Polkadot (DOT) Definition – Cryptocurrency – Investopedia
There have been a number of blockchain projects in recent years that have focused less on specific applications and more on general infrastructure-related improvements. Among them is Polkadot (DOT), arguably the most successful of the projects working to improve the fundamental technology that powers decentralized applications.
The Polkadot protocol attempts to break down the barriers between various blockchain ecosystems, allowing intermediary-free communication between these networks. We explain what Polkadot is, how it works, and why it's important in this guide.
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 their technical limitations. Ethereum is something of an exception, as the network is steadily moving toward a more scalable solution.
But the benefits are not limited to these technical pain points. Polkadot’s Substrate, a blockchain development framework, is a key 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.
The end result of this system is that developers can easily build blockchains and applications, leveraging a protocol that overcomes speed and scalability issues, while maintaining security.
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 consensus algorithm and was inspired by the Ouroboros protocol that also inspired Cardano (ADA).
The parachains are essentially Proof-of-Stake blockchains that can run independently and be customized to a great degree by the owner. They are focused on applications with features and programming logic that is limited to itself. But what binds these parachains together is the relay chain, which is responsible for shared network security, consensus, and interoperability. These chains serve as the governance layer of the network and are a management mechanism. The relay chain validates data and ensures that it is understandable, i.e., it is responsible for achieving consensus and ensuring transactions are executed.
Polkadot also contains bridges, which connect blockchains and allow data to be transferred between. Bridges are what establish interoperability. It can also 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.
The DOT token itself has two uses: for staking on the network to bolster network security and in the governance mechanism.
Polkadot was started by Ethereum Co-Founder Gavin Wood, someone 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.
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.
Many see Polkadot as one of the most promising networks of the future, as it is attempting to lay a foundation for how value is transacted across the internet. While the project is still in a fairly early stage, there are many promising developments that indicate that the path it has laid out could be the standard for value exchange.
It may not be the case that Polkadot convincingly becomes the go-to platform for development, especially not when Ethereum is set to release its own scalability improvements and with the arrival of other novel protocols. 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.
Polkadot can process an estimated 1,000 transactions per second, which is significantly higher than Ethereum’s 30 transactions per second. The potential upper limit for Polkadot’s transaction throughput is 1 million transactions per second.
Polkadot says that the parachain model is more decentralized and trustless than layer-2 scaling solutions alone. Many teams already have begun building parachains, so the future bodes well for this budding ecosystem. As of 2022, millions of transactions have been processed on parachains.
The Polkadot transactions acting in parallel via parachains—100 are currently supported—offer a great degree of freedom to developers. Those building on parachains have a lot of flexibility regarding state changes and the creation of general rules.
Three stakeholders exist within the consensus model on Polkadot. They are nominators, who pick validators; collators; and fishermen.
Nominators secure the relay chain and select trustworthy validators. The latter are themselves responsible for staking DOT, validating proofs from collators, and participating in consensus. The next group, 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. Fishermen, the last group, are responsible for reporting malicious behavior on the network.
As one of the market’s most popular assets, the DOT token is widely available on both centralized and decentralized (DEX) exchanges. However, when you trade it on a DEX, remember that it is a pegged version that is a representation of the asset on a specific blockchain. The actual DOT token can only be transferred to and from DOT addresses on the Polkadot network.
Cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology, which is a distributed ledger enforced by a disparate network of computers.
Polkadot lets all parties involved take public and private blockchains and plug them in to a shared connectivity layer, resulting in intermediary-free communication among the networks. Chains can choose to maintain their own validator set or use Polkadot's pooled security system to verify transactions via the relay chain, which is responsible for shared network security, consensus, and interoperability.
A blockchain is a distributed database or ledger shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. They are best known for their critical role in cryptocurrency systems such as Bitcoin, namely maintaining a secure and decentralized record of transactions.
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. As of the date this article was written, the author does not own Polkadot.
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