Image source- Polkadot
While blockchain has seen strong growth with both brain and money power being invested in the technology, the 2 problems which have continued to plague the system are:
1. Interoperability - Each blockchain functions in a silo and is disconnected from other blockchains.
2. Scalability- All blockchain networks are still way behind traditional networks in terms of the number of transactions they can process and the speed at which they process them. Bitcoin can process 7 transactions per second, Ethereum 15 transactions per second and Visa 1700 transactions per second.
Polkadot is designed to take on the above 2 challenges.
Before we talk about the wonders of Polkadot technology, it is important to talk about its colorful history.
Polkadot was founded by Gavin Wood who is also among the original co-founders of Ethereum and creator of Solidity, the computer language used to code smart contracts on Ethereum. During the ICO boom, Web3 Foundation co-founded by him to build the Polkadot network, raised US$140mn through an ICO. Gavin Wood founded Parity Technologies was chosen to develop the Polkadot Network. The $140mn raised in the ICO was stored in a wallet developed by Parity Technologies. A week or two after the ICO, the wallet became the victim of a hack, and more than 66% of the money raised was lost. The team went on to develop the network using the leftover funds. Despite the disaster post the ICO, Polkadot was able to more money through several private token sales. Roughly US$60mn in 2019 and US$45mn in 2020.
Technically, how does Polkadot work?
Polkadot is a blockchain framework that enables interoperability and scalability. With Polkadot, several blockchains called “Parachains” which all have their own tokens, consensus mechanisms, governance tools, etc are connected to a central Relay Chain. The Parachains communicate with each other through the “Relay Chain” which is also responsible for the security of the network. The Parachains connect to outside networks like Bitcoin and Ethereum through special blockchains called “Bridges”
Image source- Parachain
Solving for Interoperability- Traditional blockchains do not have any tools to communicate with each other. At Polkadot, interoperability is achieved with the Relay Chain facilitating inter-Parachain communication.
Solving for Scalability- In the case of the Bitcoin blockchain, there is only one chain. All transactions queue up to get processed in that chain. This leads to capacity constraints and time delays. Polkadot is a sharded blockchain i.e. it allows for multiple chains. Time is saved and efficiency is gained as transactions are processed simultaneously in one of several chains instead of sequentially in the same chain. Given the advantages of sharding Ethereum too will be transitioning to sharding in Ethereum 2.0.
A brief description of the complex consensus mechanism
Polkadot works on a Proof-of-Stake consensus mechanism called Ghost-based Recursive Ancestor Deriving Prefix Agreement (GRANDPA). It enables Instant Block Finality and has mechanisms to process millions of blocks at once in case of network partitioning. There are 4 main players:
Nominators- Their job is to nominate trustworthy Validators. The incentive mechanism requires that they stake DOT (the native cryptocurrency of Polkadot) when they do so. 1 Nominator can nominate up to 16 Validators.
Validators - They secure the network by confirming the proofs sent by Collators. Validators too need to stake DOT.
Collators - They connect the Parachains to the Relay Chain and periodically communicate their network stake to the Relay Chain.
Fishermen - They monitor the network and report bad behavior to Validators
Let’s talk about money: DOT
The native token of Polkadot is called DOT. Originally, Polkadot was launched with only 10 million DOT. In August’2020, DOT was redenominated and 1 DOT was split into 100 DOT. This increased circulation from 10 million to 1 billion DOT.
DOT is used for:
1. Staking - Nominators and Validators are required to stake DOT for confirming blocks. As in any proof-of-stake protocol, they’re rewarded in proportion to the amount staked.
2. Transaction Fees - Similar to gas prices in Ethereum, Validators maintaining the network charge a fee for processing transactions. The transactions in the case of Polkadot are communication from one Parachain to another.
3. Bonding - Parachains have to pay for connectivity. A Parachain wishing to connect to the Polkadot network must deposit a certain sum of DOT in the network. The DOT can be withdrawn if and when the Parachain for any reason wants to disconnect from the network.
4. Governance - DOT holders can vote on proposals like network fee, auction dynamics, protocols for Parachains, upgrades and other fixes.
Polkadot Treasury
Polkadot Treasury which can fund various network initiatives went live in Sept'2020. The treasury has 4 sources of funds: 1. A portion of transaction fees 2. A portion of slashed stakes 3. A portion of fees paid by parathreads (pay as you go parachains)
4. A portion of block rewards. The ideal staking ratio is 50%. If 50% of all DOT are staked then 100% of block rewards go to the Validators. If the staking ratio deviates from 50% then a portion goes to the treasury.
Anyone who wants to get their project funded must put down a bond of 5% of the project cost or 100 DOT, whichever is higher. the community will then vote on it. If the proposal is accepted then the bond will be returned to the proposer and the project is funded. If not, then the bond amount is burnt.
Parachain Projects
The Polkadot Blockchain can currently support only 100 Parachains. However, there are several 100 projects vying for these limited spots. To avoid a situation where projects with the most funding claim these slots whether or not they're good for the overall ecosystem, Polkadot has come up with a new funding process called Parachain Loan Offering (PLO).
DOT holders can lend their coins to projects seeking a Parachain slot in exchange for project tokens. The projects with the highest amount of DOT loaned gets the slot. The DOT lent cannot be used by the project itself and remain in the wallet of the lender.
Some of the Polkadot projects that have created a lot of buzz recently include:
* Interlay - A wrapping protocol that will create a PolkaBTC token by building a trustless bridge between Polkadot and Bitcoin blockchains. * Acala - A USD stablecoin * Polkaswap - A decentralized exchange * Kilt - a token standard for Polkadot (similar to ERC20 on Ethereum)
The topic of Polkadot Governance deserves a more detailed discussion
In a traditional blockchain, upgrades require a fork. New code must be forked away from the old code base and all nodes need to agree to run the new code. Disagreement among the nodes could lead to a hard fork which means that the blockchain is split with some nodes continuing to run the old code and some moving to the new code. (This happened to Ethereum after the MakerDAO debacle).
Polkadot on the other hand has an on-chain voting mechanism built into the Relay Chain which allows the blockchain to upgrade without forks.
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