Polkadot (DOT)

What Is Polkadot?

Several blockchain projects in recent years have focused less on specific applications and more on general infrastructure-related improvements. Among them is Polkadot (DOT), arguably one of the most successful projects working to improve the fundamental technology that powers decentralized applications (dApps).

The Polkadot protocol attempts to break down the barriers between various blockchain ecosystems, allowing intermediary-free communication among these networks. Polkadot can be thought of as a network of networks, allowing even vastly different blockchain architectures to interact with each other. It does this through parachains, or specialized blockchains that have their own functionality and tokens. The network uses the nominated proof-of-stake (PoS) consensus algorithm and was inspired by the Ouroboros protocol.

Learn what Polkadot is, how it works, and why it’s important to blockchain and cryptocurrency advancements.

Key Takeaways

  • Polkadot (DOT) uses the nominated proof-of-stake (PoS) consensus algorithm.
  • Polkadot uses parachains and a relay chain to facilitate a much more scalable blockchain ecosystem.
  • The protocol’s bridges allow different blockchain networks to interact with each other.
  • The protocol also features the DOT token, which is used in governance and staking.

Polkadot Basics

Polkadot was started by Ethereum co-founder Gavin Wood, who, incidentally, coined the now-ubiquitous term Web3. Wood published the white paper for Polkadot in 2016, launching the Web3 Foundation alongside Peter Czaban the year after. The foundation then raised $145 million for the development of the protocol by selling DOT tokens. There was another private sale in 2019, which raised $43 million.

Issues Addressed by Polkadot

Industry experts and developers list three major obstacles hindering the growth of blockchain technology: speed, scalability, and security. Most first-generation blockchains, a somewhat loose term, have made incremental improvements over time, but they remain inhibited by technical limitations such as scalability.

Parachains and the Relay Chain

Parachains are essentially PoS blockchains that can run independently and be completely customized by the owner. They are focused on applications with features and programming logic that is limited to themselves. These chains serve as the governance layer of the network and are a management mechanism.

But what binds these parachains is the relay chain, which is responsible for shared network security, consensus, and interoperability. The relay chain validates data and ensures that it is understandable; i.e., it is responsible for achieving consensus and ensuring that transactions are executed.

The Polkadot network first launched in May 2020, with multiple technical releases following in the months after. Polkadot was considered fully launched with the release of five parachains in December 2021.

Bridges and Parathreads

Polkadot also contains bridges, which connect blockchains and allow data to be transferred among them. Bridges are what establish interoperability and can be used to connect with external networks like Bitcoin (BTC) and Ethereum. Another part of the network is parathreads, a smaller-scale version of the parachains that works on a pay-as-you-go model. It is useful for blockchains that don’t require continuous connectivity to the Polkadot network.

Substrate

The benefits are not limited to only addressing the previously mentioned technical pain points. Polkadot’s Substrate, a blockchain development framework, is a vital part of the project’s offerings and has strong implications for how development in the industry evolves. Its design is such that teams, companies, and individuals can focus on building the actual product—as much of the initial legwork of designing a blockchain is taken care of by the framework.

Consensus

Three stakeholders exist within the nominated proof-of-stake consensus model on Polkadot. They are nominators, validators, and collators:

  • Nominators: secure the relay chain and select trustworthy validators.
  • Validators: responsible for staking DOT, validating proofs from collators, and participating in consensus.
  • Collators: require less involvement than a validator—they are responsible for keeping a record of valid parachain transactions and sending them to validators on the relay chain.

The DOT Token

The DOT token has two uses: for staking on the network to bolster network security—also called bonding—and in the governance mechanism.

  • Staking: Like other proof-of-stake blockchains, staking DOT incentivizes network participants to act honestly by holding DOT as collateral for good behavior. Rewards are issued to those who stake their DOT.
  • Governance: DOT holders are given rights and abilities to participate in voting through referenda—a voting scheme weighted by stake.

Polkadot's Future

Many see Polkadot as one of the most promising networks of the future, as it is attempting to lay a foundation for a multitude of purposes. While the project is still in its early years, many developments indicate that the path it has laid out could be the standard for value exchange.

Polkadot may or may not become the go-to platform for developing blockchain-based applications, especially with Ethereum releasing its own improvements that address many of the same issues. However, what is particularly favorable is the combination of the Substrate development tool along with the fundamental technical benefits, which could attract a lot of development.

The Polkadot transactions acting in parallel via parachains—100 are currently supported—offer developers a great degree of freedom. Those building on parachains have a lot of flexibility regarding state changes and the creation of general rules.

Polkadot can process an estimated 1,000 transactions per second. The potential upper limit for Polkadot’s transaction throughput is 1 million transactions per second.

Polkadot says the parachain model is more decentralized and trustless than layer-2 scaling solutions alone. Many teams have already built parachains, so the future bodes well for this budding ecosystem. As of 2022, millions of transactions have been processed on parachains.

Where Is Polkadot Available?

The actual DOT token is not available on centralized or decentralized exchanges. The tokens seen on these exchanges are tokens created on a different blockchain pegged to DOT. You can purchase the pegged DOT on exchanges such as Binance, Coinbase, Kraken, and Gemini. The tokenized DOT is not widely available on decentralized exchanges like SushiSwap, UniSwap, or dYdX.

If you own DOT, there are several wallets you can use to store it. Some examples are Ledger, Fearless, Polkawallet, and Polkadot-JS Plus.

Is Polkadot Crypto a Good Investment?

DOT, like any cryptocurrency, experiences significant price fluctuations. This volatility makes DOT a risky investment. It's best to talk to a financial advisor familiar with cryptocurrency to find out if DOT is suitable for your investing goals and strategy.

What Is Polkadot DOT?

DOT is the native token for the Polkadot blockchain ecosystem. It is used within the Polkadot environment for governance rights and validation staking.

What Is Polkadot Crypto Worth?

The DOT found on exchanges is not the actual DOT—it is a pegged version created on another blockchain. This version's price fluctuates, but on Sep. 29, 2022, its value was $6.34.

Investing in cryptocurrencies and other initial coin offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Because each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
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  3. Polkadot. “Parachains Are Live! Polkadot Launch Is Now Complete.”

  4. Polkadot. “About Polkadot, a Platform for Web3.”

  5. Polkadot. “Polkadot: Vision for a Heterogeneous Multi-Chain Framework: Draft 1,” Page 1.

  6. CoinDesk. “Polkadot Goes Live as Web3 Foundation Pushes Prospective Mainnet.”

  7. Nasdaq. “Polkadot Raises $43M in 72-Hour Private Sale: Source.”

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  10. Polkadot. “Availability and Validity.”

  11. Polkadot. “The DOT Token.”

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  13. Coinbase. “What Is Polkadot (DOT)?

  14. Polkadot. "Can I Trade DOR on a DEX?"

  15. Polkadot. "Where To Store DOT: Polkadot Wallet Options."

  16. CoinMarketCap. "Polkadot (DOT)."

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