An Overview : The Polkadot Ecosystem

Introduction:

The web3 market is awash with various Layer-1 and Layer-2 solutions that differentiate themselves by using different consensus or scalability processes. Many of these chains can be delegated using the services provided by Luganodes. Read our in-depth reports on these chains on the Luganodes Medium! Each of these networks aspires to be the missing piece in the blockchain trilemma jigsaw.

Polkadot, on the other hand, positions itself as the first Layer-0 solution in the blockchain sector. It provides a framework for several blockchains to relay communications, including value, in a trust-free manner. Now isn’t that awesome?! In this report, you will learn about Polkadot, how it operates, its tokenomics, current trends, and on-chain metrics, as well as many other aspects that contribute to Polkadot’s success.

Why Polkadot?

Currently, the world’s blockchain initiatives are relatively abstracted from one another concerning the fact that there is no direct channel of data communication between them. For example, if your proof of age is kept on another blockchain and you need this data to complete a few transactions, you would be heavily reliant on a third party to assist you to execute this information transfer. This brings with it more risks than advantages since it entails placing trust in an entity, which on some level veers into the realm of centralized economics. Polkadot is a multi-chain technology that is scalable and diverse. Polkadot is a crucial building piece of the new web that aims to empower individuals and companies, corporations, and governments to use private and secure applications that don’t rely on trusting a third party. Polkadot was created in 2016 by Ethereum co-founder Gavin Wood. It was created by Parity Technologies, a software business located in London, England. Polkadot’s development is overseen by the web3 foundation, a non-profit organization in Switzerland. Polkadot’s main net went online in the summer of 2020, and while it is wholly functioning, the project is still technically in development.

How it works?

Polkadot’s Relay chain is the backbone of the Parachains, which are full-fledged blockchains with their tokens and consensus mechanisms. The Relay chain is responsible for security, consensus, and cross-chain interoperability. To obtain continuous connectivity with the Relay chain, blockchain networks can adopt a pay-as-you-go approach (Parathreads) or lease Parachain slots through a candle-style para chain slot auction by bonding the most DOT. The Relay chain can host an estimated 100 to 250 Parachains. The Parachain can do very complex transactions quickly without clogging up the base chain. An important Parachain on the network is the Kusama network, which is the canary chain for Polkadot. Kusama provides a testnet to try out new innovations that could potentially be on the Polkadot network, i.e. Kusama is a launching pad for Polkadot products. Other popular Parachains include Acala, Moonbeam, Noodle, and Moonbeam. See the entire Parachain list on Polkadot and Kusama here.

To achieve consensus on the Relay chain, Polkadot uses its version of the delegated proof of stake mechanism which it calls nominated proof of stake. While the hardware requirements for running a Polkadot validator are modest, validators must stake a minimum of 1.8M $DOT to become part of the active validator set, according to the Polkadot’s website.

Decentralized apps have now permeated almost every facet of the web2 world, and also introduced various new use cases like NFTs and smart contracts. Ethereum, despite its revolutionary and ambitious intentions, failed to comprehend that a single blockchain is insufficient to serve the possibly thousands of applications that would emerge in the future years. Polkadot’s Relay and Parachain structure connects numerous specialized chains into a single-sharded network, allowing multiple transactions to be executed at the same time. Polkadot also plans to improve its scalability through a feature called nested Relay chains, which will expand the number of Parachains in the network.

Under the hood, the Substrate development framework is used by the Relay chain and its Parachains. Substrate, created by Parity, has all of the capabilities required to build one’s own blockchain. Thanks to Substrate’s forkless upgrades and transparent governance tools, networks built on Substrate can add new features over time without the fear of splitting the network.

Tokenomics

The $DOT token is used for governance, staking, and bonding. Unlike any other network, $DOT holders exercise complete control over the protocol and are eligible to participate in events such as protocol updates and bug fixes. They are also rewarded for staking their $DOT. Bonding tokens aid in the induction of new Parachains as well as the removal of outdated Parachains.

Polkadot’s native cryptocurrency, $DOT, was introduced in 2017 with the distribution of 10M tokens via an ICO. The original supply was later redenominated by a community vote, which resulted in a 100x rise in $DOT account balances. This functioned similarly to a stock split and had no effect on the $DOT valuation since each token was now valued 100x less. The current circulating supply of $DOT is 1,252,457,614. $DOT has no fixed supply limit; instead, tokens are regularly pushed into circulation at a 10% yearly inflation rate. The initial token distribution of the coin followed a crowd sale pattern, and the distribution was done as follows:

Funding

Polkadot raised around $145 million in 2017 and an additional $100 million between 2019 and 2020. The second round of sales was intended to make up for the $100 million lost when the project’s Ethereum wallets ($30 million) were hacked shortly after the first round. Polkadot got around $130 million in initial fundraising, and while numerous Polkadot ventures have since generated tens of millions of dollars, Polkadot has not received any post-ICO funding.

Polkadot has also participated in several venture rounds and secondary market deals. 30 investors contributed a total of $293.7 million to the fundraising. Among the venture capital firms are Kosmos Venture, CoinFund, 8 Decimals Capital, and AU21 Capital.

Current Trends

At first sight, a Polkadot newcomer may believe the network is not as decentralized as other big Layer-1 networks such as Solana and Avalanche. This is due to the fact that the number of validators in both networks greatly outnumbers that of Polkadot — Solana has almost 85% more validators and Avalanche has over 78% more validators than Polkadot’s 297! However, according to a recent report by Ultimate Money, Polkadot’s Nakamoto coefficient outranked every popular Layer-1. Nakamoto coefficient is the gold standard for quantifying the extent of decentralization in a network, and Polkadot’s Nakamoto coefficient of 82 was 3x that of Solana and Avalanche and a whopping 12x of networks like NEAR and Cosmos.

This is a natural consequence of the project’s sharded design. When combined with the nominated proof of stake consensus, this framework enables better stake distribution and, as a result, more decentralization. Polkadot’s excellent decentralized governance has aided in the administration of about 540 network upgrades so far, and the network is working to make its governance system more decentralized.

Polkadot’s improvements, upgrades, collaborations, and announcements have been fantastic, but the price charts were not very kind to the digital token. Its price is essentially the same as it was when the previous bull market began. The extremely bad price behavior of $DOT is attributable to several things, the first of which is that the rest of the crypto market has been disrupted as a result of the hawkish economic policies implemented in the previous two quarters.

To add fuel to the fire, $DOT is not obliged to pay transaction fees on Polkadots Parachains, implying that it lacks a major demand driver that many other smart contract cryptocurrencies have. In all fairness, when new use cases are developed on these Parachains, the demand for $DOT is certain to rise. For the time being, the only major demand driver for $DOT is people and institutions interested in participating in Polkadot’s ongoing Parachain slot auctions. The project’s published roadmap concludes with future enhancements like as its recently announced cross-chain communication protocol and the launch of Parathreads, which will certainly increase demand for $DOT.

Despite the red on the price charts, the market registers positive sentiment toward the network. In the last two weeks, Polkadot saw a surge of about 300% in the daily new accounts and has experienced a surge of 900% of the same metric in November 2022 alone. These spikes can be attributed to the outflow of liquidity from centralized exchanges.

Conclusion

Polkadot is an ecosystem of Parachains that are built on a Relay chain. Polkadot’s security is shared by the Parachains, and they will be compatible without the need to develop their own blockchain. The DOT token is utilized in governance, security (staking), and augmenting new Parachains. $DOT is one of the few assets that has a decent possibility of recovering from the troughs of crypto gloom. Polkadot is well on its way to attracting additional users to its platform and sustaining itself in this competitive sector, with 27 Parachains now in place.