Polkadot. (DOT): Connecting Blockchains

To fully understand the fundamental drivers behind the new token Polkadot (DOT), one must comprehend the facets of blockchain in general.

As its name suggests, blockchain is a collection of blocks that link together and store a chain. The blocks are different vessels that comprise a larger unit that allows data to be stored, immutable by other forces. This means that once data appears on the block, it cannot be changed or altered. As new data flows into the network, it is stored onto new blocks, linking to previous blocks while chaining them together in order. Thus, blockchain has birthed a market of decentralized currencies offering the transmissions of data to be completed with speed and integrity.

Cryptocurrencies that emerge are different applications of blockchain technology in some facet. A decade ago, Bitcoin (BTC) gained popularity by simply using blockchain to have transactions permanently recorded and viewable to anybody as a public ledger. Ethereum (ETH) gained notoriety because it facilitates many of the same uses of Bitcoin but does so through more efficient means. Furthermore, what differentiates BTC from ETH is the fact that ETH is built upon an Open-Source API, meaning Ethereum can be leveraged by companies looking to develop new programs on top of existing blockchain technology.

Enter Polkadot: “A scalable, interoperable & secure network protocol for the next web” (Polkadot.network). Polkadot is a blockchain-built ecosystem comprising of individualized tokens called DOTs. A DOT token is to Polkadot as a bitcoin is to the Bitcoin network. However, the main components of a Dot and Polkadot protocol are: Relay Chains, Parachains, and Bridges.

• Parachains are heterogeneous blockchain shards housed and secured by the main Polkadot Relay Chain.

• Shards are networks of nodes that hold bits of data.

• Sharding is the act of breaking up workload (data) with peer-to-peer nodes. Every shard is shared amongst a network of nodes comprising of parachains that offer scalability to existing blockchain networks through bridging each parachains. To better understand this concept, consider the following: When Bitcoin makes a new transaction, data is stored or added onto the blockchain. The main issue that exists for current blockchains in terms of scalability is processing time and energy. However, with heterogeneous sharding, Polkadot can break up the amount of work needed for the different crypto networks to function. It essentially acts as a method to partition data, making it faster to process with different identifiers noting the assortment of addresses, like a librarian that knows where each book in the library belongs.

• So, in short, the parachains are comprised of shards. Shards are composed of peer-to-peer nodes that break up workloads of data. These nodes can have their own data, meaning their blockchains can have their own tokens and specialized functions.

• Bridges are another component of the Polkadot protocol composed of different Polkadot shards that can link across chains. Now in English: take something you bought in BTC and buy it in ETH or any other cryptocurrency. In a sense, it creates a bridge linking blockchain technology across platforms or networks. BTC-XRP-SOL-ETH-LTC, are all capable through this technology at low costs because of the Polkadot ecosystem.

• Validators are tiny nodes that secure the relay chain by staking DOTs, validating proofs from collators, and participating in consensus with other validators.

Transactions from Polkadot are signed by validators and fed into the Ethereum network, where they can be interpreted and enacted by a transaction forming a forwarding contract. Given Ethereum’s ability to host both break-in and break-out contracts, Polkadot can exercise transactions via the Elliptic Curve Digital Signature for approximately 3,000 gas under EVM. On a daily rotation of validators, maintaining this bridge to the Ethereum network costs only $45 per year.

• Staking contracts in the Polkadot ecosystem is the mechanism by which Polkadot Relay Chains can maintain validator sets depicting which accounts are currently validators, which accounts placed a stake nominating validator, along with the properties of each stake, the APY charged, volume, etc. Holders of the DOT currency are currently incentivized to place their tokens for stake through the accrual of interest on their underlying asset: (DOT).

There is an interesting parallel drawn between the Polkadot protocol and the process commercial banks use to regulate deposits and lending segments. Banks lend out deposits in exchange for a loan, but to ensure that every customer can get access to their money at any time, they keep a reserve ratio of at least 20% (reserves in cash relative to total balance sheet). Staking is pivotal to the functionality of Polkadot technology and so that there is continuous liquidity in the market.

How do you force staking of a currency? Well, the same way it’s done with the current financial institutions in the United States: Offer interest.

Incentivization of staking is done through the offering of interest for a period of time. Just as a bank incentivizes consumers to keep assets under their roof in exchange for interest, while they leverage the assets to make loans. This is the same concept as staking; however, the incentivization of staking promotes network security. Individuals who choose to stake their coins are, in a sense, the neighborhood watch person for the entire crypto space. Its game theory, Polkadot essentially acts as a mechanism in which good actors are rewarded (APY interest to have their DOT staked), while bad actors lose their stake in the network (fisherman-group of validators, destroy bad actor).  It effectively enables a self-regulating, incentivized governance and security of the blockchain because of the token’s technology. For Polkadot’s secure technology to exist, there needs to be individuals staking their currency onto the network; otherwise, it cannot form a bridge composed of parachains made up of bonded tokens (DOT). People are incentivized to stake their DOT to earn interest, and if they act in malintent as a stakeholder or validator, then your stake in dot is entirely gone and regulated by the other stakeholders. To further comprehend the governance, consider the following:

In the Polkadot protocol, the ecosystem is governed by the tokens (DOT) themselves. It enables staked tokens to be utilized as a voting mechanism for any protocol changes the currency aims to undergo. While some may be concerned surrounding the assertion of worth equivocating voting weight, Polkadot offers time-locking stakes. These stakes allow owners of DOT to elect to stake their currency for a longer duration of time so that they can weigh their view on a particular issue that pertains to Polkadot more so rather than owning additional Polkadot. This effectively allows the monetary system to be self-governed, with those who wish to hold DOT longest or have significant amounts of DOT staked in the ecosystem. They are granted voting rights, interest earned, and ownership of the network’s technology. Each DOT token staked in the ecosystem allows for the interoperability of blockchains, the primary function of the Polkadot technology. While the ecosystem hinges on staked currency to allow for the tokens to enact the Polkadot technology on different blockchains, it incentivizes its base to stake its currency in exchange for both interests earned on the underlying asset along with voting rights within the community itself in efforts to govern the future updates to the blockchain’s protocol. This enables the users of the blockchain to democratically choose the advancement of the currency itself, which is another incentive for investors to stake their wealth with DOT tokens.

So, what does this all mean? Well, one thing you may be confused by is the oversaturation of different cryptocurrency networks that seemingly utilize the same technology: Blockchain. DOT recognizes this and doesn’t want to be another crypto network like Bitcoin or Ethereum. Instead, they believe in the power of decentralizing the entire crypto universe so that it is possible for someone to transact across blockchains, with the crypto holders deciding policy. We’re talking XRP to ETH, BTC to DOGE, the whole gambit, all without using an exchange. It is sounding out to be a dawn of a new world bank. A bank that allows for the interoperability of blockchains, whose policymakers are stakeholders, owners of DOT. To give a practical, real-world application of how this technology (Polkadot along with a DEFI app on the Polkadot ecosystem) is used, consider the following:

• Mark buys an NFT from an auction of his favorite artist Justin Bieber in the underlying currency: Bitcoin.

• Mark loves his NFT but wants to pass his NFT on to a younger-more vibrant fan because he feels that he’s exhausted its utility for himself.

• Mark lists his NFT on Instagram saying that he’s open to offers and that anyone interested can DM him.

• Mark finds a young, vibrant fan to whom he would like to sell the NFT. However, the younger fan has Ethereum and is concerned that he cannot transfer that NFT to his Ethereum wallet because it is being denominated in Bitcoin.

• Mark assures the young fan that because it was engineered and facilitated by the Polkadot ecosystem and a (DAP of the Polkadot Ecosystem), Mark can sell his Bitcoin denominated NFT to the younger fans Ether denominated wallet.

How is this transaction verified, do you say? Well, it’s through blockchain. Where the blocks in this scenario are all the existing cryptocurrency networks, and the chain linking them together is Polkadot.

But isn’t UNISWAP essentially the same thing?            

Well, when UNISWAP occurs, it uses abnormally high gas fees, incurring a large cost on the buyer and seller along with copious amounts of energy use. Polkadot uses its parachains and heterogeneous sharding to partition the blockchain quicker into smaller bits, allowing for a faster and more cost-effective transaction. This allows Polkadot to have interoperability between multiple cryptocurrency networks while allowing each chain to remain the same ecosystem. This is accomplished with the parachains (shards and nodes) of Polkadot and their Relay Chain being able to form bridges across networks for a truly decentralized financial system that is incredibly cost-effective.