What is Polkadot? It Might Not Be Too late To invest!

In this Polkadot Blog post, we are going to dive into the project and give you a basic understanding of it!

Here is what we are going to cover:

• History of Polkadot
• Purpose of the project
• Breakdown the structure
• Discuss Relay Chains
• Look at Parachains and the use-cases
• Talk about what “Bridges” are
• Touch on general governance and Consensus
• Tell you my personal perspective
• Is it too late to invest?
• and finally leave you with some links to learn more!

Remember, the point of these posts are purely educational. I want to teach you guys the basics of the projects, give you some cookies to learn more, and throw in my 2 cents since I’ve been around the market for a while. At the end of the day, please use this knowledge to make your own financial decisions, and remember I am just some guy on the internet blogging about crypto in my free time.

Nothing should be considered investment or financial advice. Enjoy the ride.

Quick History of Polkadot

The Polkadot project was envisioned by Gavin Wood in 2016. He happens to be an Ethereum Co-founder and the creator of Solidity which is the programming language used by Ethereum. Already you can see where some of the politics and inspiration comes in.

Today, the project is run by the Web 3 Foundation (W3F) and developed by Parity technologies. Ironically, both of these companies were also founded by Gavin wood.

Polkadot raised roughly $200 million from investors across two sales of its DOT cryptocurrency, making it a fairly well funded project in the crypto community.

If you want to check out the White paper and learn more about the history then this brief summary of the project then here is the link for those interested.

Purpose of the Project

The purpose of Polkadot was born from the problems that the crypto market is currently facing and will need to solve in order to push the crypto agenda into the traditional market.

Most blockchains currently are fragmented and separated in terms of use. In short, there is no efficient way for these chains to communicate or really work together. This means that sharing data, merging value or anything is extremely difficult.

Polkadot aims to fix this by providing cross-chain interoperability for projects. It will allow any blockchain, public, private, premissioned, premissioned-less, oracles, and decentralized apps to talk to one another and be connected for the first time. This will all be done through trustless and decentralized connections within the Polkadot network.

Here are some examples.

Lets assume you have a type of smart contract on the Ethereum network that needs to trigger a payment from the Bitcoin network. This could be done on the Polkadot network.

Or if you need to make a cross-chain swap of LTC for ADA using a smart contract and no intermediary for potential micro payments. The Polkadot network can handle this.

Perhaps you have an oracle protocol within your network then needs to feed price data to several blockchains simultaneously to update exchange rates. This can also be done on the Polkadot network.

Some people have referred to Polkadot as The Internet Of Blockchains

Imagine each blockchain as its own website or data base. Polkadot could be referred to as the Google search engine for websites or maybe even as the main server to connect all the websites for communication and interaction.

Chain Breakdown

Breaking down the Polkadot network is not to difficult. The network functions by creating three separate types of chains. Those types are:

• The Relay Chain
• Parachains
• Bridges

This could look confusing, but it is actually quite simple to understand. Lets start with the main chain, the Relay Chain.

Relay Chain

The main chain that is created from the Polkadot network is called the Relay Chain. This is the chain that is tasked with filing, confirming and integrating transactions. In order for the network to be faster than most other chains, the Relay Chain parses up this process into two main areas:

• Adding new transactions
• Validating transactions

By doing this, the network can currently process over 1,000 transactions per second according to some testing sites! Speed is extremely important because of what Polkadot aims to do. The network was built to allow multiple blockchains to connect to each other, so it will need all the speed it can get in order to allow that to happen real time without lag.

Lets get into the next chain to help describe just how the network plans to “allow” other chains to communicate to each other.

Parachains

The second chain created on the Polkadot network is referred to as a Parachain. A Parachain is simply a custom blockchain. This custom blockchain is used to pass along the chain’s computational power in order to validate the order of transactions and amounts.

Parachains are a little hard to understand, but let me try walk through some examples to help explain what they are and how companies acquire them.

Parachain example 1

Lets make a quick example of a Parachain in use.

Lets say there is a company called NUMBERS INC that wants their own blockchain to store data. NUMBERS INC has many clients that give it sensitive data that is used for financial services.

NUMBERS INC might learn about blockchain and decide, “Hey we want one of those, but we don’t want to build it.”

Then they might come to Polkadot and say, “We would like a Parachain to host out clients data, and use your network to preform some of our financial services, and host our native app on.”

NUMBER INC would then go and purchase a select number of DOT tokens to bid for the bond amount at a specific parachain bid.

Parachain Example 2

The other example will obviously be a project like Ethereum.

The Ethereum foundation could purchase a select number of DOT tokens and bid for a parachain likewise with the bond payment. Now why would Ethereum want to support Polkadot? Because Polkadot aims to make parachains able to communicate trustlessly with the third chain we will discuss in a moment called bridges.

This means that Ethereum could execute smart contracts with other chains in order to settle cryptos in other cryptos. In short, you could have a smart contract that is settled in Bitcoin without the need of a third party exchange that is hosted on the Ethereum parachain.

These are just small examples, and I am sure there are thousands more.

Acquiring a Parachain

In order to acquire a parachain, companies can join an auction and bid for one. Ideally, the network will only have up to 100 Parachains. The companies bidding will try to reach a “bond” amount that will be a specific number of DOT tokens that will be placed in reserve as the bond payment for using the Parachain.

The idea behind this is DOT tokens will be able to get staking rewards at 10%-20%. By placing the tokens in a bond and on the Relay Chain these tokens owned by the company will forgo those staking rewards. These staking rewards can also be considered as the risk-free rate of owning DOT tokens.

In short, companies will bid on these parachains with DOT tokens. The tokens will be placed in a holding or reserve account on the main chain, and the companies will be allocated resources from the main chain. By placing tokens in the holding account, companies will forego the staking rewards they could have received with their tokens, aka the opportunity cost.

Parachain Loan Offering

Companies that can not afford a bond payment can use what is called a Parachain Loan Offering in order to secure the required amount of DOT tokens. These loan lenders will be “rewarded” for their contribution with on-chain tokens or rewards ideally on that newly created parachain.

That about covers the parachain idea. Lets move onto the third chain created on the network, Bridges.

Bridges

The third chain on the network is extremely important and really what most of the hype around Polkadot is about. This third chain is called a bridge.

A bridge allows the network to communicate and interact with other blockchains across the market. Now, this has been proposed hundreds of times across the network, but has never efficiently and effectively been done.

The Polkadot network is currently working very hard to build these bridges with projects like Ethereum, Bitcoin, EOS, and many more in order to allow tokens to be swapped through their network as a central mean for exchange.

The main way the team seeks to achieve this goal is with XCMP, the native interoperability technology. This tech will allow parachains to trustlessly communicate and exchange tokens likewise.

Now that we’ve discussed the main chains on the network, lets move to governance and consensus.

Governance and Consensus

Consensus on each blockchain in crypto is always unique. Polkadot is no exception.

The network uses what is called “nominated-proof-of-stake” or NPoS for short. Most blockchains use a traditional proof-of-stake (PoS) consensus method for comparison.

The NPoS system is run by stakes of DOT. These DOT stakes are locked within special contracts across the platform on the Relay Chain and will be given a following role in the operation of the network:

• Network validators
• Nominators
• Collectors
• Fishermen

Lets go over what each “role” does on the network:

Network Validators 

This role is used to validate data from the parachains. Network validators can also participate in consensus to vote on proposed changes to Polkadot.

Nominators 

Nominators on the network are used to secure the Relay Chain by “nominating” trustworthy validators. While this is important, the Nominators unfortunately delegate their staked DOT tokens to the validators. This in turn allocates their votes to them.

Collectors 

The collectors run nodes that store a full history for each parachain. They will also be responsible for aggregating parachain transaction data into blocks for addition on the Relay Chain. 

Fishermen

The last piece of the puzzle are the Fishermen. These stakers are used to monitor the Polkadot network and report bad behavior to validators. Sort of like the Polkadot S.W.A.T. team

It is also important to know that the people performing these roles are eligible to receive DOT rewards in addition to their service to the network.

Personal Perspective

Whew! That is a lot to cover in one post and thanks for reading all of that (if you did).

I enjoyed diving into this new project and learning about the differences and similarities it holds to other projects across the space. While the idea behind this project is not necessarily new, it is important. There needs to be interoperability across the network for the crypto economy if it is to ever move into the traditional financial sector fully.

Therefore, I believe in the purpose of this project.

This project has huge potential, but it has a long way to go. Betting and investing in this project is still a huge gamble, but it could pay off big. Either way, any project pushing the crypto economy of things and use-cases is a good project to me.

Is it too late to Invest?

In short, it is not too late to invest in this crypto project.

This project has a long long way to go and will be around for a while. If you are interested in this project, I would personally buy in at lows and stake my holdings for the next 2-3 years. This would be MY PERSONAL strategy for maximizing returns on this investment long-term.

Also, I never invest in crypto short-term for those wondering.

Stay Up-To-Date

Make sure to follow all of the updates and developments with the Polkadot project:

Stay up-to-date with their Roadmap

Learn more about Polkadot

Polkadot Blog Post

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