Most recent update: [June 26, 2023]
What Is Polkadot?
Polkadot is often referred to as a multi-chain network, thanks to its ability to join multiple networks with each other. Polkadot has two features that make it stand out from other parachains in the market: its scalability and its easily upgradeable. Polkadot enables blockchains to transfer data and assets by allowing multiple chains to function through a single network. Polkadot aims to ensure that public and private blockchain communication is speeded.
The protocol can connect permissionless networks, public and private chains, and oracles and is powered by DOT, its native cryptocurrency. DOT is currently the 9th largest cryptocurrency in the crypto space.
How Does Polkadot Work?
Polkadot has four components that it utilizes to create an ecosystem that allows it to ensure interoperability between different blockchains. These are Parachains, Relay Chains, Parathreads, and Bridges.
The Relay Chain
The relay chain is at the core of Polkadot and essentially holds the protocol together. The relay chain works similar to how the Proof-of-Work and Proof-of-Stake consensus mechanisms function and is utilized by Polkadot to verify transactions. Polkadot users can stake their DOT tokens and help in the verification of transactions. The relay chain performs the following functions in the Polkadot ecosystem.
- Validation of transactions
- Nominate users who will stake their tokens
- Keep a record of all data
- Monitor the Polkadot ecosystem
The Parachain
The Parachain resides on top of the Relay Chain. Polkadot describes the Parachain in its whitepaper as “an application-specific data structure that is globally coherent and validatable.” Polkadot’s Relay Chain handles functions such as the governance function, validation of transactions, and the security of Parachains. The Parachain allows Polkadot to host multiple blockchains. For example, suppose the Bitcoin and Ethereum blockchains are in Parachains based on the Polkadot network. In that case, they will be able to communicate with each other, carry out transactions, and allow users to convert BTC into ETH or vice versa without requiring an exchange.
Parathreads
Parathreads are primarily used to test new ideas on Polkadot. They are very similar to Parachains as they allow the building of applications or special use blockchains. However, the difference between the two is that Parachains are much more resource-intensive and permanent, unlike Parachains. Parathreads also have to share scarce resources among other Parachains, which means that they must compete for the resources and pay the hosts’ owners of hosting Parachains for processing each block.
Bridges
Bridges essentially allow Parachains or blockchains that are within the Polkadot ecosystem to communicate with each other and share other data between them. Bridges are available on Polkadot in both centralized and decentralized versions.
History and Founders of Polkadot
Polkadot was founded by the Web3 Foundation, whose founders are Dr. Gavin Wood, Peter Czaban, and Robert Habermeier. Gavin Wood is the president of the Web3 Foundation and also the most famous face behind Polkadot, thanks to his history as Ethereum co-founder. He is also the creator of Solidity, the smart contract language utilized by Ethereum.
Robert Habermeier is a developer and blockchain, and cryptography researcher. He is also a Thiel Fellow, while Peter Czaban is the foundation’s Technology Director. Web3 is a Swiss Foundation that is facilitating a fully functional, decentralized, and user-friendly web.
Unique Characteristics of Polkadot
Polkadot improves scalability significantly, thanks to the protocol’s ability to simultaneously process several transactions on several Parachains. Custom blockchains that have been developed through the substrate network can easily connect to Polkadot. Polkadot’s network is also adaptive and flexible, and this quality allows the protocol to share information between participants easily. We also mentioned that Polkadot is easily upgradable and can be easily upgraded through a series of soft forks.
Polkadot has also adopted a unique, user-driven governance mechanism. User communities can customize the governance on Polkadot depending on their needs and conditions.
Technology Behind Polkadot
Polkadot acts as a network protocol that allows the transfer of any type of asset or data across multiple blockchains. This makes Polkadot a proper multi-chain application that can support cross-chain computations and cross-chain registries. The Polkadot ecosystem makes it possible to transfer data across open, public, and private blockchains, allowing applications to source data from private blockchains and use it on public blockchains.
Polkadot is a scalable multi-chain network that offers interoperability and shared security. The central Relay Chain offers layer-zero scalability that allows for sharing data between multiple layer-1 blockchains connected as Parachains.
Polkadot Utilizes four core components.
- The Relay Chain - The Relay Chain is at the heart of Polkadot, helping the protocol create interoperability, shared security, and consensus across different chains.
- Parachains - Parachains are independent chains. These chains can be optimized for specific use cases and can also have their own tokens.
- Parathreads - Parathreads are similar to Parachains. However, they have more flexible connectivity that is based on a pay-as-you-go model.
- Bridges - Bridges enable both Parachains and Parathreads to connect with external blockchains such as Bitcoin and Ethereum.
Polkadot Token Supply
There are a total of 1 Billion DOT tokens in existence. The token supply was increased after the redenomination of the network, which had an initial supply of 10 Million DOT tokens. Polkadot undertook the redenomination to avoid the use of small decimals and make calculations easier. While balances increased by a factor of 100, the distribution of the DOT tokens was not impacted.
How Is the Polkadot Network Secured?
Polkadot offers interoperability through common validators that help the network secure the multiple blockchains on its Parachains, allowing them to scale their transactions by enabling them to use multiple Parachains. Polkadot’s Nominated Proof-of-Stake (NPoS) enable the network to select nominators and validators, maximizing the security of the chains. Chains can interact with each other securely under the same set of rules while being governed independently.
Polkadot Risks
- Polkadot faces intense competition from several other Proof-of-Stake smart contract platforms such as Cardano, Cosmos, and Tezos. Add to this the fact that industry leader Ethereum has a stranglehold on the smart contract space that will be extremely difficult to overcome.
- As of now, Polkadot has a relatively small number of Parachains. Slots on Polkadot are sold via an auction which could price out smaller players.
- Polkadot was affected by a serious hack when Parity, a company that manages several digital wallets. A hacker managed to breach one of the wallets and wipe out everything in the wallet, leading to all other wallets being frozen. Polkadot was one of the companies with their wallets frozen. The wallet reportedly contained $98 Million.
Due Diligence
Prior to listing Polkadot on the VirgoCX Platform, VirgoCX performed due diligence on Polkadot and determined that Polkadot is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Polkadot and/or its primary development team;
- The supply, demand, maturity and liquidity of Polkadot; and
- Legal and regulatory risks associated with Polkadot.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
References
https://coinmarketcap.com/currencies/polkadot-new/
You can access the Polkadot whitepaper here.
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