The Polkadot crypto project is a next-generation blockchain that attempts to promote a heterogeneous multi-chain framework. It has garnered extreme attention from an entire community of investors, developers and users and is considered to be one of the most innovative projects in the cryptocurrency space.

Powered by the DOT, the network’s native coin, the Polkadot ecosystem tries to resolve many of the limitations that blockchains currently hold, like scalability and security. It serves as a solution that implements the technology’s distinctive features conjointly. 

The project was conceived in 2016 and it took it a couple of years to materialize. The DOT token did not hit the market until August 2020, and its ultimate recognition was granted in June 2021 when Polkadot was listed on Coinbase. 

Why is Polkadot considered innovative? Generally, the unique properties of blockchains are decentralization, speed, and security in a trustless environment. While most blockchains tend to offer one — or just a few — of these distinguishing traits, their current architecture is not built to sustain all of the features at once. 

Ethereum, for instance, is the most popular platform for DApps. Still, it is currently not very scalable and carries exceptionally high fees, particularly when traffic on the platform is high. EOS, on the other hand, secures fast and zero-fee transactions at the expense of decentralization.

All these networks are isolated from each other, with little to no information exchanged between them. Think of different banks, for example, that were not allowed to interact — we would not be able to transfer money smoothly from one bank to another. 

Think of emails. Their interoperability allows us to transfer information from a Yahoo to a Gmail account, for example. Currently, a lack of interoperability is preventing the mass adoption of blockchain technology. Polkadot aims to fill this gap. 

What is the Polkadot network in crypto? 

In simple terms, Polkadot (DOT) is a blockchain with a core network — the relay chain, where other blockchains connect and communicate with each other. By hosting blockchains, the relay chain also handles their security and transactions, allowing cross-chain interoperability (communication between different blockchains) to function seamlessly. 

As a matter of fact, besides sending DOT tokens across blockchains, Polkadot also allows them to communicate and exchange actual data.

Thus, interoperability is the big problem that Polkadot tries to resolve. Instead of separate entities that work independently, blockchains should become part of the same ecosystem where information and money can be exchanged securely in a scalable way. 

While private blockchains have somewhat different technical protocols from public blockchains, Polkadot even resolves the communication between these two distinct types of networks.

Polkadot’s flexible and adaptive network architecture facilitates building new technology on top, enabling developers to take advantage of the scalability, interoperability and security offered. Therefore, Polkadot’s network also represents a significant breakthrough for developers and entrepreneurs who want to build a new blockchain from scratch.

When trying to create a new blockchain, developers build a unique state machine and a consensus algorithm, which is not easy to implement and takes a lot of effort and time. Polkadot’s fundamental architecture aims at resolving this as it eliminates the need to build blockchains from scratch. 

A blockchain built within Polkadot uses the Substrate modular framework, which allows users to plug in the features they require while also allowing them to change them as needed. Moreover, it allows developers to customize the chain architecture, select specific components that suit their requirements, and bridge blockchains with other networks, including Ethereum and Bitcoin.

History of the Polkadot network 

The network’s name is already unique: A polka dot pattern on fabric consists of an array of large filled circles of the same size. The circles probably symbolize the different blockchains and the overall pattern, the Polkadot crypto world.

The history of Polkadot is closely associated with Ethereum. Its founder is Dr. Gavin Wood, who was chief training officer and core developer of Ethereum. He developed its smart contract programming language, Solidity. The lead developer left Ethereum in 2016 to build a more sharded blockchain, and in October of the same year, he published Polkadot’s white paper.

While still at Ethereum, Wood co-founded the EthCore Blockchain Technology Company, which later turned into Parity Technologies. The company developed important blockchain infrastructure technology, such as the Substrate development framework and the Polkadot network.

In 2017, Wood also co-founded the WEB3 Foundation, a non-profit entity established to support the research and development of Polkadot and oversee its fundraising efforts. 

In July of the same year, the first adverse event occurred within the organization. A hacker exploited a vulnerability in Parity’s multisig wallet code and stole 153K ETH (about 33 million USD at the time) from three different wallets. 

In October, the foundation hosted the initial coin offering and raised $145 million in just under two weeks, making it one of the largest ICOs up to that time. 

Only a few days after the token sale, though, Parity Technology experienced a new hack incident. The ICO smart contracts were hacked, and 66% of the funds raised ($150 million) were frozen. The event was irreversible and inevitably slowed down the project’s early development. 

In the following months, through a private sale, the WEB3 Foundation team managed to raise enough funds to continue to meet its development goals, and by 2019, everything was back to business as usual. 

How does Polkadot work? 

As mentioned in the article, Polkadot provides a core network, the relay chain, and parallel blockchains called parachains. 

Let’s take a closer look at the network’s architecture, the system’s technical components and how they work in conjunction.

The relay chain’s protocol determines the network’s shared security, consensus and cross-chain interoperability. It is the engine that keeps the whole infrastructure together, connecting other network participants and providing transaction finality. 

The relay chain was deliberately built to provide minimal functionality. For instance, smart contracts are not supported, and the chain’s primary responsibility lies in the coordination of the system as a whole, including parachains. 

The term parachains is short for parallelized chains. They are sovereign blockchains with their tokens and governance and offer their specific use cases. 

However, parachains use and take advantage of the relay chain’s security and interoperability for the finality of transactions. The use of the relay chain allows parachain’s system to work seamlessly while developers and users can focus on other specific goals like privacy or scalability and their particular applications. 

In essence, parachains get to enjoy one of the network’s most significant benefits: using Polkadot’s established security and fast and scalable transaction speeds.

Parachains need to lease slots that are limited to one hundred in Polkadot to participate in the network. Due to its limitation of space, parachain’s slot allocation may, therefore, in the future become somewhat competitive and challenging to obtain. There are three ways to gain a slot allocation:

The parathreads have similar functions to parachains. However, they run on a pay-as-you-go model that allows them to work when needed and does not require being connected to the relay chain at all times. 

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Parathreads participate temporarily without the need to lease a parachain slot. Parathreads will have a slower block time than parachains but have the same security level and interoperability feature. Also, depending on the relay chain’s slot availability and needs, any blockchain can switch between being a parachain or a parathread.

Finally, bridges allow parachains and parathreads to communicate with external networks like Bitcoin and Ethereum, thereby further expanding the interoperability of the Polkadot blockchain. Bridges can, eventually, enable different tokens and coins to be swapped without a central exchange.

Governance 

Governance in a blockchain is how transaction and block verification rules are decided upon, implemented, and enforced. It can be intended as the integration of the norms and the code, the people and the institutions that facilitate the existence of a given organization.

Polkadot’s governance is based on the proof of stake protocol, the primary goal of which is to ensure that the majority of the stake can always control the network. The proof of stake used by Polkadot is a nominated proof of stake (the NPoS system), where nominators back validators with their stake as a sign of trust in their good behavior. 

If nominators choose a bad validator, they are subject to loss of stake, the main difference with the more generic delegated proof-of-stake (DPoS) system used in EOS, for example.

Several on-chain voting mechanisms must agree on changes to the protocol, such as referenda with flexible super-majority thresholds and batch approval voting.

Polkadot’s multilayered governance model allows the implementation of protocol updates without resorting to hard forks. 

Governance roles: GRANDPA 

Governance in a blockchain is achieved through consensus, a method for agreeing to a shared state of affairs. For the blockchain to continue to build and move forward, all nodes in the network must agree and come to a consensus. 

Polkadot takes a different approach to consensus mechanisms by introducing GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement) that provides Polkadot with a more secure, scalable and resilient network. Specifically, it allows networks to pool security. The added protections are then combined and applied to all.

Consensus roles 

Nominators – Nominators must secure the relay chain by selecting trustworthy validators and staking dots in the ecosystem.

Validators – Validators, too, must secure the relay chain, but they do it by staking dots, validating proofs from collators and participating in consensus with other validators on the network.

Collators – Collators must maintain shards by collecting shard transactions from users and producing proofs for the validators.

Fishermen – Fishermen are tasked to monitor the network and report bad behavior to validators. Both collators and any parachain full node can perform the fisherman role in the Polkadot network.

Roadmap — the five development phases 

Polkadot adopted a multi-phase rollout strategy for its mainnet launch. The Genesis block of its relay chain with staked validators was launched in May 2020 during Phase 1. During this early version, Polkadot was operated as a proof-of-authority (PoA) platform, which means that six validators from the Web3 Foundation were managing the network

Most users were able to claim their tokens from the Ethereum contract, stake tokens and declare their intent to validate transactions and nominate validators.

The second phase in June 2020 included the implementation of the nominated proof-of-stake with the first validator election. The phase licensed DOT owners to claim validators slots and unlocked staking rewards. 

Phases 3 and 4 in late July 2020 enabled Polkadot’s governance system. For the first time, the Council and Technical committees were elected, and public proposals were accepted.

In August 2020, the final phase approved balance transfers of the DOT token. The current phase is shaping the rollout of parachains tested and optimized on Kusama and parachains testnets. Once the full process is completed and parachains are running smoothly on Kusama, Polkadot governance can enable parachains and begin their slot lease auctions. 

Tokenomics 

The DOT token is what powers the network, being Polkadot’s native coin. It is used for payment of network fees, for governance voting and validating rights, for interoperability. 

When messaging or exchanging data between two blockchains in the network, DOTs are used to pay for transaction fees. Voting on protocol updates or fixes also occurs by payments of DOTs.

Nominators also bond their DOTs to a dedicated validator they are backing. Bonding tokens help to increase the network’s attack cost and allow DOT holders to earn newly minted tokens as staking rewards. 

Substrate — the development tool 

Substrate is Polkadot’s powerful development tool that makes building a new blockchain significantly easier. It is designed to help developers build their unique blockchain while connecting to the relay chain and enjoying its security, speed, and efficiency. The design allows developers to focus on adding value to their projects instead of spending resources and funds on building an infrastructure from scratch.

All chains that use Substrate are compatible with Polkadot, with seamless access to the interoperable ecosystem of parachains, applications and resources.

The pioneers of the blockchain industry who created Substrate envisioned a system that could overcome the limitations of previous-generation networks and intended to offer developers a building tool that avoided developing and optimizing a blockchain from its foundations. 

Although synergetic, Polkadot and Substrate are not dependent on each other. Polkadot parachains can be built and maintained with alternative software options than Substrate, while chains made with Substrate do not need to be connected to Polkadot or Kusama. 

Kusama — the experimental development platform 

KUSAMA is a Polkadot testing development platform where developers can experiment with new ideas and projects before going live on Polkadot. 

Kusama has a lower economic barrier entry than Polkadot, therefore launching a parachain or becoming a validator is much easier and requires less staking of DOTs.

The drawback of using Kusama is the less rigorous governance parameters that grant smoother and faster upgrades. However, Kusama is up to four times faster than Polkadot. All it needs is seven days for token holders to vote on a referendum followed by a validation period of eight days, after which the referendum will be ratified on the chain. 

Nonetheless, this speed rate happens at the expense of stability and security which means stakeholders must keep vigilant to follow up on all the proposals, referenda, and upgrades. At the same time, validators on Kusama often need to update on short notice.

Polkadot vs Bitcoin 

Polkadot network and Bitcoin are somewhat different in the functionality and goals they aim to achieve. While Bitcoin is en-route to becoming the first global decentralized network for payments, Polkadot seeks to grow into a multi-chain platform that allows interoperability between blockchains to leverage token, data and communication exchange.

A Polkadot business looks for a blockchain network protocol to enable arbitrary data to be transferred across blockchains. However, a Bitcoin business is interested in an innovative payment network and a new kind of money powered by blockchain.

From a technological perspective, the main difference is in the mining process and consensus algorithm. Bitcoin uses proof-of-work, and Polkadot adopts a nominated proof-of-stake that we’ve seen earlier in this guide.

Polkadot vs Ethereum

Ethereum is a smart contract platform and strives to be a blockchain for distributed finance. On the other hand, Polkadot offers a structure for building specific blockchains easily and the ability to connect different networks. 

Both platforms are designed for developers who want to build decentralized applications and both seek to fix scalability based on parallelized execution. However, Ethereum tries to achieve it with shards, Polkadot with parachains and parathreads. 

From a technological perspective, Ethereum is currently running on proof-of-work consensus like Bitcoin. However, the upcoming upgrade to the 2.0 version will switch it to the proof-of-stake system, which will likely be different from Polkadot’s NPoS.

Polkadot vs Cardano

Both Cardano and Polkadot were designed to address some of the inherent limitations of Ethereum. They also both share a history with Ethereum since they were both conceived by prominent contributors to Ethereum.

Cardano (ADA) is a third-generation blockchain platform that focuses on DApp development. It is a proof-of-stake blockchain platform and the first to be founded on peer-reviewed research and developed through evidence-based methods. It combines pioneering technologies to provide security and sustainability to decentralized applications, systems and societies.

We’ve learned by now that Polkadot, on the other hand, is a multi-chain application ecosystem, blockchain, and cryptocurrency. The network was built to streamline cross-chain interoperability with the overall goal to power next-generation DApp development.

The future for Polkadot

Considering the overall benefits for entrepreneurs, developers, users and investors, it looks like Polkadot’s evolution will be interesting to follow. 

DOT serving as the protocol’s governance token and for staking to secure the network or bond new chains is a clear indication that the project aims at incentivizing usage by rewarding participants. Indeed, staking DOTs has become one of the most valuable incentives in the crypto space with an annual yield of 10% on average. 

The platform’s stable and reliable network along with its roadmap adherence contribute to a promising scenario for the project. From the perspective of technology and economic value, Polkadot is among the most ingenious innovations of the blockchain industry and the next few months will be crucial to estimate the network’s actual capabilities.