By Aidan Kalish | Crescent City Capital Market Analyst Intern
The Polkadot project is a next-generation blockchain that is considered to be one of the most innovative projects in the cryptocurrency space. Polkadot intends to resolve many of the limitations that blockchains currently have such as security and scalability. This is done by using a multi-chain network that bridges unrelated blockchains together through the Polkadot network.
One of the biggest inhibitions of blockchains is that they have limited applications for most projects due to not having the proper infrastructure to provide a seamless connection to other blockchains. Polkadot provides the proper infrastructure needed to bridge projects across multiple blockchains. This is possible because Polkadot operates as a relay chain, which is a large blockchain that connects other chains to itself and provides communication between them. The relay chain is designed to have minimal functionality, for example smart contracts are not supported and cannot be used on the relay chain. The relay chain’s main task is to coordinate the overall system and its connected parachains. Aside from connecting the parachains on its network, Polkadot also allows its parachains to connect to both the Ethereum and Bitcoin networks. This means that parachains no longer have to choose which network has the best connections for the project, allowing them to access and interact with a vast network of systems.
Polkadot uses a different approach to consensus methods by implementing GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement). GRANDPA provides Polkadot with a more secure and scalable network by allowing parachains to pool security. The main actors that take part in this consensus method are the validators, nominators, collators, and fishermen.
Polkadot’s relay chain also ensures shared security for all its parachains. This creates a shared state between the relay chain and all of the connected parachains. If for some reason the relay chain has to revert, then all of the parachains would also revert. This ensures that the system’s validity can be maintained, and no individual part can be corrupted.
Polkadot uses its native token DOT to carry out the key functions of the network. These key functions are providing governance for the network, operating the network, and creating parachains by bonding DOT. The first function of DOT is to give holders complete governance control over Polkadot. This includes determining the fees of the network, and the schedule for the addition of parachains, upgrades and fixes to Polkadot. DOT’s second function is to facilitate the network’s consensus mechanism. DOT is required to be staked for valid transactions to be carried out across parachains. The third function of DOT is the ability to add new parachains by bonding DOT. The DOT used will be locked during its bonding period and will be released back to the account that bonded them after the duration of the bond has passed and the parachain is removed.
At the time of writing DOT has a market cap of $22.9 billion and a fully diluted market cap of $25.5 billion. DOT had a significant amount of growth in 2021 beginning the year at $9.20 and reaching its all time of $53.88 on November 3rd, 2021. DOT began 2022 at $29.73 and has since fallen to $23.07 at the time of writing. Despite its price crash, the DOT token continues to be popular among investors.
The largest risk to Polkadot is competition as there are other platforms that are taking different approaches to Polkadot’s functionality. Yet Polkadot’s innovative network still garners attention as the unique design of this platform and possible applications makes it easy to wonder what Polkadot will look like in a year or two from now. Polkadot has a lot of potential since it can be applied to essentially any blockchain. The ability for a project to interact with another project based on a different network creates even more possibilities for developers and strengthens the appeal of Polkadot’s network. This could potentially lead to a large increase in the amount of projects utilizing Polkadot, thus increasing the value of DOT making it a worthwhile investment.
Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. Please conduct your own due diligence before making any investment decisions.