What is Polkadot?
Polkadot is a project that focuses on interoperability issues between blockchains. Let’s take a look at why this feature is essential to the development of the whole market.
1. Interoperability between blockchains, a necessary evolution
One of the fundamental problems with blockchain networks like Bitcoin or Ethereum is the lack of communication. A smart contract on the Ethereum blockchain cannot verify that a transaction has taken place on the Litecoin blockchain, just as a Tezos service is unable to detect a Stellar transaction. These blockchains are not interoperable.
However, it has already been proven that this communication is useful, if not essential. If decentralized finance protocols are successful, it is largely because they are composable and interoperable. And they are so because they all run on the same blockchain, Ethereum.
The ability to detect a payment on the Bitcoin blockchain could, for example, open up the entire Bitcoin valuation, the largest in the market, to decentralized finance. There are already intermediaries who offer products to make this bridge, for example wBTC and tBTC, which are representations of Bitcoin on the Ethereum blockchain, but it would of course be more interesting to be able to do this directly, and without any intermediary.
So this is the problem that Polkadot is trying to answer.
2. How does Polkadot work?
Polkadot consists of a central network, called the “relay chain”, which functions like a classic blockchain, with nodes, miners and all the infrastructure necessary for its operation. Around this network are grafted secondary networks to external blockchains such as Bitcoin. These secondary networks are called “parachains”.
The role of the relay chain is to ensure the security of the parachains and to relay messages between them. Messages can be any type of data, and are primarily used to detect a transaction and relay that information to the other chains.
Each parachain has a unique architecture depending on the blockchain on which it is connected and has of course its own token.
In this way, it becomes possible for projects that have a totally incompatible architecture to communicate through a common interface. This process can be summarized as follows: parachain 1 -> relay chain -> parachain 2
Everything we have described here is for users who want to exchange. But there is another type of stakeholder on the Uniswap platform, namely the investors.
3. Auction systems for new entrants
Each parachain added to Polkadot consumes a certain amount of resources. To get a slot on a parachain, a project will either have to get a parachain for free as it is considered necessary for the network, typically Bitcoin or Ethereum, or participate in an auction system.
But most projects can only rent parachains for a certain predefined period. The project providing the highest DOT bid, the native Polkadot asset, occupies the scheduled slot. The DOTs in the auction are then locked in for the lease period, ranging from six months to two years.
In exchange, an equivalent value in the native token of the parachain is generated. Thus, the liquidity of the parachain and the value of its tokens are secured.
One of the advantages of this system is that it allows even private blockchains to create their own parachain. However, as we know, the most important disadvantage of private blockchains is the lack of immutability, i.e. the guarantee that past transactions cannot be modified. By connecting via a parachain to Polkadot, they can acquire this immutability because they now depend on the Polkadot mining system.
4. Back to the story of Polkadot
Polkadot completed its ICO (a cryptocurrency fundraiser) on July 30, 2020, with a launch price of $0.29.
Alongside the Polkadot network, the development team created Kusama, a blockchain based on the same code as Polkadot, with more experimental features, which can be used by developers before they are implemented on the main network. Kusama is not considered a test network, but a network focused on research and development. Its token has a capitalization of $3 billion as of April 2021.
5. A complex transaction validation system
Polkadot has implemented a verification protocol called “nominated proof of stake” (NPoS). There are 4 groups of participants within Polkadot: nominators, validators, collectors and harvesters.
Each of these interdependent groups focuses on one aspect of transaction verification through DOT’s staking process: instead of running machines in competition with each other like Bitcoin, staking allows funds to be put into play for transaction verification.
Validators who do their job correctly are rewarded in DOT, and those who make mistakes have a portion of their capital taken away.
6. Conclusion and outlook for Polkadot
Polkadot has several strengths:
The security of its network.
The 421 projects that show increasing adoption.
The processes of remuneration and management of its token.
Be careful, because the DOT token is part of an inflationary scheme: the number of tokens is unlimited, and each year the number of DOTs on the network increases. The token gives access to several interesting functionalities: the governance of the project is managed entirely by its holders, and the staking system allows them to be remunerated, to validate the transactions on the network and to add new parachains.
Polkadot is therefore a project to watch, which meets a fundamental need for interoperability between blockchains. It proposes an original, innovative and high-performance architecture: the parachains are theoretically capable of delivering up to 1,500 transactions per second, which is significantly higher than Bitcoin and Ethereum.
Similar networks are also positioning themselves on this niche, such as Cosmos or Avalanche. Polkadot will therefore have to prove the superiority of its technological choices, and manage to fulfill all its promises before its competitors. Solving the interoperability problem between blockchains will be a major step for the development of the whole ecosystem.
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