meta protocol by Parity Technologies.

Relay chain

The relay chain is the layer 0 protocol on Polkadot. It allows all the parachains in the network to relate with each other. It allows for the processing of transactions from all chains in the network at the same time. Summarily, the relay chain only handles security, network consensus, and cross-chain interoperability. 

It takes a lot of work to secure a relay chain. It could involve mining or locking up stakes to ensure the rules of protocol are upheld.

Polkadot uses a nominated proof of stake to secure the relay chain. Validators secure the relay chain by staking their dots for a chance to run nodes 24/7 producing blocks and earning Dots in return. 

They also validate proofs from collators and participate in consensus with other validators. Nominators do their part of securing the relay chain by selecting trustworthy and competent validators and staking dots. Validators and nominators work to secure the relay chain to avoid slashes and huge losses.

Parachains

The Launch of Parachains. The staged launch of Polkadot is about… | by  Gavin Wood | Polkadot Network | Medium
Polkadot Parachains

The ability for all blockchains on Polkadot to process transactions separately at the same time is why they are called parachains. They run separately from each other, processing data simultaneously.

Prachains are the primary users of Polkadot’s security. Parachain users lock their Dot tokens to have space in the relay chain. With Polkadot’s locking system, parachains can have their logic of how to use their locked tokens to vote in referendums. 

They can handle payments, staking, messaging, smart contracts and many other functions a blockchain can support. A parachain can be optimized for specific use purposes. 

Teams and enterprises can lease to build on parachains. However, parachains are only assigned to the winners of parachain slot auctions. The first parachain slot auction will start on the 11th of November, 2021.

These slot auctions do not follow the typical auction process where parachains go to the highest bidder. The candle auction method is used instead. The candle auction is used to avoid useless projects from coming on the network just because they can afford it.

Currently, there are 100 parachain slots but not all will be allocated via parachain slot auctions. Some will be used for governance-voted parachains (aka system chains) and parathreads.

Parathreads

Parathreads allows users to verify blocks as they need to. It is cheaper than parachains and ideal for businesses that don’t transact data as frequently as per seconds. They operate on a block-by-block, pay-as-you-go basis.

Once the 6-24 months lease on a parachain is expired and not renewed, projects will still seize to transact blocks on Polkadot automatically, but can still maintain connection and use parathreads as the need arises.

The parathreads package will operate on unleased parachains.

Bridges

Blockchain Bridges

Polkadot is designed with bridges that support interoperability between parachains and external blockchains. This enables parachains to securely communicate with each other and external blockchains in a trustless environment.

Substrate

A substrate is a modular development framework. The billing time for using Polkadot can be reduced using Substrate. Substrate and Polkadot are separate technologies. They are designed to work together, but they can function separately.

This ability to secure unique and independent blockchains through a meta protocol, relay chain, parachains, and parathreads, makes Polkadot a united network of sovereign systems.

Dot

Dot token is the name of Polkadot’s native currency. It was denominated in July 2020 by a factor of 100:1. This move was to make Dot easy to reconcile when calculating transactions and appear affordable to investors.

Dot is used to make payments, participate in governance, stake, pay network fees, and for bonding. After the slash by a hundredfold in July 2020, Dot has been on a steady rise to the moon. It currently ranks as the top 5 cryptocurrencies by market cap.

More so, Dot tokens don’t have a fixed total supply. In any given year, the supply of Dot cannot increase by more than 10%.

Founders/Team

Polkadot is the leading project in the Web3 Foundation, a non-profit. It was founded in 2016 by Dr Gavin Wood. Gavin Wood is one of the original co-founders of Ethereum. He coded the first functional version of ethereum. Amazing, right? He was CTO and is credited with being part of the team that created Solidity programming language —Ethereum’s programming language. 

Bill Laboon is the Technical Education Lead at Web3 Foundation.

Investments and Funding

Polkadot was founded in 2016 when its whitepaper was published. The project raised $145 million in its first token sale. It launched its main net in May 2020. 

In July 2020 it raised another $43.3m in ICO.

Digital Finance Group (DFG) announced in a blog post to disclose an exclusive Polkadot Ecosystem Fund that will count with $20 million focused on assisting and promoting the top-tier projects of each sector being developed in this space.

What Problem is Polkadot solving?

Polkadot is the first protocol to connect diverse blockchains and allow them to communicate securely at scale in a decentralized way.

Gavin Wood decided to create Polkadot because he didn’t find blockchain maximalism reasonable. He is a big supporter of innovation in the Web 3 space and reasoned that blockchain maximalism doesn’t reward creativity. 

Blockchain maximalism is when people only favour a type of blockchain technology at the expense of embracing the potential for innovation accepting other blockchains offers. His goal for Polkadot in his words is to “make blockchain great again”.

Polkadot solves the following problems:

1). Communication barriers.

2). Bottlenecks and High Transaction Fees.

3). Centralized Governance

4). Forks

5). Blockchain maximalism.

Communication Barriers

Polkadot seeks to reduce barriers to entry, making blockchain accessible and practical to teams innovating real-world solutions. Its cross-chain messaging allows users to exchange and manage data like token, account balance, and information safely online. This feature of interoperability promotes innovation on new use cases that leverage the capability of different chains, eg. DeFi, gaming, IoTs, social media, and supply chain logistics apps.

Bottlenecks and High Fees

Typical blockchains composed of single blockchain systems can only process a limited amount of transactions per second. This leads to delay and increased transaction fees. For instance, ethereum processes 15 tps. Polkadot on the other hand can process 1000 tps on each parachain.

Centralized Governance

On other blockchains like Ethereum, the decision of a small group of stakeholders can affect the operations of the entire network. For instance, in ethereum, you have to use Eth to carry out transactions in the system.

On Polkadot, a parachain can create its tokens for transactions within its ecosystem, and with other blockchains and customers. Parachain teams have complete sovereignty and are free to govern their blockchains as they deem fit. The Polkadot ecosystem is dynamic yet orderly.

On the relay chain level, Polkadot is governed by all stakeholders who wish to participate; proposing and voting on referendums using Polkadot’s native token: Dot. Upon consensus, the Web Assembly executes the instruction set across all nodes. No one party can disrupt the ecosystem.

Forks

Parachain teams can bring new features to their blockchain on Polkadot easily and faster than with other blockchain protocols. The process for upgrading other blockchains such as Ethereum, Cardano, etc, requires a lot of work and can incur the risk of a fork, and community split.

A fork occurs when some nodes that recognize the new changes in a blockchain’s logic cease to agree with nodes that do not. The blockchain ends up having fractions that will not recognize blocks the same way. 

Polkadot has a Web Assembly execution host in its nodes that enables it to enforce runtime upgrades based on the consensus of stakeholders on Polkadot. Once there’s a consensus, the upgrade is automatically executed following the established instruction set. This is a forkless on-chain upgrade.

The upgrades are proposed and approved through the on-chain governance system. Web Assembly executes it across all nodes.

Blockchain maximalism

Gavin Wood calls Polkadot “the biggest bet against blockchain maximalism.” It enables bridges. Bridges also allow parachains to use other networks like Bitcoin, and Ethereum for cross-network communication and functionality. 

Polkadot’s project Moon Bee has developed technology for the transfer of assets between ethereum and Polkadot by providing compatibility with the EVM. By implication, Defi users will be able to interact on both chains.

More than 300 projects are already being built on Polkadot. They are creating solutions like developer tooling, oracles, DeFi apps, gaming, NFTs and prediction markets. Polkadot makes blockchain technology available for teams innovating real-world applications to create a better future. Examples of such applications are:

1). Bridges: ChainX, Interlay and Darwinia.

2). Oracles: ZK Oracle, ChainLink, and PolkaOracle, 

3). DeFi smart contracts: RioChain, Altair, and MathChain.

4). NFT: Chads.VC, Banksy Finance, and NFTMart.

5). Identity validators: KILT protocol and Litentry.

6). Privacy: LayerX, Gunclear, and Phala Network.

Polkadot was created to promote interoperability, scalability, compatible blockchains, and low transaction fees without sacrificing decentralization. As given, it keeps being integrated to guarantee decentralization and security.

Is Polkadot truly Decentralized?

Parachains are auctioned using the candle auction method to avoid bias, promote independence and avoid concentration of power. Dot holders can also loan dots to teams who won a parachain, locking it up for a fixed period of 6-24 months. However, voting rights stay with the original dot holders. 

The second phase of Polkadot’s Nominated Proof of Stake (NPoS) was launched in June 2020 as a way of decentralizing governance away from the sole control of the Web3 Foundation. A decentralized set of validators were consequently added to oversee the network. 

A validator is one of the servers on the Polkadot network that is producing the next block in the blockchain, adding data to the system. All validators must agree on the next block that should be added to the blockchain.  

Validators are chosen by how much stake they have. This ensures they behave without malice or incompetence and helps to keep other validators in check-in wary of a slash on Dots.

There are a limited number of active validator slots available on the network. Currently, there are about 190 active validators. It begs to ask, “How will Polkadot maintain decentralization despite this small number?” There’s an answer.

Polkadot operates a Nominated Proof of Stake (NPoS). As you already know those with higher Dots staked get accepted to be active validators. However, when slashing occurs, validators with larger amounts of stake suffer more in proportion to their total funds. This incentivizes nominators to nominate smaller validators, thus contributing to the decentralization of the network. 

Finally, parachains owners are not chosen solely based on financial capacity, nor on the preference of Parity Technologies or Web 3 Foundation. It’s as far as reasonably possible.

Is Polkadot Secure?

The decentralized system of the ecosystem helps create a trustless system. Network governance was also passed to Dot token holders in August 2020. This compels stakeholders to act in good faith.

Regardless of these, there are concerns regarding the security of the Polkadot system. After over $90k worth of ethereum was locked up in the Parity Wallets due to a bug in the system, these concerns are only reasonable.

Justifying the accident, Gavin stated that Parity Technologies had limited funds at the time to offer a secure solution. They had only built a software solution – an idea. Now, they have the funds, much has been done to secure the network.

1). Polkadot had gone through 4 external audits. One of such was with ChainSecurity.

2). Polkadot is being implemented by Parity Technologies alongside 2 independent external teams.

3). There is an auditing process put in place to constantly search for bugs in the Polkadot system.

The second and third measures are being sponsored off a portion of the 29.7% stake Web 3 Foundation and Parity Technologies have in Polkadot.

How and Where to buy Dots

The Dot tokens are available to buy on major crypto centralized exchanges such as Binance, Kraken, and Crypto.com.

1). Binance

Binance Exchange is one of the world’s largest crypto exchanges by trading volume. Binance offers one of the widest ranges of cryptos available in the market including Polkadot.

2). Kraken

On Kraken, you can buy Dot with cryptocurrencies or stablecoins. You can also exchange Dots using FIAT like USD, EUR, or GBP. Kraken’s minimum order size is 1 Dot.

3). Crypto.com

The exchange at crypto.com is part of a whole suite of products from crypto.com. It offers trading for over 55 different cryptocurrencies including Dot.

We have another article explaining more about exchanges check it out -> Top Crypto Exchanges

Most decentralized exchanges for Polkadot are still in development. For example, Polkaswap and Polkadex.

How to store Dots

Once you have purchased or exchanged your DOT tokens, you should store them in a supported wallet. While exchange wallets are considered secure, “it’s always safest to store your DOT in a non-custodial wallet, a software or hardware device that stores the public and private keys required to make crypto transactions.” 

Exchanges are likely targets for hackers. Worse still, you don’t have control over your assets without access to your private keys and your private keys are in the custody of the exchanger.

Examples of Polkadot supported wallets:

1). Parity Signer

Parity Technologies developed Parity Signer. With it, you can turn your smartphone into a hardware wallet for Polkadot, Ethereum, and Kusama. The app is available on AppStore or GooglePlay. All data will be transmitted via QR codes.

Take an old smartphone, restore it to factory settings, turn off the wifi, Bluetooth and switch on airplane mode. With it, you can generate and store multiple private keys, scan, verify and sign your transactions with Parity Signer. You can also scan the QR code provided by Parity Signer to release your transaction to the blockchain and send your funds.

2). Polkawallet

Polkawallet was the first cross-chain mobile wallet for the Polkadot ecosystem. With this multi-wallet, you can hold your locked, reserved, and bonded assets and transfer them using a QR code. The wallet also allows staking and participation in the governance of Polkadot. In addition, the app will send you a notification of proposals and referendums should you wish to get involved.

3). Atomic Wallet or Exodus

If you’re looking for a free desktop wallet you can also use the Exodus or the Atomic Wallet to manage your DOT, as well as up to 300 other coins and tokens.

4). Ledger Nano S or Ledger Nano X

Using a hardware wallet such as a Ledger is one of the most secure ways to store your DOT tokens. With Ledger, you can manage your DOT tokens directly within Ledger Live. You can also earn DOT rewards through bonding with Ledger live.

How to stake Polkadot

Polkadot uses a nominated proof of stake system (NPoS). You can stake DOTs as a validator or as a nominator. 

Validators stake Dots for the opportunity to create and verify new blocks on the parachains and get rewarded. Nominators lend their Dots to validators to share in their reward. Validators and Nominators get a daily payout from staking on the Polkadot network.

If you produce blocks and everybody agrees on the network that you did a good job and didn’t cheat or break a protocol, you’ll get rewarded for building the blocks. On the other hand, if you try to break the network by sending invalid data, attempting to defraud the system, or being offline for a long time you will be slashed. That is, some of your deposits will be taken away.

Validators

In a NPoS, validators stake a huge amount of coins in the network, thus ensuring the integrity and commitment of their operations in the network.  

Validators create and verify new blocks, if they do a good job they get a reward in dot tokens, if they do a bad job part of their staked dot tokens will get slashed.

If you’re interested in running and producing blocks but you don’t have a large number of tokens to get into the set representing the top of the entire network stake, you can borrow Dots from others (Nominators) and they get to share in your block rewards.

Nominators

Nominators support validators by staking dot tokens and giving validators access to them. A nominator helps other validators build blocks without actually building them themselves. This is to avoid the work of being a validator and still enjoy the rewards of validation.

1). Validators have to maintain your node.

2). They need to make sure that it’s upgraded to the correct version of the software

3). They need to make sure that it has very high availability

4). They need to worry more about hackers who may try to take you

5). It’s risky when a validator’s funds are staked, they are liable to be slashed in cases of malice or incompetence. 

Where a validator does a good job, the nominator shares in the reward tokens. Where the validator does a bad job, the staked Dot tokens of the validator get slashed affecting a percentage of the nominator’s Dot as well.

Polkadot provides two means of minimizing loss on bad validators. One is the ability to nominate up to 16 different validators. You can diversify your risks. If one of the validators you select turns out to be malicious, only a very small percentage of your stake would be slashed. Two, you can review validators before staking using Polkadot. For a detailed guide on how to stake using polkadot.js.org, watch this video

How to Ascertain A Validator’s Credibility

When reviewing a validator to nominate, there are certain things to look out for. They are:

1). Verified Identity: When a validator’s identity is verified, you will be able to see the email address, website and Twitter handles. The more information that is available on a validator, the more you can trust them.

2). Validator’s Own Stake: When a validator does a good job, he gets rewarded in dot tokens, if a validator does a bad job, a part of his own stake gets slashed. Also, the more of his own stake a validator has, the more he’s got to lose if he does a bad job.

There are downsides to using this parameter to pick a validator. One is, the bigger the stake owned by a validator, the lesser his need for a nominator. Two, in the reward distribution, if you support a validator with a huge stake, you will receive a smaller percentage of the reward. 

If you support a validator with a small stake, you will receive a larger percentage of the reward. 

If you want some more security, go for a validator with a high stake. There are also risks involved here. Slashes are higher for validators with a high stake.

3). Commission: The higher the commission of a validator, the lower the rewards a nominator will receive. You won’t get any rewards supporting a validator having a commission of 100. Go for validators with low percentage commissions like 1.

4). Arrow Points, Elected Stake, Rewards, and Slashes: On the far right of the validator list, there is a graph icon. When you click on it, you will arrive at a window with three graphs: the arrow points, the elected stake, and rewards and slashes

Look out for whether the validator has received slashes in the past, and has arrow points showing stability.

Diversify. repeat the selection process until you have a list of 16 validators. Picking 16 validators as opposed to 1 or 3 will avoid the risk of your stake not yielding rewards should the validator you pick not get elected to validate on Polkadot.

For a step-by-step guide on how to nominate a validator, watch this video.

Why Join Polkadot as a Validator

On Polkadot, all validators compete to be active, that is, produce blocks so they get rewarded with dots. Currently, the available slots for active validators are 900.      

i). Even if you’re not selected to be an active validator, you will still help keep the ecosystem running as a backup. If there is a problem where many of the current validators have to be offline, you as the backup will be ready to step up to be an active validator.

ii). You can also join the Thousand Validators program by Parity Technologies to help you become an active validator.

  1. You will have technical assistance from Web 3 Foundation and Parity Technologies. 
  2. You will get a review of your setup.
  3. You will be provided with nomination funds so you can be a part of the active validator set if you don’t have enough on your own.
  4. You will be monitored and given feedback on your validator.

Direct Methods of Staking

You can stake your DOT tokens using the following platforms:

i). Ledger Nano S: Ledger Nano S is one of the most popular cryptocurrency hardware wallets at the moment. The Ledger wallet is a hardware cryptocurrency wallet that allows you to safely store your cryptocurrencies. Not only that, but it allows you to send and receive lots of different cryptocurrencies. Earn 10% by staking and bonding DOT tokens directly within Ledger Live and choosing a validator. The current annual yield on Polkadot is around 10%, minus the validators’ commission rate.

ii). Polkawallet: Go to the “staking” menu in the app and pick your validator to stake your tokens. APY is 10%.

iii). Binance: On Binance, navigate to the “Finance” menu, under “Binance Earn”. There you can nominate Binance as a validator for as little as 1 DOT. The APY is 11.51%.

iv). Kraken: Kraken offers a 12% fixed return on DOT. Find “Staking” in the menu, choose Polkadot and select “Stake”.

v). Ledger Live: If you’d prefer the safety of storing your tokens in a hardware wallet, you can use Ledger Live to earn rewards at around 10% per annum.

Price predictions for Dot

According to Gov.capital, Polkadot price will be around $108.02 on 6 October 2022, believing the coin’s price will be around $251.645 by 2023. On 6 October 2024, it should be somewhere around $446.34 and for 2025 it should shoot up to stand at somewhere around $691.18. Then, 12 months down, it should be at $984. 

This is not a financial advice. There is a likelihood that if polkadot continues with it current trend, an investment of $1,000 today might result to $984,000 in 2025. Again, this is not a financial advice. Make sure you do your research before investing in any cryptocurrency/project.

Conclusion

Polkadot brings multiple specialized chains together into one scalable network. It is an industry-disrupting project. I am not surprised by its steady rise. The brand’s vision has been to build a strong community around it.

With the Parachains slot auction set to start in less than 14 days, we can only wonder what position the Dot will take in the market price and cap once it’s launched. 

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