Polkadot: The Next Ethereum?

Currently, blockchains operate separately and in silos hence Interoperability and scalability are long-standing challenges in the blockchain industry. Right now, most public blockchains like Ethereum and Bitcoin cannot communicate with one another or grow without external technologies. Polkadot is a network designed to join the dots with all other networks and was designed to resolve these issues, in addition to several other major challenges, by providing something of a base-layer that can connect all others, thus enabling them to communicate and scale.

Polkadot is a sharded bridge-like protocol, which focuses on maintaining communication, value transfer, and pooling the security of blockchains. It allows blockchains to operate with each other in a parallel manner by unifying them into one network. The unification compounds the strengths of different blockchains and mitigates their weaknesses.

According to the team, Polkadot is a project by developers for developers. It is aimed at connecting public and private chains, oracles, DApps, and services to seamlessly work side by side. And thus, it facilitates the connection of different independent blockchains together into a single Web3 Internet.

Team

Dr. Gavin Wood, founder of polkadot was also co-founder of Ethereum

Polkadot is the flagship protocol of Web3 Foundation, a Swiss Foundation with a mission to facilitate an open-source, fully functional and user-friendly decentralized web. Polkadot’s founders are Dr. Gavin Wood, Robert Habermeier and Peter Czaban.

Wood, Web3 Foundation’s president, is the most well-known of the trio thanks to his industry influence as Ethereum co-founder, Parity Technologies founder and the creator of the smart contract coding language Solidity. Wood is also credited with coining the term Web3.

Habermeier is a Thiel Fellow and accomplished blockchain and cryptography researcher and developer. Czaban is the former Technology Director at Web3 Foundation, with a wealth of experience across highly specialized fintech industries.

Architecture

The Polkadot network allows for the creation of three types of blockchains.

• The Relay Chain – The main Polkadot blockchain, this network is where transactions are finalized. To achieve a greater speed, the relay chain separates the addition of new transactions from the act of validating those transactions. This model allows Polkadot to process over 1,000 transactions per second, according to 2020 testing. The Polkadot wallets, accounts, and governance are all structured in the Relay Chain framework.
• Parachains – Parachains are custom blockchains that use the relay chain’s computing resources to confirm that transactions are accurate. The individual Substrate-based blockchains that connect to the Polkadot platform via available “slots”. The parachain’s team and community are then responsible for leasing the available slot using the DOT native token. We will explore slots more in the tokenomics section. Parachains are free to use their own token in their platform for transaction fees, and other economic activity pertaining to their own blockchain.
• Bridges – Bridges allow the Polkadot network to interact with other blockchains. Work is underway to build bridges with blockchains like EOS, Cosmos, Ethereum and Bitcoin, which would allow tokens to be swapped without a central exchange. Parachains can host the setup of the bridge to allow for tokenized versions of the “bridged” chain to be represented on its Substrate blockchain and therefore be compatible with the larger Polkadot ecosystem.

Consensus Mechanism

To keep its network in agreement about the state of the system, the Polkadot Relay Chain uses a variation on proof-of-stake (PoS) consensus called nominated-proof-of-stake (NPoS).

This system allows anyone who stakes DOT by locking the cryptocurrency in a special contract to perform one or more of the following roles necessary to its operation:

• Validators – Validate data in parachain blocks. They also participate in consensus and vote on proposed changes to the network.
• Nominators – Secure the Relay Chain by selecting trustworthy validators. Nominators delegate their staked DOT tokens to validators and thus allocate their votes to them.
• Collators – Nodes run that store a full history for each parachain and aggregate parachain transaction data into blocks for addition to the Relay Chain.
• Fishermen – Monitor the Polkadot network and report bad behavior to validators.

Users who stake DOT and perform these roles are also eligible to receive DOT rewards.

Polkadot Governance

Polkadot governance model is on-chain and well defined. It is designed to include all stakeholders in a governance council. The users can participate in the system’s decision-making by simply holding the native $DOT token. Currently, Polkadot’s Council and Technical Committee are in place, so the project and its direction is completely in the hands of $DOT holders. Governance proposals are submitted by the Council, the Technical Committee or $DOT holders. There are then voted on by the $DOT holding public.

Three types of Polkadot users can influence the software’s development.

These include:

• DOT holders – Anyone who purchases DOT tokens can use their DOTs to propose changes to the network and approve or reject major changes proposed by others.
• The Council – Elected by DOT holders, council members are responsible for proposing changes and determining which changes proposed by DOT holders are made to the software. Proposals by Council members require less votes to be approved than those by ordinary DOT holders.
• The Technical Committee – Composed of teams actively building Polkadot, this group can make special proposals in the event of an emergency. Members of the technical committee are voted in by Council members.

Polkadot vs Ethereum

Given they share a high-profile founder, there has been much speculation about what makes Polkadot different from Ethereum.

Indeed, Polkadot and the forthcoming major update to Ethereum, known as Ethereum 2.0, share many similarities in design and operation.

Both networks operate a main blockchain where transactions are finalized and allow for the creation of many smaller blockchains that leverage its resources. Both technologies also use staking instead of mining as a means of keeping the network in sync.

Research is ongoing on how transactions between the networks could be made interoperable. Parity, for example, has developed technology designed for users who may wish to deploy applications leveraging Ethereum’s code and community, but that would run on Polkadot.

Lastly, developers can use Polkadot’s development framework to simulate a copy of the Ethereum blockchain that can be used in their own custom blockchain designs.

Advantages

The Polkadot project is set to revolutionize blockchain technology by offering a bridge-like framework that provides the following advantages:

1. Limitless Scalability – Polkadot can support an infinite number of blockchains and allow them to connect together. These are known as para-chains.
2. Adaptable Consensus Mechanism – As different blockchains run on different consensus mechanisms, the Polkadot platform provides an open and adaptable consensus mechanism to host them.
3. Cross-Chain Transactions – The framework can support the transfer of value between different blockchains. It’s necessary for interoperability and true integration.
4. Defined Governance Mechanism – It has a defined governance mechanism, which eliminates a major problem faced by other blockchains.
5. Upgradeability – Polkadot can support upgrades, without having to resort to drastic hard forks to implement change.
6. Pooled Security – The blockchains connecting with Polkadot can be secured by a unifying security umbrella. This can help protect small chains that don’t have effective security bootstrapping.
7. Low transaction fees– Polkadot claims it has lower transaction fees compared to Ethereum.

Use Cases

Smart Contract Applications

Polkadot was built from the ground up to be a smart contract first blockchain.

The Substrate framework currently supports EVM (Ethereum Virtual Machine) that allows developers to migrate their Ethereum Dapps instantly to the Polkadot platform.

More modern languages like WebAssembly (Wasm) and Rust are being integrated that will allow developers to build smart contracts faster because of the languages’ familiarity.

Cross-Chain Transactions

Blockchain interoperability is a key part of the Polkadot platform, allowing each application to be built on its specific blockchain but still allow interoperability.

Currently, the most popular blockchain applications are causing the Ethereum network to become congested, and those same applications on a platform like Polkadot would divide the stress between the different connected blockchains.

The specialized Substrate blockchains can reach 1000 TPS (transactions per second) according to a recent Gavin Wood presentation.

For example Tether (USDT) can live on its own blockchain and USDT token transactions between users can be independent of other token transactions.

When USDT users wish to trade on Uniswap a separate Blockchain they would then deposit to a cross-chain contract for its value to be credited on the Uniswap Blockchain.

The Uniswap blockchain would then be configured to handle its specialized transactions with the USDT token and other tokens sent over the same way.

Scaling Solutions

Parachains are free to configure the consensus model that affects its own blockchain security and speed allowing them to scale more easily since they are just an interoperable independent chain.

Specialized use cases like DEX’s and lending platforms would, therefore, be operating independently not affecting each other’s transaction load.

Staking Rewards

The native currency DOT is used to stake the different components of the Polkadot system that secures the web of interconnected Substrate blockchains.

The DOT token holders are then incentivized to stake and participate in the governance of the platform to be rewarded additional DOT tokens from the protocol block reward mechanism.

DOT Token

The DOT token powers the Polkadot network. It is used for governance over the network, operation, bonding, and interoperability. Polkadot (DOT) stakeholders can decide on all kinds of governance including exceptional events such as protocol upgrades and fixes. Stakeholders are incentivized to behave in honest ways and are rewarded through a specific mechanism that causes bad actors to lose their stake in the network. This ensures the network stays secure. Whoever wants to secure a parachain slot can utilize bonding tokens. Bonded parachains cannot be removed from the network arbitrarily or unbond their DOTs until their lease ends. If messages shall be passed from one blockchain to another, there may be a fee – but this is not automatically required.

With $28B market capitalisation, it is the 10th largest cryptocurrency in the world.

Popular Apps on Polkadot

Acala Network

The Acala network is the first decentralized financial consortium and is expected to be one of Polkadot’s most successful initiatives when it launches in the new year. Its primary goal is to include DeFi into the Polkadot ecosystem. It has its token (ACA) that is used to regulate the system. It implies that Acala is completely decentralized and controlled by its token holders, who may vote, validate, and govern the Acala network as a whole. Acala is a dual-protocol network, meaning it uses two different protocols. Homa protocol and Honzon protocol are the two protocols.

Centrifuge

The centrifuge is a decentralized financial asset technology that works with the Polkadot ecosystem. Polkadot entrepreneurs have launched yet another DeFi campaign. It works closely with MakerDAO, Circle, and Celo Protocol to create a world of fair money. Centrifuge provides trustless and safe lending of finance against real-world assets. Tinlake and Centrifuge chain are the two main components.

Edgeware

Edgeware is a Substrate-based chain that intends to become a parachain of Polkadot in 2021. It will enable the construction of smart contracts inside the ecosystem. Its smart contracts are written in Rust and compiled into WASM, which is a particularly handy approach for Substrate-based blockchains. Due to nPoS – nominated Proof of Stake – consensus, Edgware users may execute voting and funding procedures as well as delegate their privileges. One of the network’s major aims was (and continues to be) to create a nice test environment for on-chain governance. As a result, Edgeware is designed in such a way that it makes self-improvements and then asks users to vote on them.

Conclusion

The Polkadot ecosystem brings to reality a fantastic cross-chain communication and data sharing project. While being built on the Substrate architecture, it has the potential to provide a whole new degree of blockchain ecosystem resilience.