Education • 4 min read
By Aron Abraham
Created by one of the co-founders of Ethereum, Polkadot is an open-source, decentralised protocol that connects many specialised blockchains called parachains into one, interoperable ecosystem.
Polkadot is an open-source, decentralised platform that connects many specialised blockchains called parachains into one, interoperable ecosystem. It was created by Gavin Wood, the former CTO and co-founder of Ethereum. Though the Polkadot network was launched in mid-2020, the Initial Coin Offering (ICO) of its native token, DOT, took place in 2017.
Polkadot’s aim is to create a blockchain ecosystem that is capable of working for several use cases, providing unprecedented scalability, interoperability, and heightened security. Apps and services that are developed on the Polkadot network can communicate with each other across the various chains. For example: Polkadot can enable secure data transfers between the Bitcoin and Ethereum blockchains.
The core value proposition of Polkadot is simple: to bring the best of blockchain technology to the masses. The project aims to accomplish this with its parachain framework: many semi-autonomous blockchains (parachains) are connected by the main chain and can process transactions on their own or together as needed. Think of the Polkadot ecosystem as a country with states: each state has some level of autonomy and special orientation, but they are all bound together by a common federal government, values and goals.
People who want to buy Polkadot can do so through cryptocurrency exchanges like Bitpanda using fiat currencies, e.g. euros or U.S. dollars. It’s a good idea to first get familiar with the Polkadot price history and the current exchange rate. Once purchased, your Polkadot investment can be viewed and accessed in a digital wallet that acts similarly to a banking app. You then have the option to hold on to your DOT or sell it again via the exchange.
DOT is Polkadot’s native token and has three core use cases for holders. They are able to use DOT for staking (which is necessary to keep the Polkadot network running), bonding and governance.
In a Proof-of-Stake (PoS) system, individuals stake cryptocurrencies (in this case, DOT) in order to validate transactions and to earn certain rewards in return. In the event of malicious behaviour, however, the stake can be lost. In a Nominated Proof of Stake system (NPoS), which Polkadot uses, nominators vote on who the validators will be by putting their own DOT at stake, meaning that they too are subject to losing their stake together with the validators they nominated.
NPoS provides an extra layer of security in the form of the nominator’s stakes, plus it allows virtually all DOT holders to continuously participate in the network’s maintenance. Also, NPoS aims to improve upon the efficiency of the traditional Proof of Stake algorithm.
Bonding DOT is required for connecting parachains to the main Polkadot chain. If the connected parachain later becomes inactive, the bonded DOT tokens are taken by the algorithm and the parachain is disconnected from the Polkadot main chain, which makes this bonding a kind of PoS in itself.
DOT holders also have governance rights, meaning that they get to vote on upgrades, fixes and the direction in which the network is headed in a coin-weighted voting system.
Polkadot is considered to be an alternative to Ethereum, and in many ways is influenced by Ethereum’s structure. The Polkadot founders identified the need for an interconnected and efficient ecosystem that features elements similar to those of the Ethereum protocols and technologies, but with the ability to easily scale to the next level.
Ethereum can currently process around 25 transactions per second (TPS), while Polkadot’s base TPS is set to be around 100,000. In terms of functionality, ETH can be used as collateral to create new tokens on Ethereum. DOT can also be used as collateral, but for the purpose of bonding new parachains to the main Polkadot chain. Also, ETH is the main currency of DApps (Decentralised Applications), but it doesn’t provide nearly as many governance rights as DOT, through which holders exclusively get to decide the future orientation of Polkadot.
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Bitpanda Tech • 2 min read
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