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🤔 What is Polkadot ?

Polkadot is a blockchain that supports smart contracts. It aims to overcome Etherium’s limitations(scalability trilemma).

Scalability trilemma was first described by Vitalik Buterin, the co-founder of Ethereum. It states that it is very difficult to develop a blockchain that has all the three features:

  • Scalability
  • Security
  • Decentralization

A developer can choose a maximum of 2 of the desired qualities.

Polkadot blockchain aims to solve the scalability trilemma becoming secure, decentralized and scalable.

💡 What role does DOT token play ?

DOT is the native cryptocurrency of Polkadot. It is used for:

  • Governance: DOT holders propose and vote on updates to Polkadot protocol.
  • Transactions fees: Users have to pay transactions fees in DOT tokens to carry out inter parachain transactions.
  • Staking: Users can stake their tokens to participate in the process of validating blocks.
  • Validator rewards: Validators receive DOT tokens as rewards for building blocks.
  • Bonding: Developers have to lock DOT tokens to add their parachain to the relaychain slots.

📝 Origin of Polkadot

  • Polkadot is the brainchild of Dr. Gavin Wood, who is one of the co-founders of Ethereum and the inventor of the Solidity smart contract language. Dr. Wood started working on his idea to “design a sharded version of Ethereum” in mid-2016 and released the first draft of the Polkadot white paper in Oct. 2016.
  • In 2017, Dr. Wood and Parity’s Peter Czaban founded the Web3 Foundation, a non-profit entity established to support the research and development of Polkadot as well as to oversee its fundraising efforts.
  • The Switzerland-based Web3 Foundation hosted Polkadot’s first token sale in Oct. 2017, using a Spend-All Second Price Dutch Auction to distribute the funds. The sale raised $145 million in just under two weeks, selling 50% of the initial 10 million DOT (old) supply.
  • The team launched Kusama in Aug 2019. Kusama is an early, unaudited, and unrefined release of Polkadot, designed to serve as a “canary” network for Polkadot to test governance, staking, and sharding under real economic conditions.
  • Polkadot adopted a staged rollout strategy for its mainnet launch. Polkadot’s first mainnet chain candidate, Phase 1, launched on May 27, 2020. 
  • This early version of Polkadot operated as Proof-of-Authority (PoA) network managed by six validators belonging to the Web3 Foundation. Eventually, the network transitioned to its proposed Nominated Proof-of-Stake (PoS) system on Jun. 18, 2020 (Phase 2).
  • Phases 3 and 4 in late Jul. 2020 introduced Polkadot’s governance functionality and handed control of the protocol over to the community.

👴🏻 Gavin wood-Founder

  • Wood was born in Lancaster, England, United Kingdom.
  • He attended the Lancaster Royal Grammar School and graduated from the University of York with a Master of Engineering (MEng) in Computer Systems and Software Engineering in 2002 and completed his Ph.D. entitled “Content-based visualization to aid common navigation of musical audio” in 2005.
  • He co-founded Ethereum with Vitalik Buterin, Charles Hoskinson, Anthony Di Iorio and Joseph Lubin during 2013–2014. He also wrote Solidity, Etherium coding language and authored Etherium yellow paper. He also served as the Ethereum Foundation’s first chief technology officer. Wood left Ethereum in 2016.
  • Wood founded Parity Technologies (formerly Ethcore), which developed a client for the Ethereum network and creates software for companies using blockchain technology, with Jutta Steiner, who also previously worked at the Ethereum Foundation in 2016.
  • He founded Web3 Foundation, a non-profit and started working on Polkadot in 2017.

😌 What problems does it solve ?

  • Interoperability: Polkadot believes in a world where many blockchains exist and communicate with each other. Blockchains will benefit from exchanging information with each other, just as countries and traders benefit from trade:
    • Availability of a greater variety of goods.
    • Efficiency and specialization.
    • Efficient allocation of resources
    • Innovation
    • Competitiveness etc.
  • Other blockchains like Etherium needs to accommodate all use cases. Hence it optimizes for the average use case. This results in developers having to make compromises on the design and efficiency of their application (for example, requiring use of the account model in a payments platform where a UTXO model may be preferred).
  • Polkadot Substrate: Developers can use substrate framework and modules provided by Polkadot to quickly and easily develop blockchains that are efficient and secure.
  • Cheap: Transaction fee on Polkadot is several times cheaper as compared to Etherium.
  • Forklesss way to upgrade: Polkadot implements on-chain governance. No hard forks and community splits are involved in upgrading the protocol.
  • No downtime: Thousands of node operators running 24 X 7 ensure the network is always online.
  • Scalability: Polkadot performs 1,000 transactions per second (TPS) that can scale to 1 million transactions per second in the future.
  • No trusted third party: Users do not have to trust Polkadot team. The code is open source, anyone can see and verify how the code works.
  • Efficiency gains: Projects building on Polkadot do not have to run servers and hire an army of network engineers.

🤖 How does it work ?

Consensus mechanism

Polkadot uses a hybrid proof of stake consensus, which separates finality from the block production mechanism.

Polkadot allows the network to produce blocks at a rapid pace while permitting the slower finality agent to run in a separate process, thereby not affecting transaction execution times.

This design theoretically helps overcome the issues associated with probabilistic finality, namely the chance of unknowingly following an incorrect fork or the inability to produce new blocks (aka stalling).

The two mechanisms that power Polkadot’s consensus include:

  • BABE: The Blind Assignment for Blockchain Extension (BABE) is the block production mechanism. It assigns block production slots to randomly selected validators according to stake (as defined by the Polkadot randomness cycle).
  • GRANDPA: The GHOST-based Recursive Ancestor Deriving Prefix Agreement (GRANDPA) is the finality gadget for the Polkadot relay chain. This agent reaches agreements on chains rather than blocks, which could speed up the finalization process.

The protocol reaches consensus with help of 4 participants:

  • Collator:

    • Each para chain has a collator that fulfills the task of a miner in a proof-of-work (PoW) blockchain.

    • A collator maintains the Polkadot relay chain state as well as the state of the parachain.

    • The collator then manages the queue of transactions going into and out of the parachain from the relay chain.

    • Collators collects parachain transactions, produce state transition proofs, create new candidate blocks and then pass them along to validators in exchange for a fee for their work.

    • In a competitive market, collators can incentivize validators to choose their block by sharing a portion of their fee with the validator.

  • Validators:

    • Validators are randomly nominated to accept block candidates from parachain collators, verify the information in the block, and republish the block candidate to the Polkadot relay chain.

    • Once a validator confirms a block, they also validate and change the state of the relay chain block by moving the transaction data from the originating parachain’s input queue to the destination parachain’s output queue.

    • Validators are incentivized through a staking mechanism that requires them to stake Polkadot (DOT) tokens to the network to be chosen as an active validator.

    • Validators that break the consensus algorithm are punished by losing a portion of their stake, while those that correctly secure the network and verify blocks are rewarded with new tokens.

  • Nominators:

    • Nominators are those who may be unable to participate in the transaction validation process directly, so they instead contribute tokens to a validator of their choice.

    • Nominators receive a pro-rata share of the validator reward based on their portion of the validator’s bond, so nominators are incentivized to choose a validator most likely to receive the largest reward.

    • The team believes the nominator process will create a competitive, but honest, marketplace for high-quality validators and nominators.

  • Fishermen:

    • Fishermen do not participate in the transaction validation process with validators and nominators, but instead, act as watchmen monitoring activity across the Polkadot network and identify validators who break consensus rules.

    • Fishermen stake a smaller bond of tokens than a validator but receive a proportionally larger reward than validators for their role in securing the network.

Substrate

Polkadot’s substrate is a generalized framework that simplifies the process of building secure blockchains. It is based on two major principles:

  • Modularity: The goal of substrate is to create an ecosystem that allows developers to easily spin up blockchains without having to code each bit of functionality from scratch. Additionally, developers can create new modules to customize their applications. As Polkadot network develops, the ecosystem of modules will expand, making it increasingly easier to develop complex blockchains.
  • Capabilities-based security: Capabilities constrain the security boundaries between modules, enabling developers to better reason about the composability of modules and limit the scope of malicious or unexpected interactions.

Architecture

The Polkadot network uses a sharded model where shards – called “parachains”, allow transactions to be processed in parallel instead of sequentially. Each parachain in the network has a unique state transition function (STF).

Polkadot has a Relay Chain acting as the main chain of the system. Based on Polkadot’s design, as long as a chain’s logic can compile to Wasm and adheres to the Relay Chain API, then it can connect to the Polkadot network as a parachain.

Parachains construct and propose blocks to validators on the Relay Chain, where the blocks undergo rigorous availability and validity checks before being added to the finalized chain.

The Cross-Consensus Messaging Format (XCM) allows parachains to send messages to each other.

In order to interact with chains that want to use their own finalization process (e.g. Bitcoin), Polkadot has bridge parachains that offer two-way compatibility.

Relay chain

The Relay Chain is the central chain of Polkadot. It is composed of a relatively small number of transaction types that include:

  • Governance mechanism,
  • Parachain auctions
  • Participating in NPoS.

The Relay Chain has deliberately minimal functionality – for instance, smart contracts are not supported. The main responsibility is to coordinate the system as a whole, including parachains. Other specific work is delegated to the parachains, which have different implementations and features.

Parachains and Parathreads

Polkadot can support a number of execution slots. These slots are like cores on a computer’s processor (a modern laptop’s processor may have eight cores, for example).

Each one of these cores can run one process at a time. Polkadot allows these slots using two subscription models: parachains and parathreads.

  • Parachains have a dedicated slot (core) for their chain and are like a process that runs constantly.
  • Parathreads share slots amongst a group, and are thus more like processes that need to be woken up and run less frequently.

 Parachains will have to reserve DOT for the duration of their slot lease; parathreads pay on a per-block basis.

Most of the computation that happens across the Polkadot network as a whole will be delegated to specific parachain or parathread implementations.

Polkadot places no constraints over what parachains can do besides that they must be able to generate proof that can be validated by the validators assigned to the para chain.

This proof verifies the state transition of the parachain. Some parachains may be specific to a particular application, others may focus on specific features like smart contracts, privacy, or scalability — still, others might be experimental architectures that are not necessarily blockchain in nature.

Parachains connect to Polkadot relay chain by leasing a slot on the Relay Chain for up to 96 weeks at a time, with the option to renew.

Parachain slots are assigned by an on-chain auction, with auction winners locking up a bond in DOT for the duration of the lease.

Auctions and crowd loans raise the bar for blockchain projects, incentivizing them to demonstrate their technology and gain community support prior to launch.

Bridges

A blockchain bridge is a connection that allows for data transfer from one network to another. 

In Polkadot, bridges connect to the Relay Chain and are secured through the Polkadot consensus mechanism.

Bridges are fundamental to Polkadot’s interoperable architecture by acting as a [secure and robust] communication channel for chains in isolation.

🏛️ Governance model

Polkadot has two special collectives related to governance: the Council and the Technical Committee. 

The Council

The Council is an on-chain collective that exists to represent passive stakeholders. It does this by proposing important changes and canceling uncontroversially dangerous proposals. Any DOT token holder can run for Council, but their reputation is at stake to act in good faith for the network.

DOT token holders vote to elect Council members. Polkadot launched with a Council with thirteen seats that will gradually expand to 23.

The Technical Committee

The Technical Committee serves as Polkadot’s last line of defense against software errors. Unlike the Council, the Technical Committee is not elected by vote, but rather selected by the Council.

They can only make governance changes for critical bug fixes, but cannot control the network.

Governance process

All governance decisions begin as a proposal and pass through a public referendum. Proposals can start in three ways, namely:

  • From the public, as in any DOT token holder
  • From the Council, which consists of publicly-elected DOT token holders
  • As the result of the enactment of another proposal

Any number of public proposals can exist simultaneously, but only one can make it to a public referendum during each voting period to avoid conflicts.

Once a referendum begins, users can begin voting. But unlike other blockchains, votes are not strictly the number of tokens in an account. Every vote comes with some conviction, some skin in the game.

By default, users who voted for a passed proposal must lock tokens up until the proposal’s enactment. This lock makes them stay in the network and endure the ramifications of their vote, while those on the losing side of the referendum are free to exit.

But users can increase their voting power by committing to the decision for a longer period of time and thereby increasing their exposure to the outcome. This mechanism exists to ensure that users with little stake but strong opinions can express their conviction in referenda.

If the proposal passes, then Polkadot’s logic automatically schedules it for enactment, normally 30 days later to give time for external services to make any necessary adjustments and for those who oppose the decision to exit. Fast-tracked referenda, presumably for an emergency technical fix, can take effect immediately.

Each para chain can have its own governance – independent of Polka Dot governance(Relaychain).

😨Competitors

  • Tezos

and many more.

🤑 How much money does the project have for future development ?

  • The project raised:
    • $145 million in 2017
    • $60 million in 2019
    • $42.76 million in 2020
  • Project and founders have 30% of the overall DOT token supply.
  • The treasury generates revenue from:
    • Transaction fees: A portion of each block’s transaction fees goes to the Treasury, with the remainder going to the block validator.
    • Parathreads: Parathreads participate in a per-block auction for block inclusion. Part of this bid goes to the validator that accepts the block and the remainder goes to the Treasury.
    • Slashing: When a validator’s stake is slashed for any reason, the slashed amount is sent to the Treasury with a reward going to the entity that reported the validator. The reward is taken from the slash amount and varies per offense and number of reporters.

👍 Tailwinds

  • Growing ecosystem:Large number of projects are building on Polkadot.
  • Hundreds of parachains built using substrate can learn from each other and grow substrate developer ecosystem.
  • Sustainable model: Most crypto projects raise huge amounts of money one time at the start of the project during initial coin offering. They do not have any recurring source of income to fund their treasury. Polkadot team has long-term vision and a way to fund it.
  • Switching cost: It will be very difficult for apps built on Polkadot to migrate to other blockchain solutions with their community and ecosystem.
  • Network effects:
    • New apps can use the functionality of existing apps to build new features.
    • More apps will attract more users. As more users interact with apps, new apps will decide to build on Polkadot.
    • Number of Polkadot developers will increase as more users and apps join Polkadot ecosystem. As more developers learn to code on Polkadot: more apps will be built.

Controversies and hacks

  • In July 2017, a hacker exploited a vulnerability in Parity’s multi-sig wallet code and stole 153K ETH (about 33 million USD at the time) from three different wallets.
  • Only a few days after the token sale, 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.

😨 Risks and challenges

  • Parachains lease slots for a duration of 96 weeks. The parachain will be removed from the slot if it is not able to keep winning the auction every 96 week. Once the parachain has been removed it will have to pay uncertain fees on Parathreads to keep running. Application developers would not want to expose their applications to such base layer blockchain uncertainty.
  • Polkadot and projects built on it are a direct threat to the current banking, government and legal system. Governments will resist and  fight the change
  • Competition: There are many crypto projects that are in direct competition with Polkadot.

💰 Tokenomics

10 million DOT were created and distributed as follows:

  • 50% allocated to token sale investors
  • 5% allocated to the 2019 private sale investors
  • 3.4% allocated to 2020 token sale investors
  • 11.6% retained by the Foundation for future fundraising efforts
  • 30% allocated to the Web 3 Foundation for immediate use to develop the Polkadot network and other undisclosed Foundation activities.

 

The initial supply was later redenominated by a community vote, a cosmetic change that increased token account balances by 100x.

The tokens will be released as follows:

Token Inflation

The inflation rate depends on the total network stake. Current inflation rate is set to 10% per annum with total supply stake of 50%

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on DOT will come from:

  • Governance: Users will acquire DOT tokens to participate in the governance process.
  • Transaction fees: Users will acquire and pay DOT tokens to carry out inter parachain communication.
  • Staking: Users will also acquire DOT tokens to participate in the process of block validation.
  • Bonding: Projects will acquire and bond DOT token to win and deploy their parachain in relay chain slot.
  • Speculators: They will acquire DOT tokens for future price appreciation.

🧐 Indicators to watch out for

  • YouTube channel is gowing:
  • Twitter account is growing:

👋Final remarks

The project has a wonderful founder and team, who want to make the world a better place. They are doing valuable research which will help the entire crypto community to move forward.

I would be investing in DOT tokens. However, investors must keep in mind to stake with trusted validators to avoid being penalized by inflation.

😊 Do further research

You can continue your research by using following resources:

Further reading