Published on Jan 23, 2023

Polkadot — The Blockchain of Blockchains

Author: Kaushal
#Insights
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Polkadot — The Blockchain of Blockchains

Polkadot is a one-of-a-kind blockchain and is different from other conventional chains in its structure. Consider it as 'a blockchain of blockchains'. Gavin Wood, the former CTO of the Ethereum Foundation, is the mastermind behind the Polkadot protocol.

Why Polkadot?

Why did Gavin feel a need to create a new chain while working at Ethereum?

All blockchain face a unique problem called the blockchain trilemma, which comprises three factors — decentralization, security, and scalability — that make a blockchain effective and worthy of use.

Developers haven't found a way to increase all three simultaneously in a single base layer. When they try to enhance one factor, the other two factors suffer —that's how the trilemma manifests.

Suppose we increase the security by making it difficult to solve the problem that miners or validators solve when creating a blockchain. In that case, fewer people will participate in creating blocks, decreasing decentralization and mitigating transaction speed.

And if we try to increase the decentralization and allow everyone to validate blocks, security will be at stake.

If we make a chain highly scalable by increasing block size, then only a select few validators will participate as nodes become expensive to operate.

Let's see a couple of real-life blockchain examples.

Ethereum is a smart contract-based blockchain with the highest number of users, as it's easy to deploy Dapps on top of it. But way too many people host useless and heavy projects affecting the network's throughput and shooting up the gas fees. In the fourth quarter of 2017, a project named CryptoKitties occupied 12% of the whole network.

On the contrary, EOS is a blockchain that offers instant transactions. But the blockchain network is highly centralized. The block validators are nominated and are very few. They can likely team up and validate illegitimate transactions for their personal interest.

All blockchains made trade-offs to support certain features.

Another issue with conventional blockchains is their inability to communicate with each other. It's like having an account in a bank that doesn't allow you to interact or transfer money to other banks. Put another way, blockchains are isolated, and information can't be transferred from one chain to the other.

To reach mass adoption and to be used day-to-day by laypersons, blockchain must be interoperable.

Polkadot solves all these problems with its cutting-edge mechanism.

Polkadot's anatomy

Polkadot has two main structural components that make it a multichain network—Relay Chain and Parachains.

Relay Chain

The Relay Chain is the most critical chain and is central to the entire Polkadot network. It ensures security, consensus, and cross-chain interoperability. However, despite being central to everything, it intentionally was not made to support smart contracts–to reduce its functionality.

Relay Chain is a "nominated proof-of-stake" consensus mechanism chain where stakers stake DOT, Polkadot's native token–for participating in the networks of nodes to create blocks in a chain.

Nominated PoS requires stakers to bond their stake and find other validators in the network, then get them recognized to be allowed to validate new blocks. The revenue the validators generate from validation is shared with the nominators. Since the stakers are staking their money, the onus is on them to select only legitimate individuals for validation.

Parachains

All the Parachains connect to the Relay Chain and delegate the consensus and security operations to it. So relay chain is central to the entire Polkadot system.

Each Parachain can have its own governance rules, but when it comes to passing blocks, it must do it in a way that is understandable to the Relay Chain. Collators transfer consensus and security computations from the Parachains to the Relay Chain.

Each Parachain is created for specialized purposes. For instance, one Parachains might be good at settling transactions fast, while another might be designed to implement smart contracts.

Para Threads

While the Relay Chain is always active and permanent, Parachains can disconnect if need be and reconnect. The connection of Parachains is established via a recurring subscription basis—like monthly recurring music streaming subscriptions to Spotify.

Parachains lease their space in the network by locking the funds for the entire duration of the lease, whereas Parathreads use the pay-as-you-go model.

While Parachains run constantly, Parathreads need to be woken up and run only when required.

Why is Polkadot special?

Polkadot allows almost 100 Parachains to be connected to the multichain simultaneously, showing a rare transaction speed and scalability level. A fully operational Polkadot multichain system can process up to 1,000,000 transactions per second (4x faster than Visa) while also being decentralized.

Parachains and Parathreads in the network are designed to communicate. Even the flagship blockchains like Bitcoin or Ethereum can join the Polkadot network via bridges. This solves the isolation problem of the chains and allows for blockchain interoperability.

Also, the cost of running a network like Polkadot multichain is very low since there is only one main Relay Chain responsible for most of the operations.

Moreover, the Polkadot network is devs-friendly. Most of the Parachains are created using Substrate, a modular framework allowing custom blockchains to be built in a matter of hours.

Since the Relay Chain is also made using Substrate, any Substrate-based chains can easily connect with the network.

Polkadot has come up with a smart way of tackling the blockchain trilemma issue with its infrastructure.

Polkadot and Ethereum - compared

Besides having Gavin Wood in Polkadot, its design and infrastructure resemble the new upgrade to Ethereum, called Ethereum 2.0.

Both networks have a central chain where transactions are finalized (Relay Chain in Polkadot and the Beacon Chain in Ethereum). Several other chains operate in unison with the main chain and leverage its resources (Parachian and Shards in Polkadot and Ethereum 2.0, respectively.)

Also, both networks use the Proof of Stake consensus mechanism, except it's "delegit's" in Polkad"t.

Moreover, dev teams are working to make transactions between the networks possible. For instance, Parity has developed a technology to help Dapps utilize the code and community of Ethereum but wants to host on Polkadot.

Developers can use the Polkadot development framework to copy an Ethereum-based Dapp that can be deployed in their custom blockchain design.

Tokenomics

DOT tokenomics is unlike most regular cryptocurrencies. DOT serves as a governance token, a staking token for the delegated PoS chain, and is also used for bonding purposes to connect a chain to the Polkadot network as a Parachain. Each DOT token has several use cases within the Polkadot multichain ecosystem.

Polkadot has a way for projects to fundraise for a Parachain slot on the Polkadot network called crowd loans. DOT holders who allocate their assets to crowd loans impact the APR or staking, as only unbonded DOT can participate in the crowd loans. Polkadot's Polkadot's total value locked, aka TVL, crossed $1 billion in November 2021.

Unbonding DOT from the staking reduces the supply of DOT locked in staking contracts, pushing both APR and DOT demand higher. With it, two birds are shot with a single stone, the value of the Polkadot coin rises, and projects can raise funds for Parachain slots.

Polkadot governance

Polkadot lets users have a say in the future of the ecosystem.

  • DOT holders: The Polkadot's Polkadot'sn holders can use their holdings to propose changes to the network and vote on changes proposed by others—they can approve or reject based on their wisdom of how changes might affect the network.
  • The Council: The council members are elected by DOT holders. These are responsible for proposing changes and assessing which changes serve the network's bnetwork'sest in the long term. Also, another advantage of being a council member is that your proposal requires fewer votes to be approved than those raised by normal DOT holders.
  • The Technical Committee: The team of developers behind the network actively builds the Polkadot multichain system. The Council elects members of the technical committee. The committee members have the privilege of making special proposals in an emergency.

Polkadot's the native DOT coin

Polkadot is competing with the likes of Ethereum(ETH), the biggest famous Layer 1 smart contract-based blockchain; Solana(SOL), Avalanche (AVA), Terra(LUNA), Cosmos(ATOM), among others.

It was launched in May 2020 and has gone from $4 per DOT in Q4 of 2020 to an all-time high of $53 in March 2021. At the time of writing, it's clockiit'st around $27.39 per coin.

source: coinmarketcap.com

DOT's markeDOT's is north of $27 billion, making it the 11 largest cryptocurrencies.

The momentum Polkadot gained in 2021 will likely continue in 2022 as well.

Defi on Polkadot is also evolving faster and has witnessed the development of defi primitives and building blocks like stablecoins, non-custodial exchanges, money markets, and oracles.

In the future, we'll likelwe'll other defi products in the ecosystem, like insurance platforms, dex aggregators, yield aggregators, derivatives, no-loss lotteries, decentralized futures, and options trading.

Some of the already existing projects include Acala, which allows users to transact USD across chains connected to Polkadot; Stafi, which lets users use and exchange stake tokens; Zenlink, a cross-chain dex network, among a plethora of others already up and being built.

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