August 2020 the DOT token quietly springs ahead of Chainlink to rank fifth on CoinMarketCap, more than doubling its value in less than seven days. Recently undergoing re-denomination, the DOT has become a serious contender for the crown.
The Roots of Polkadot
The Polkadot begins with one of Ethereum’s co-founders, Dr Gavin Wood (PhD in Software Engineering). More than 20 years of experience working as a software developer, he became frustrated with the slow development of Ethereum 2.0.
January 2016, Dr Wood quit his position as Ethereum’s Chief Technical Officer (CTO) and core developer. Later that year Wood began the development of a cryptocurrency that would go beyond the capabilities of Ethereum, this would be the Polkadot.
Polkadot is the star project of the Web3 Foundation. The Swiss Foundation is based in Zug and was established to expedite a fully functional and user-friendly decentralized web. Parity Technologies develop and maintain the Polkadot network on behalf of Web3.
Dr Wood is the co-founder of Web3 Foundation and Parity Technologies, therefore, is the primary developer of the Polkadot network. A blockchain building tool developed by Parity Technologies, called Substrate, is used to build Polkadot.
The DOT Cryptocurrency ICO
Hacking of Polkadot occurred in July of 2017, and over $33 million in Ethereum disappeared from their reserves. Despite the lost funds, the Polkadot team were able to continue.
Three months later, the DOT’s Initial Coin Offering (ICO) took place and raised over 145 million USD in Ethereum. Ten Million was sold, half to private investors and the rest to the public.
Disaster struck again just two weeks after the sale when a vulnerability in Polkadot’s multi-signature wallet code caused over $90 million of the fund to be permanently frozen.
January of 2019, in an attempt to make up for the frozen funds Polkadot held another round of funding, selling 500,000 DOT and raising over $60 million.
The third round of funding was held in July 2020, raising another $43 million, bringing the total budget for the DOT cryptocurrency to over $250 million, not including the $90 million still frozen.
Also in July Polkadot held its first official poll for DOT holders, determining the consensus on re-denomination. Eighty-six per cent of the community voted in favour of the new DOT denomination. They were effectively changing 1 (old) DOT token into 100 new DOT’s.
Polkadot uses the DOT on its network for governance, staking by Validators, Nominators, and Fishermen and bonding Parachains to the Relay Chain by way of Collators.
Holders of DOT assist the consensus mechanism underpinning Polkadot, they perform an active function in allowing valid transactions to operate across parachains.
A process called Bonding also uses the DOT; this practice secures the DOT during the creation of a new Parachain, it is then released back to the account when the bond has transpired and removes the Parachain.
At present, the storage of DOT’s is limited to Polkadot.js browser plug-in or the Polkawallet mobile app. However, Ledger, Metamask and others are beginning to integrate support of the DOT.
A re-denomination is comparable to a share split. It will increase the circulating quantity of a token while market capitalisation remains unchanged.
“Some unscrupulous exchanges may choose to enact the re-denomination prior to the date agreed by the Polkadot community. Such an act would result in the token trading at approximately 100 times lower than the actual market price. We believe such action is irresponsible, possibly constituting fraud through deceptive advertising and certainly puts Polkadot stakeholders at risk.”Polkadot Team Statement
Polkadot explained explicitly to DOT holders that re-denomination does not affect the percentage share of Polkadot, and on the 21st August 2020 the re-denomination went ahead at block number, 248,328.
Yet shortly after re-denomination, the price of the token soured almost doubling the closing price by August 22nd and peeking nine days later closing at $6.28.
Initially, the rapid ascent confounded the market and despite the confusion interest in the project appeared unaffected until the 3rd September when the price began its descent, closing on September 6th at $4.78.
What is Polkadot
Polkadot is an open-source network protocol that permits data and tokens to be transferred across blockchains.
It is capable of transferring data across both private permissioned blockchains as well as open, public, permission-less blockchains. It is a Multi-chain application environment for cross-chain computations and cross-chain registries.
The foundation of the network comprises of three core components, the Relay Chain, the Parachains and the Bridges.
- The central chain where all of the validators reside and are staked to is the Relay Chain.
- Parachains are pieces of parallel blockchain that connect to the central Relay chain and are controlled by their unique validators called collators. Similar to ERC-20 token smart contracts on Ethereum.
- Bridges are the specific blockchains that permit Parachains to communicate and connect with external networks, such as Bitcoin or Ethereum.
Don’t be Baffled by the Terminology
Some elements of the Polkadot network have a series of articles dedicated to explaining them. The system uses a mixed consensus mechanism.
- On the Relay Chain, the consensus is a version of Proof of Stake (PoS).
- The Parachains use a Proof of Work called Blind Assignment for Blockchain Extension (BABE).
Polkadot’s hybrid consensus involves 4 key elements:
Validators check transactions of Parachains and add them to the Relay Chain blockchain. They are assigned randomly to attached Parachains to monitor their transactions; each Parachain requires a minimum of five Validators.
Collators create the most recent blocks on the Parachain attached to the Relay Chain. The Validators select the block with the highest probability of accurate representation of the current state of a Parachain. The chosen block is subsequently attached to the Relay Chain.
Nominators select Validators by assigning DOT tokens to Validators. Every individual Validator receives block rewards proportional to the number of transaction verified.
Fishermen monitor the operation of Validators and Collators. An undefined “small amount” of DOT is required to become a Fisherman, rewards of an indefinite “large amount” is given for the identification of misconduct by a Collator or Validator.
There is a lot of technical jargon, but what does Polkadot do? What is its purpose?
There are claims that it is an immediate version of Ethereum 2.0, but until the launch of that project, there is no way to compare the two.
The launch of Ethereum 2.0 is due late 2020, and one has to wonder if the speed with which the Polkadot project has been forging ahead is to get the jump on Ethereum.
This pre-emptive strike could be somewhat rushed and ill-thought-out; there is a long list of questions about the things that could cause errors with a community governed hybrid consensus network.
Concern for User experience seems to be missing altogether. The technical complexity does not explain the use or purpose of the project. If all the explanations about the workings of Polkadot are designed to cause intellectual confusion, then kudos, it has succeeded.
The penalising of inactive DOT holders with unreasonably high inflation is de-emphasised. Also, the fact that participators will be putting their DOT holdings on the line to perform chain functions, with the potential of losing that stake is smudged over with technical jargon. However, to be fair, this is apparently to discourage malicious participation in the network.
Christened the “Ethereum Killer” cryptocurrency, Polkadot’s founders insist that it is not in competition with Ethereum. However, the rushed launch may suggest otherwise.
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