What is Polkadot?



Polkadot is a blockchain protocol on which decentralised applications (dapps) can be built. The unique thing is that these applications all have their own blockchain, so-called Parachains that are linked to the Polkadot blockchain, the Main Chain. So the Polkadot ecosystem is a network of blockchains, and everything is decentralised.

All these different dapps can therefore customise their blockchain exactly to their needs, while being kept safe and secure by the Polkadot Main Chain. Moreover, transactions can be processed a lot faster than on, say, Bitcoin or Ethereum.

These blockchains can in theory even be linked to Polkadot, allowing them to be used within the Polkadot network. Polkadot also makes it possible for all blockchains connected to the network to communicate with each other and carry out transactions among themselves.

This is why Polkadot is also called the blockchain of blockchains. The team foresaw that there would probably not be "one blockchain to rule them all", but hundreds of blockchains that are all set up differently to optimise for their function. The more different blockchains, the more room for innovation

Team

The founder of Polkadot is Dr Gavin Wood. Gavin was previously the CTO of Ethereum and a very well-known name in the industry. This software veteran was essential in the initial stages of Ethereum. He developed both the unique Solidity programming language and the Ethereum Virtual Machine (EVM), which is the bridge between the code and the blockchain.

Wood saw some shortcomings in the technology of the Ethereum blockchain and decided to develop his own blockchain, Polkadot, in 2016. With his reputation and experience, he quickly managed to attract a lot of interest and capital to his new project. The idea behind Polkadot was broadly the same as that behind Ethereum; shifting power from the central parties to the individual, through decentralisation.

In Wood's words: "Polkadot empowers the individual against the much more powerful corporate and state actors". However, Polkadot should be a lot faster and should be able to connect all kinds of blockchains with each other. There is quite some competition between Polkadot and Ethereum. Wood calls Ethereum "a toy" and Polkadot "the real thing".

In 2016, Wood and his team set up the Web3 Foundation, which is the organisation that manages Polkadot's capital and supports the development of the network. The first project to be funded was Parity. This party built the Polkadot protocol and consists of a team of world-class blockchain developers, including Gavin Wood and another former Ethereum leader, Dr Jutta Steiner. So it all had to be better than Ethereum, but how does Polkadot do it?

Dr. Gavin Wood, the founder of Polkadot.
Dr. Gavin Wood, the founder of Polkadot.

Scalability is the biggest problem for Bitcoin and crypto in general. Currently, many blockchains suffer from low transaction speeds and high transaction costs. For example, at the time of writing, 17 February 2021, transaction costs on the Ethereum blockchain are extremely high because the majority of the DeFi market runs on the Ethereum blockchain. Polkadot was conceived as a solution to the scalability of blockchains like Ethereum, whose transaction throughput is severely limited by the need for each node to validate every transaction. Polkadot uses sharding. Sharding is a technique where not all nodes need to verify every transaction. In fact, transactions are distributed across multiple parts of the network, called shards. Learn more about sharding here. At Polkadot, however, these shards are called parachains. The scalability problem is addressed by Polkadot through a unique blockchain architecture.

Polkadot Network

Relay Chain

The most important part and the core of the architecture of Polkadot is the Relay Chain. The Relay Chain is the heart of the entire network. It is a blockchain where the entire Polkadot network comes together and functions as the payment and security system of the ecosystem. All the different blockchains or shards on the Polkadot network are connected to each other via the Relay Chain. The other blockchains, the Parachains, link to this Relay Chain and communicate their transactions. These are processed, added to and kept secure on the Polkadot Main Chain. The Parachains can also exchange information with each other via the Polkadot Main Chain. The Relay Chain provides the shared consensus (agreement) between the different blockchains, called parachains, and also provides the cross-chain interoperability we talked about earlier.

It is therefore the core of the Polkadot ecosystem. No smart contracts or dapps can be built on top of the Main Chain, as it is only used for the digital accounting of the network. By keeping this protocol as simple as possible, the chance of errors is minimal and security is maximised. All validators of Polkadot stake out the Relay Chain in DOT tokens and validate for the Relay Chain. The Relay Chain has relatively few tasks, including ways to communicate with the governance mechanism, parachain auctions and participation in the consensus mechanism. We will go into that in more detail in a moment. So the most important thing is that the Relay Chain ensures that transactions from all parachains on the network can be processed simultaneously and securely. This ensures increasing scalability of the network. Other specific work is delegated to the parachains, which have different implementations and functions.

At Polkascan you can see the Polkadot blockchain live and follow all transactions.

Parachains

Parachains are individual blockchains that can have their own tokens and optimise their functionality for specific use cases. Parachains are connected to each other via the Relay Chain. It is therefore important that parachains can be optimised for a particular application. This ensures that teams have more functionality, efficiency and security on a parachain than if they used their own general blockchain. In addition, teams or companies can dramatically reduce the time it takes to build a blockchain by building it with Substrate, a framework for building blockchains on Polkadot. The data from the Parachain is validated by the validators connected to the Relay Chain. Furthermore, it is very important to know that there is not an unlimited number of parachains that can be connected to the Relay Chain. Polkadot supports a limited number of parachains, currently estimated to be around 100. Because the number of slots is limited, Polkadot uses Parachain slot auctions. Parachain auctions are literally auctions. Parachains-bidders can bid in the auction by specifying the spot on the Relay Chain they want, as well as the number of DOT tokens they are willing to spend. Parachains bidders can do this out of pocket or use crowdloan functionality to raise DOT from the community.

A blockchain application on top of Ethereum is called a dapp. These dapps all function in their own way, but are bound to an Ethereum blockchain. This means that all transactions must be processed by the entire Ethereum blockchain, which can be very slow and expensive, that they can only program what Ethereum's code allows and that the entire network suffers from errors that are in the blockchain.

Ethereum's network has become huge over the last few years, so the blockchain has to process a lot of transactions. For example, if a DeFi dapp is used a lot, all the other dapps suffer from it. Also, the binding to Ethereum's code limits the freedom of programmers.

To solve these problems, Polkadot introduced Parachains. Parachains are stand-alone blockchains linked to the Relay Chain. This allows programmers to develop their own blockchain that fits perfectly with their applications and supports specific functions. So each Parachain can have its own group of users, its own token and its own way of consensus, while all being part of the Polkadot network.

Parachains can also set up their own way of processing transactions. The only requirement is that they frequently send an update to the Relay Chain with the most recent transactions. This update is then permanently deposited on the Polkadot blockchain. If something changes in the Relay Chain, the Parachains are also changed.

Communication

Because the Parachains are all connected to the Relay Chain, they can also communicate with each other. So one Dapp can exchange information with another Dapp. For example, think of a dapp in which you create a digital identity and then use it with all the other Parachains. This way, you only have to create one identity, and the Parachains can easily verify it.

Substrate

The easiest way to build Parachains is to use Substrate. This software makes it easy for programmers to develop a custom blockchain, and the Polkadot Relay Chain was also developed with Substrate.

Most of the software previously built with Substrate is open source, which means that other programmers can use it too, so they don't have to reinvent the wheel. Substrate also supports most blockchain-compatible programming languages.

Blockchains built with Substrate upgrade without the need for forking. Most importantly, Substrate blockchains can always be linked to the Polkadot network.

Bridges

As mentioned earlier, interoperability and cross-chain transfer of data are important features of the Polkadot blockchain. Cross-chain transfer refers to the transfer of data between different independent blockchains. This cross-chain property is created, among other things, by the so-called bridges. Bridges, or blockchain bridges, are ways in which two independent and technologically different blockchains can communicate with each other. For example, the Bitcoin blockchain or the Ethereum blockchain can be connected to the Polkadot network via a bridge.

Substrate also allows the development of dedicated blockchains that interact with blockchains outside the Polkadot network, such as those of Bitcoin, Ethereum or Cosmos.

This allows bitcoins and ethers to be used on Polkadot, dapps from Ethereum to be used within the Polkadot ecosystem and information from other blockchains to be used on Polkadot.

Previously, all these blockchains were completely isolated from each other. With Polkadot's Cross-Chain Messaging Protocol (XCMP) this is no longer the case. All industry blockchains can converge on Polkadot.

The architecture of the Polkadot network is shown schematically below to make it somewhat clear.

The Polkadot network with the Relay Chain at its core.
The Polkadot network with the Relay Chain at its core.
Zoomed in on one Parachain..
Zoomed in on one Parachain..

Polkadot Algorithm

Polkadot uses a Consensus Algorithm. With blockchains it is important that all data on the blockchain is in agreement with all participants (nodes) of the network. In other words: all participants in the network must agree that what is on the blockchain is the truth. This is done by means of the consensus algorithm. Read more about consensus algorithms here. Polkadot uses a unique consensus algorithm called Nominated Proof of Stake (NPoS). This is a variation of the Proof of Stake mechanism. NPoS is designed with four different roles: validators, nominators, collators and fishermen.

Nominators

Nominators secure the Relay Chain by choosing reliable validators and staking DOT. If you are a user and holder of DOT tokens and you want to earn more DOT by striking, but you don't want to have the responsibility of a node that has to be online 24/7, you can become a nominator.

Validators

Validators secure the Relay Chain by staking DOT, validating collators' block certificates and participating in consensus with other validators. A few times a day the Polkadot system chooses validators. These validators will play a key role in the coming hours in very sensitive protocols such as block production.

Collators

Collators maintain a full node of one specific Parachain. This means that they keep all the necessary information to write new blocks and perform transactions. Under normal circumstances, they will collect and execute transactions to create an unsealed block and provide this, along with a proof of state transition, to the validators responsible for proposing a Parachain block. Because they are full-fledged nodes, each Collator knows each other as peers. This makes it possible for them to send messages from parachain A to parachain B; interoperability.

Fishermen

Fishermen is a future upgrade of the Polkadot network, so they are not currently on the network. Fishermen's job is to keep an eye on the Collators. So they keep an eye on the process of writing new blocks and making transactions, so that no invalid state transitions are included.

Roles in the Polkadot Network.
Roles in the Polkadot Network.

Polkadot Technology

Sharding (Speed)

Blockchains are slow. Bitcoin can only handle 7 transactions per second and Ethereum not much more with 30. This is what we call the scalability of blockchains, and Polkadot has a good solution for this.

To make Polkadot scalable, the protocol uses so-called "Sharding" technology. Instead of having every transaction processed by everyone, with sharding a random group of transactions is processed by a random group of participants. This allows many more transactions to be processed and executed simultaneously while keeping the whole system secure.

In the case of Polkadot, this happens within the Parachains. These parallel blockchains have the freedom to customise their technology, and part of this is processing transactions. Because each Parachain processes its own transactions, they do not all end up on the Relay Chain and the network is therefore not overloaded, no matter how popular a Parachain becomes. Only a summary of a group of transactions end up on the Polkadot blockchain, where they are immortalised and kept safe.

Consensus

Before the transactions of the shard end up on the Polkadot blockchain, they are first verified by the users who keep this blockchain safe. These users must agree with each other, or come to a consensus, which is what the consensus model Proof of Stake is used for.

In Proof of Stake, users record their tokens of a network, DOT in this case. An algorithm randomly chooses a user who is allowed to add a new block. However, this cannot be every user, but before a user can secure the blockchain, he must first be selected. This is why we call Polkadot's consensus mechanism Nominated Proof of Stake.

As a non-nominated staker you can strike your DOT on another user who is selected and still get the strike rewards. Currently, DOT strikers get an average of 12% per year in rewards, a lot more than you get in your bank.

However, Polkadot's consensus system is a bit more complex than a simple Proof of Stake model. There are four different functions that DOT strikers can perform.

Governance

Polkadot (DOT) further distinguishes itself in the way its governance is arranged. The board is in charge of the future of a crypto: possible upgrades and adjustments to the network. In other cryptocurrencies, upgrading a blockchain is often a difficult and slow process. An upgrade often even results in a so-called hard fork. A hard fork can take months of work and can even cause a crypto community to fall apart. An example of this is the hard fork of Bitcoin Cash (BCH). A large part of the Bitcoin Cash community used to be part of the Bitcoin community, but due to a disagreement about Bitcoin's block size, they left the Bitcoin community.

The development of the Polkadot blockchain and the network is managed by everyone who has DOT tokens. All proposals are communicated to all participants and they can vote for or against. Any DOT holder can also propose upgrades.

The Council Members are selected Polkadot users. They are appointed by DOT holders and can make important decisions, especially propose referendums and veto proposals that are detrimental to the network. There are 24 Council Members in total and they can sit on this committee for a maximum of 12 months. They can also be voted out early if the network feels that they are not performing their duties properly.

There is also an "on-chain" treasury. In this treasury, transaction costs of the network are kept and other forms of DOT are collected. DOT holders can petition the Council to receive a portion of the treasury for developing a new dapp on Polkadot or improving the technology.

This treasury is set up in such a way that it is encouraged to spend the DOT in it. The DOT in the treasury are slowly destroyed (burned) if they are not spent, so there is pressure to use them to improve Polkadot.

Polkadot is doing things differently by adopting a transparent and decentralised governance mechanism where the users have the power. Polkadot calls this "user-driven network governance". Polkadot's governance consists of all stakeholders who want to participate in the governance. These stakeholders can participate in governance by voting on referendums using the DOT token. Referendums are simple voting arrangements based on the staked DOT tokens. Each referendum has a specific proposal. Referendums can be initiated in several ways:

  • Publicly submitted proposals by the Polkadot community.
  • Proposals submitted by the Council.
  • Proposals submitted as part of the determination of a previous referendum.
  • Emergency proposals submitted by the Technical Committee and approved by the Council.

The Polkadot governance mechanism thus consists of: - the Council members, - the Technical Committee and - all stakeholders who vote with discontinued DOT tokens.

DOT holders can vote for referendums with their docked DOT tokens and can also make public proposals for referendums.

The Council consists of Council members who are elected by DOT holders. The Council proposes referenda and votes for or against emergency proposals.

Unlike the Council, the Technical Committee is not elected by voting but is chosen by the Council based on a formal specification of the Polkadot Protocol. The Technical Committee, together with the Council, can draw up emergency referenda, which can be quickly voted on and implemented. These emergency references are only meant to be used when there is an emergency within the Polkadot network.

Upgrades

Like all software, blockchains need upgrades to keep up with the times. For many blockchains these upgrades are done by so-called "forks". Basically this is a copy of the entire blockchain and its protocol, but with the new upgrades. If the whole network agrees and uses the new version, this whole process goes well.

However, blockchain upgrades in the past have led to many disagreements, resulting in a "hard fork". This means that suddenly there are two blockchains and networks. This happened, for example, with Ethereum and Ethereum Classic, Bitcoin and Bitcoin Cash, and later Bitcoin Cash and BitcoinSV. This can be hugely detrimental to a blockchain as the network is split up, along with the programmers, investors and users.

In Polkadot, no forks are needed to upgrade the software. Upgrades are communicated in full transparency to all participants, who can vote on them through Polkadot's on-chain governance protocol. Each Parachain can also upgrade itself without the rest of the network noticing.

Kusama

The Polkadot network has a second, early stage version of itself, Kusama. This protocol is an early, raw release of the Polkadot protocol and is intended for programmers who want to experiment with the technology. This way, programmers can see what is possible while the Polkadot network learns what can be improved about the main protocol.

Kusama even has its own token, KSM. This token works basically the same as DOT. So you can strike KSM, vote with it and use it as a means of payment on the network. Ideal for testing new ideas, but to become big, projects will have to end up on Polkadot.

Polkadot Tokenomics

Tokenomics refers to how tokens operate within the wider ecosystem of a crypto. In the case of Polkadot, that token is the DOT token. The DOT token is reflected in Polkadot's ecosystem in a number of ways, namely governance and strike.

The underlying cryptocurrency of the Polkadot ecosystem is DOT. This token is used for the following five purposes:

1. DOT Strike

DOT holders can "strike" their tokens and receive a reward in the form of more DOT for doing so. Currently, this reward is around 13% per year. There are three ways to strike. First, you can become a validator and directly help secure the blockchain. Validators capture a large number of DOT through their wallet. If they maintain the blockchain as the system prescribes, they receive new DOTs as a reward. However, these can also be taken away by a process called "slashing" if they are caught trying to add false information to the blockchain.

However, this position demands a lot of DOT tokens, and so most participants staked their DOT for a reward by slashing DOT on another validator. You can do this yourself in your own wallet but also through the exchange Kraken, which has made this process very easy and you will receive your strike rewards almost daily.

2. DOT Transactions

For transactions within the Polkadot ecosystem, which is basically new information passing through the Polkadot Relay Chain, small transaction fees are charged. This also means that if different Parachains want to communicate with each other, a small number of DOT must be paid. Of these transaction costs 20% goes to the validators and 80% to the treasury of Polkadot. These proportions can be changed by DOT holders through a voting round.

3. DOT Governance

As mentioned above, the first function of DOT is to give DOT holders the right to control the governance of the platform. DOT is also used within the Polkadot network for democratic decision-making, or governance. Each user can use his or her tokens to vote for or against new upgrades, nominators, Council Members or projects that can get DOT from the treasury. Some of the functions that fall under the referena of the governance mechanism include determining the fees (trading costs) of the network, adding or removing parachains, and exceptional events such as upgrades and fixes for the Polkadot network. Polkadot allows any DOT holder to participate in the governance.

4. DOT Parachain Stakes

In addition to the governance mechanism, DOT is also used in Polkadot's consensus mechanism: Nominated Proof of Stake (NPoS). Strikes are there to keep the Polkadot network functioning and to enable valid transactions over parachains. DOT holders strike (deploy) their DOT and in return receive a reward. On the other hand, malicious participants of the network are punished if they do not follow the rules. Their stake (bet) is taken away from them.

5. DOT Crowdloans

This is a unique and very interesting way for DOT holders to contribute to the development of the Polkadot ecosystem. Every fortnight there is a voting round in which DOT holders can vote for their favourite project with their tokens. There is only one winner, so there is stiff competition.

The whole process is on-chain, via smart contracts that anyone can view. The winning crowdloan team gets to keep the DOT tokens and give the tokens of their project to their voters. The DOT received can be staked by the team to get revenue and fund their project. At the end of the proposed term, all borrowers get their DOT tokens back.

Capital

In October 2017, Polkadot raised money for the first time. The sale of 50% of the tokens raised $145 million in Ether. However, after this sale, a major problem occurred. The Ether raised was in a Parity wallet, and an unknown hacker found a flaw in the code of this wallet which eventually caused the wallet to be frozen. 66% of the $145 million, or about $100 million, is still frozen in this wallet. The Ethereum network would have to do a blockchain upgrade to release these tokens, and 4 years later they still haven't decided.

Despite this, there is still enough capital to continue. However, another $60 million was raised in the summer of 2019 through a second token sale.

DOT Supply

Unlike, for example, Bitcoin and many other projects, the Polkadot coin does not have a maximum supply. Initially, 1 billion tokens were released. 55% of these were marketed through token sales. The rest are still in the hands of the Web3 Foundation, which uses them to cover the costs of developing the technology and to financially support new projects on top of the protocol.

New DOTs enter the system via strike, which is the network's way of paying for security. Strikers are paid an average of 12%, which means 12% inflation per year. This new entry can be changed by the community through a vote.

Polkadot Ecosystem

Via Substrate, entrepreneurs and programmers can build their own Parachain relatively easily. They then link this unique blockchain to the Relay Chain and become part of the Polkadot ecosystem.

Due to the many advantages of Polkadot over other blockchains, such as the freedom of movement for programmers, the speed of transactions, the fact that each Parachain can have its own cryptocurrency and the security of the Relay Chain, Polkadot has quickly become an extremely popular blockchain ecosystem.

There are already more than 350 Parachain projects and there will be many more by 2021. At the moment, these projects are still mainly focused on the development of infrastructure for the Polkadot ecosystem. Think for example of wallets, tools for programmers and validators, data transfers and communication protocols so that everyone can chat with each other via the blockchain and exchange information. And, of course, DeFi on Polkadot should not be missing either.

A number of projects are also already in the process of connecting their existing blockchain network to Polkadot via a bridge. These include Chainlink, Ocean, Polymath and OriginTrail. All these projects started on Ethereum, but after the scalability problems of this blockchain, they looked further and ended up on Polkadot.

The Future of Polkadot

Polkadot is directly competing with Ethereum to become the blockchain application platform. The "blockchain of blockchains" has a few major advantages over its predecessor, namely it is a lot faster, gives a lot more freedom to programmers by giving them all their own blockchain and can simply launch all the good ideas that have already been built on Ethereum on Polkadot. After all, all blockchain applications are open source.

However, the battle is far from won. Blockchain is still only a relatively small online industry and the masses are yet to come. Ethereum is in the transition phase to Ethereum 2.0, which promises to make the blockchain many times faster and easier to use. There are also many other dapp platforms such as Cardano, Cosmos, Solana, Near and Algorand.

However, the Polkadot ecosystem is doing extremely well. Hundreds of projects are being built on the network, projects from Ethereum are transitioning and the technology is almost fully functional. 2021 could well be the year of Polkadot.


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DeepDove: Crypto Network (2021-09-21). Parachain Auction | What is Polkadot?. Retrieved , from

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This page was last changed on 2021-09-21.