Polkadot — The next-generation blockchain
Blockchains have paved the path to decentralize the world in many fields including financial services, IoT, supply chain & logistics & many more, but the inbuilt protocols have made the blockchain system unsuited for real-world applications. The main drawbacks have been the scalability and the interoperability issues. In addition, the limited number of transactions per second, network bandwidth bottlenecks, and the increasing transaction fees due to congestion are also notable drawbacks of the existing blockchain networks. Therefore, a need has arisen to develop an application-specific system of blockchains that are scalable, customizable, and interoperable.
What is Polkadot?
Polkadot is a sharded blockchain protocol that is capable of uniting the entire network of diverse blockchains into a single ecosystem. It was founded in 2016 by Gavin Wood, one of the Ethereum co-founders. At present, W3F and Parity technologies are in charge of running and developing the Polkadot.
Current blockchain systems operate independently and in isolation. Polkadot aims to address this issue, by creating a multichain universal system where communication can happen between the independent blockchains. Also, it wishes to eliminate the other drawbacks, by making the system scalable & customizable while enabling cross-chain communication & transparent governance.
Following are some examples of cross-chain operations that Polkadot will enable,
- A payment on BTC being triggered by a smart contract running on ETH
- Cross-chain swaps
- DAPS communicating with each other
- Receiving information from other external sources (stock prices, weather data, etc.)
How does Polkadot work?
Polkadot achieves the above-mentioned functionalities mainly through 3 features.
- Relay chain
- Parachains
- Connectors (bridges)
The relay chain is the heart of the Polkadot network. Different blockchains optimized for specific functionalities are connected to the relay chain. This is similar to spokes(different independent blockchains) connected to a central hub(relay chain). It acts like a bookkeeper overlooking all the network transactions. The relay chain is responsible for the network’s shared security, consensus, and cross-chain interoperability.
Parachains are made up of sharded individual blockchains which are connected in parallel. These individual chains running in parallel increases the transaction speed significantly while paving the way for scalability. They are capable of communicating with each other, which helps to minimize the congestion on the main relay chain. Ethereum is also expecting to move to the sharded concept as a feature of Etherium 2.0. Parachains are available for sale through an auction and can be purchased by bonding DOTs. They can be customized to suit their needs and their stakeholders are given the complete freedom to govern their own blockchains. Further, they possess their own tokens and will be optimized for their own use cases.
Connectors will make the connection in-between the parachains and the central hub. With the connectors, already established blockchains like Bitcoin & Ethereum also can be connected to the Polkadot relay chain. Break-in & break-out smart contracts will allow these types of cross-chain communications.
As mentioned above, parachains are capable of running certain functions specific to a certain need. Most of these parachains are expected to run the core elements of the Polkadot network: scalability, privacy, smart contracts, and cross-chain DeFi protocols. These parachains can be further sharded into parathreads, which require even less computational power compared to parachains. Some of the most popular parachain competitors are as follows,
- MOONBEAM — a smart contract network that is compatible with both DOT & ETH
- Polkaswap — a decentralized exchange that can play the role of a decentralized central bank in a DeFi ecosystem
- Phala network — wishes to improve the privacy of smart contracts
- Crust network — a decentralized storage protocol supporting a distributed cloud ecosystem
- Kylin network — a data analytics platform
What is a DOT?
DOT is the native token used in the Polkadot network. It is used mainly for governance, staking & bonding within the network. As of today (29/05/2021), DOT trades around $21.24 in crypto exchanges with a market capitalization of $22.88B. Due to bonding & staking, the amount of DOT circulating reduces, while the parachains & transaction fees create demand for DOTs. This increase in demand & decrease in supply will cause a price increase.
Usually, an upgrade in the current blockchain systems requires hard forks which might take months to complete. There is a possibility for this to lead up to a splitting up of the community, which happened with the Ethereum network. Polkadot has overcome this issue by enabling forkless on-chain upgrades using a transparent on-chain voting mechanism. All the DOT holders are eligible to vote on the Polkadot network governance including voting on upgrades & network fees. Votes are distributed simply based on the DOT amount a user holds.
DOT holders can stake their tokens to the network as validators or nominators. Validators are the ones who are responsible for minting while nominators back them up. Both parties receive DOT rewards as an incentive for playing essential roles in the network, while fraudulent or dishonest users are punished by deducting a part of their stakes. This ensures that the network stays secure.
As mentioned previously, individual parachains are available for purchase through an auction. DOTs can be used for bidding. After winning a bid for a specific parachain, a bonding mechanism ties the DOTs to the relay chain. The DOT owners who invested in the auction for the specific parachain are eligible for the native tokens generated from that parachain throughout the bonded duration (which might last up to 2 years).
Consensus
The Polkadot network is managed by 4 distinct roles: validators, nominators, colaters, and the fisherman. Nominators secure the relay chain by selecting trustworthy validators and staking the DOTs. Validators also take part in securing the relay chain by staking DOTs, validating proofs from colators, and participating with other validators. Colators maintain shards (individual parachains) by collecting shard transactions from users and producing proofs for validators. The fishermen are responsible for monitoring the network and reporting the bad dishonest behaviors to validators.
In addition, there are 2 main governance roles in the Polkadot network: council members & the technical committee. Council members are elected to represent the passive stakeholders and are responsible for proposing referenda and vetoing malicious referenda. The technical committee oversees the developments in the network and helps the council to fast-track healthy referenda.
Polkadot uses the GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement) consensus mechanism. It is capable of finalizing the blocks almost instantly, compared to longer delays taken by the current networks.
Kusama
Kusama is the Polkadot’s experimental sister chain (test network). All the parachains will first roll out on Kusama before launching to the Polkadot.
Final Note
Polkadot is capable of introducing much more interesting features to decentralized ecosystems with its cutting-edge technologies. It should be noted that Polkadot was able to raise funds through 2 separate private rounds, despite the initial hacking attempt on the network. DOT is in demand backed up by valid reasons & looks fundamentally strong in the long run. So can the DOT hit $100? Will DOT be an alternative for ETH?
By Shasika Udayanga
Read more about Polkadot https://polkadot.network