What is Polkadot and its DOT token? Best guide for beginners

What is Polkadot?

Polkadot is a blockchain of blockchains. 

Say what?

Ok let’s expand upon that concept. Polkadot aims to be a platform for building blockchains.

And the blockchains that are built on Polkadot communicate with each other.  

These two features and the fact that it is backed by key people from the crypto space make Polkadot a very powerful player in the crypto ecosystem

First, let’s explore the building part.

To build a blockchain from scratch requires a  lot of effort and time.

Web developers are familiar with the concept of bootstrapping: instead of coding a website by writing out all the css, javascript and HTML line by line,  they use pre-made components to build the site up.

Think of this as being similar to putting together a prefabricated house.

In a similar manner, developers who wish to build a blockchain do not need to reinvent the wheel. The efficiencies gained by building on Polkadot make it a very attractive proposition. 

The most important component that Polkadot offers is security. Top end security is one of the best freebies that Polkadot packages into its offering. 

How Polkadot ensures security

Polkadot uses proof of stake as a means to secure the network. 

Huh? What does that mean?

Well you have probably read about how Bitcoin is secured by proof-of-work i.e. electrical energy and computing power that people who validate the transactions invest in for a fee.

With polkadot,  validators invest capital.

If a validator tries to do something dodgy they lose their capital.

This incentivizes the validator to remain trustworthy.

Proof of stake is not unique to Polkadot. For example Ethereum is also planning to move to proof of stake as a more efficient and more eco friendly validation method.

If this is news to you then I recommend you read “What is Ethereum“.

There are going to be about 1000 validators for Polkadot and people who have bought the Polkadot token (DOT) can give it to one of these validators to stake it for a return (currently about 10% / year). 

What is unique about Polkadot is that you do not have to garner support and create the whole ecosystem of miners or validators from scratch like Satoshi Nakamoto did when they deployed Bitcoin.

Validators are already there on the Polkadot mainframe waiting to validate transactions on your blockchain. 

Graphic depiction of the Polkadot relay chain
You can plug into the Polkadot network to benefit from its validators. Source: polkadot.network

Polkadot crypto explained: Interoperability

Let’s explore the fact that blockchain ledgers can communicate with each other. T

he first blockchain was Bitcoin. Bitcoin is great! With a first mover advantage it has grown in scale and has a very powerful network effect: you have bitcoin, I have bitcoin, we all have bitcoin.

However, there was not much you could do with the bitcoin blockchain apart from create digital currency without a central intermediary (Government).

This is not to belittle Satoshi’s achievement which is transformational. However most people would agree that Bitcoin is primarily a type of money.

Enter Ethereum: When Vitalik Buterin came up with the concept of Ethereum he wanted to offer the world a more generalized platform where you could build apps to dis-intermediate anything.

Not only governments, like bitcoin does, but also corporations.

Ethereum smart contract capabilities allow anyone to program software that will enact instructions based on a  pre-specified logic; e.g. unlock the door to my airbnb rental when the money comes through to my account.

How Polkadot differs

Polkadot aims to be even more generalized. In founder Gavin Wood’s words “Polkadot is a protocol of protocols”.

What this means is that Polkadot could encompass Ethereum.

Polkadot founder Gavin Wood uses the following analogy:  Imagine the world: there are different rules and regulations in various jurisdictions.

For example in the US companies can give special status to shares. Some shares allow you to vote and others do not.

A good example of this is Google.

You will notice Google has two stock tickers: GOOG and GOOGL. One allows you to vote on board decisions while the other doesn’t.

The same is not true of the UK. In the UK all shares have voting rights and a company cannot change this. So the rules differ in each jurisdiction and you can use those rules to architect how your company will operate.

Will you base it in the UK or the US? To draw a parallel, if Ethereum is the US then Polkadot is the world.

Polkadot allows one to operate in any jurisdictions they want with any rules they want.

If you build an app on Ethereum you need to follow the smart contract logic of Ethereum with all the rules it has around gas fee metering and so on.

In the case of Polkadot no one forces you to use the Ethereum logic. You can choose which jurisdiction you wish to belong to. 

An example

Let’s explore an example to better understand this. You will have surely heard of ICOs (Initial Coin Offerings) by now.

When Ethereum entered the crypto scene it allowed anyone to issue new tokens using the Ethereum platform.

I could for example have issued a token, called it “doofcoin”, built a community around it and got people to buy it and raise money for my website.

If anyone wanted to purchase my token they would have to use Ethereum. So they would have to take their current currency, convert it to Ethereum and purchase my token.

Now, consider Zcash. Zcash is a cryptocurrency that has its own separate blockchain and promises anonymity.

Unlike bitcoin which does pseudonymous transactions, using Zcash is completely private and transactions are untraceable.

What if you wanted to buy my doofcoin with Zcash. You can’t. The Ethereum Network and Zcash do not talk to each other.

Polkadot allows these two systems to be interoperable i.e. to communicate with each other. It would then be possible for me to purchase the doofcoin with zcash and maintain my privacy. 

How unique is Polkadot?

Polkadot is not unique in allowing interoperability between currencies.

There are other platforms such as Cosmos which are doing this as well.

However, Polkadot is unique in that it allows many different types of blockchains to talk to each other. There are blockchains on privacy, supply chain, internet of things and many more.

So allowing blockchains to communicate with each other is significant and has implications for the future that we may not fully grasp right now.

Polkadot parachains, parathreads, bridges and other fancy words

Time for some terminology!

The main blockchain,  or protocol if you like, is called the Relay chain. This is the mother ship.

Now there are two ways to connect to this mothership and talk to other blockchains: parachains and bridges

Parachains

The first way to connect to the Polkadot Relay chain is to build a parallel chain, known as a parachain.

By building a parachain you get the freebie security component that we talked about. Because this feature is going to be in demand, slots will be offered on auction.

The current plan is for there to be 100 parachains slots and each of these will be offered on lease for two years.

In order to secure a position and raise money for the auction your project needs to have garnered enough interest and built a community of people who are willing to invest in and give you enough DOT tokens to secure the parachain slot.

Most likely, unless you have managed to convince people to give you tokens for free for some higher cause, you will be rewarding these supporters with some kind of monetary reward usually in the form of your parachain’s token. 

The Moonbeam example

Let’s take the example of Moonbeam.

Moonbeam is a new blockchain that aims to be a platform for developers to transport their Ethereum apps over to Polkadot.

Developers pretty much copy their code on the Ethereum platform and paste into the Moonbeam platform.

On Moonbeam their Ethereum app can talk to other blockchains that are connected to Polkadot. Moonbeam is building a community around this cause and is raising money in order to secure a parachain slot.

They will then reward investors with their moonbeam token (called Glimmer).

If Moonbeam secures enough traction they will be able to use the parachain slot for 2 years after which they will have to enter a new auction and garner interest and support again to secure their slot for a further 2 years.

Update: Moonbeam did secure a parachain auction and is not running live on Polkadot.

So to sum up: Parachains are attractive because they offer an off-the-shelf network of validators and a security system that you can plug into. Due to high demand and limited capacity slots are auctioned and leased for 2 years. 

Parathreads

There is an alternate way to connect to Polkadot and benefit from security which is known as a Parathread.

A parathread is like a parachain but instead of raising money in an auction and leasing a spot you just connect to Polkadot and pay as you go just like you would with a utility .

Bridges

The second way to connect to Polkadot and talk to other blockchains is via a bridge.

The difference between a parachain and a bridge is that a bridge does not take advantage of the security feature that Polkadot offers to parachains.

This is interesting to all those blockchains that have built their own set of validators and ecosystems for security.

In our Zcash example above, Zcash would likely connect to Polkadot via a bridge because they already have systems in place to ensure transactions on their network are valid and secure. 

Poster showing the main components  of Polkadot
How the Polkadot Blockchain works. Source: polkadot.network

Who made Polkadot?

The main founder of Polkadot is Gavin Wood.

Gavin, a phd in computer science, met with Vitalik Buterin in 2013 when the latter published a whitepaper describing Ethereum.

Gavin Wood offered to code it up and essentially built Ethereum in about a week. He later moved to found Parity Technologies which was dabbling in various crypto projects (and still does) before he locked in on the concept of an interoperable and scalable protocol which he named Polkadot. 

Portrait shot of Gavin Wood, Polkadot's founder
Gavin Wood developed Ethereum and is the founder of Polkadot

DOT: the Polkadot token. 

DOT is the native token on Polkadot. While many tokens are ERC-20, DOT is not since Polkadot was not built on Ethereum. There are a few uses for the token

  1. You hold it cause you expect the price to go up (given all the value creation happening on Polkadot this should happen over time)
  2. One can participate in governance decisions
  3. You can stake the DOT in order to validate transactions. In actuality you will give your DOT to a company that validates transactions and earn about 10% per year after fees. Some exchanges,   such as Kraken or Binance allow you to stake directly from your account. 
  4. You can support your favorite parachains by locking up or  “bonding” your DOT tokens. This means you give your DOT to the project you want to support in order for them to participate and win the auction. Once the project wins the auction your DOT is tied up with the project. After two years when the parachain is released you can get your DOT back or you can support  the project again for their parachain renewal through a new auction. The project will likely reward you in their own token which you expect to appreciate in value over time. 

What is Kusama?

Kusama is Polkadot’s testnet. This is where Polkadot tests parachain auctions.

Things are easier to break here so it provides a learning opportunity and testing ground before launching for real on Polkadot.

Gavin Wood refers to as the canary network. In the past coal miners would take a canary with them. If they saw it suffocating they knew there was poisonous gas leaking and needed to get out fast. Kusama is where you can take higher risks to test your blockchain.

It uses a native token called KSM. What is interesting about Kusama is that some projects such as gaming NFTs have chosen to live on Kusama rather than transition to DOT.

This has resulted in a secondary ecosystem being built on Kusama. It has it’s own tokenomics and has built significant market cap at $1.5Bn as of February 2022.

Wrapping up on Polkadot

All in all Polkadot is a very promising blockchain.

With its hub and spoke model whereby other blockchains can win a parachain auction and plug into the ecosystem Polkadot is a serious Ethereum contender.

After all both Polkadot and Ethereum are built by the same person.

Polkadot is a layer 1 solutions and one of the foundational blockchains you should know about. Another serious layer 1 contender is Solana.

I break down Solana into simple words if you would like to read about it next.

Thanks for reading and please share others if you found this useful.