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Introduction to Polkadot (DOT)

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2022-08-11
Introduction to Polkadot (DOT)

Every day we interact with technologies controlled by a handful of large companies whose interests and incentives often conflict with our own. If we want the benefits of using their proprietary apps, we’re forced to agree to terms that most of us will never read, granting these companies complete control over the data we generate through each interaction with their tools.

What Is Polkadot (DOT)?

Polkadot is a next-generation blockchain protocol that unites an entire network of purpose-built blockchains, allowing them to operate seamlessly together at scale. Because Polkadot allows any type of data to be sent between any type of blockchain, it unlocks a wide range of real-world use cases. By bringing together the best features from multiple specialized blockchains, Polkadot paves the way for new decentralized marketplaces to emerge, offering fairer ways to access services through a variety of apps and providers. While blockchains have demonstrated great promise in several fields—Internet of Things (IoT), finance, governance, identity management, web decentralization, and asset-tracking to name a few—design limitations in previous systems have largely hindered large-scale adoption. Polkadot’s design offers several distinct advantages over existing and legacy networks, including heterogeneous sharding, scalability, upgradeability, transparent governance, and cross-chain composability.

History of Polkadot

Before diving further into details about the Polkadot ecosystem, let us take a look at the history of Polkadot. Polkadot has been developed by Parity Technologies under the leadership of Gavin Wood and Jutta Steiner. Both of them have already served as Ethereum executives. Most important of all, the Polkadot project also has the support of the Web3 Foundation. The Web3 Foundation emphasizes profoundly offering funding, advocacy, and research benefits along with collaborations.

Parity started off in 2015 and started working on node software for Ethereum, termed as Parity Ethereum Client. However, Parity shifted focus from that project towards Polkadot and another related project, Substrate. So, the journey of Polkadot started off in November 2017 with developers publishing the first code on GitHub. Subsequently, the company introduced two proofs-of-concept in 2018, followed by deploying the first para chain of Polkadot in July 2018.

Polkadot was officially launched in an ‘initial’ state in May 2020, and only a few months later, it enabled token transfers in August 2020. The relay chain of Polkadot had not been activated in September 2020, and the chain auctions are also not alive yet.

How Does Polkadot Work?

All blockchains make different tradeoffs to support specific features and use cases, and as chain specialization increases, the need to transact between them will only increase over time.

Polkadot is a sharded blockchain, meaning it connects several chains together in a single network, allowing them to process transactions in parallel and exchange data between chains with security guarantees. Thanks to Polkadot’s unique heterogeneous sharding model, each chain in the network can be optimized for a specific use case rather than being forced to adapt to a one-size-fits-all model. More chains and more specialization mean more possibilities for innovation. One blockchain isn’t enough to support a bustling future of decentralized applications. The limited throughput and lack of runtime specialization in early blockchains made them impractical for scaling in many real-world use cases.

By bridging multiple specialized chains together into one shared network, Polkadot allows for multiple transactions to be processed in parallel. This system removes the bottlenecks that occurred on earlier networks that processed transactions one-by-one. Polkadot will be able to scale even further in the future with a planned feature known as nested relay chains, which will increase the number of shards that can be added to the network. Early computer games were shipped on printed circuit boards known as cartridges. These cartridges were expensive and time-consuming to make as the code was etched onto the chips, leaving no room for error. These days we’re used to our apps, games, and browsers updating frequently, even automatically. Developers fix bugs before they can cause problems, and new features are added as better solutions become available. Like all software, blockchains need upgrades in order to stay relevant. However, it’s far more difficult to upgrade a blockchain than an app, game, or browser. Upgrading conventional blockchains requires forking the network, often taking months of work, and particularly contentious hard forks can break apart a community.

Polkadot revolutionizes this process, enabling blockchains to upgrade themselves without the need to fork the chain. These forkless upgrades are enacted through Polkadot’s transparent on-chain governance system. With this feature, Polkadot enables projects to stay agile, adapt, and evolve with the pace of technology. It also significantly reduces the risk associated with contentious hard forks—a severe barrier to entry for many organizations.

What Helps Polkadot Deliver So Many Functionalities?

The easiest answer to this question directly rests in the architecture of Polkadot. A proper connection of all dots on a Polkadot chart depicting its architecture can shed light further on its functionality. Polkadot combines a network of heterogeneous blockchain shards referred to as parachains.

The parachains connect to the Polkadot Relay Chain, which also takes care of their security. In addition, the parachains could also establish connections with external networks through bridges. Here are the important elements in Polkadot architecture which define its functionality.

Polkadot unites a network of heterogeneous blockchain shards called parachains. These chains connect to and are secured by the Polkadot Relay Chain. They can also connect with external networks via bridges.

1. Relay Chain

The heart of Polkadot, is responsible for the network’s security, consensus, and cross-chain interoperability.

2. Parachains

Sovereign blockchains can have their own tokens and optimize their functionality for specific use cases. To connect to the Relay Chain, parachains can pay as they go or lease a slot for continuous connectivity.

3. Bridges

Special blockchains allow Polkadot shards to connect to and communicate with external networks like Ethereum and Bitcoin.

4. Validators

Secure the Relay Chain by staking DOTs, validating proofs from collators and participating in consensus with other validators.

5. Collators

Maintain shards by collecting shard transactions from users and producing proofs for validators.

6. Nominators

Secure the Relay Chain by selecting trustworthy validators and staking DOTs.

7. Fishermen

Monitor the network and report bad behavior to validators. Collators and any parachain full node can perform the fisherman role.

Polkadot Governance Roles

Council Members

Elected to represent passive stakeholders in two primary governance roles: proposing referenda and vetoing dangerous or malicious referenda.

Technical Committee

Composed of teams actively building Polkadot. Can propose emergency referenda, together with the council, for fast-tracked voting and implementation.

DOT - Polkadot’s Native Token

The DOT token is Polkadot’s native token. It serves four functions: payment for fees, governance over the network, interoperability, and bonding. When messages are sent between two blockchains on the network, DOT's are used to pay for fees. DOT holders are also responsible for managing significant events by voting on protocol upgrades and fixes. The token also ensures that network participants act in a manner that does not damage the network by giving them skin in the game. In order to create new parachains, tokens must be bonded ensuring incentive alignment.

How to stake DOTs: While validators on Polkadot need to maintain the (often expensive) hardware necessary to secure the network, anyone can assume the role of a nominator by bonding their DOTs to a dedicated validator. Bonding tokens help increase the network’s cost of attack and allow DOT holders to earn newly minted tokens as staking rewards. Polkadot is targeting a 75% stake rate, which at a 10% inflation rate in the network’s inaugural year, would provide an annual staking return of~20%. Bonded tokens will remain locked for twelve weeks and are subject to slashing (loss of funds) should the chosen validator go offline or misbehave.

Polkadot Wallet: There are multiple teams working on Polkadot wallet implementations prior to the network launch. Most notably, blockchain.com announced that it will integrate DOT tokens into its wallet allowing users to store, send and receive tokens as well as participate in governance by voting on proposals.

The DOT token serves three distinct purposes: governance over the network, staking, and bonding.

Governance

Polkadot token holders have complete control over the protocol. All privileges, which on other platforms are exclusive to miners, will be given to the Relay Chain participants (DOT holders), including managing exceptional events such as protocol upgrades and fixes.

Staking

Game theory incentivizes token holders to behave in honest ways. Good actors are rewarded by this mechanism whilst bad actors will lose their stake in the network. This ensures the network stays secure.

Bonding

New parachains are added by bonding tokens. Outdated or non-useful parachains are removed by removing bonded tokens. This is a form of proof of stake.

Launch Initial Token Distribution

In Oct 2017, the Web 3.0 Foundation raised the equivalent of $145 million in ether (ETH) through a token sale. The sale was split between a private sale, which raised over $80 million, and a public sale, which raised the remainder. Participants were required to use a KYC system called PICOPS, which verifies the identity of each participant. Participants who were unable to verify themselves were deemed ineligible. The sale was also not available to any Chinese or American citizens due to regulatory concerns.

At the start of the network, a total of 10 million DOT (old) will be created as a native token. The initial supply was later redenominated by a community vote, a cosmetic change that increased token account balances by 100x. The following allocations are the same for both DOT (old) and new DOT:

  • 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 total supply is not fixed at 1 billion but instead will use a to-be-determined inflationary model to supply the rewards for the proof-of-stake (PoS) system.

On Nov 6, 2017, a vulnerability was exploited in the Parity multi-sig wallet containing over 500,000 ETH, including $98 million of the $140 million+ in ETH raised through the Polkadot ICO. These funds are currently frozen, and a debate among the Ethereum community will determine whether these funds can or will ever be recovered. Even if the funds are lost, the Parity team does not believe this will impact their development roadmap.

In Jun 2019, The Web3 Foundation announced it sold another 500,000 DOT (old) tokens (now 50 million new DOT) to an undisclosed group of private investors. Based on previous reports from Polkadot, the project was seeking to raise $60 million at a $1.2 billion valuation through this token sale. The Jun. 2019 announcement declared the raise successful, implying the Polkadot reached its target.

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