What is Polkadot (DOT) and How does it Work?

2021/06/30 09:36:22

Bitcoin laid the foundation of a Blockchain 1.0 era with a trust-less, peer-to-peer, and decentralized system to transfer value between two parties without the need for any intermediaries like a central bank. The Bitcoin protocol is a single big application maintained by a network of decentralized nodes.

Building over the limitations of the Bitcoin protocol, Ethereum commenced the Blockchain 2.0 era, where it allowed developers to deploy and launch DApps, custom tokens, NFTs, and Defi applications such as DEX, P2P lending protocols, derivatives, and much more. Soon after its launch back in July 2015, Ethereum set a cornerstone for the crypto ecosystem and gave rise to many new industries and use-cases, the biggest one being Defi which is now a $100B market alone.

However, there are two inherent problems with Ethereum and all the major smart contract platforms today:

Network congestion: The Ethereum network has become very congested due to many different applications getting deployed on Ethereum. Over the years, developers have realized that Ethereum is better suited for smaller applications, but it is clearly not a practical solution for large-scale and complex applications such as AMM-based DEX and P2P lending protocols.

Ethereum Average Transaction Fee | Source: Blockchair

For large-scale applications, launching a custom purpose-built blockchain is more suitable, but it is more challenging and takes a lot of resources and years of development, launch, and a ton of rigorous testing.

Lack of interoperability: Bitcoin, Ethereum, and all other public blockchains are siloed, as they can't communicate with each other and exchange value. This lack of interoperability is inducing monopolistic behavior as individual protocols are getting bigger and bigger, making it harder for smaller players to bring innovation.

To put this into perspective, Bitcoin and Ethereum hold over 62% of the entire crypto market. About 18% is held by ten smaller projects, meaning that 80% of the crypto market is dominated by two big players and ten smaller players.

Cryptocurrency Dominance Chart | Source: CoinMarketCap

Polkadot solves both of these problems with its unique design approach. It allows developers to build custom and purpose-built blockchains on top of the Polkadot network while also ensuring cross-chain interoperability, which enables these purpose-built blockchains to communicate with each other and exchange value.

What is Polkadot?

In layman terms, Polkadot is a meta protocol or a Layer-0 protocol upon which you can launch your custom and purpose-built blockchains. These custom blockchains are called Parachains or Parathreads, and the underlying layer (meta-layer) upon which these blockchains are built is called the Relay Chain.

All the parachains on the Polkadot network are highly interoperable with each other, as they can freely communicate with each other and exchange value via XCMP (cross-chain messaging protocol). If you want to get external data into your parachain, you can simply connect to another oracle provider parachain on the network to get the required data.

In addition to the in-house interoperability, these parachains can also connect to external networks like Bitcoin and Ethereum via Bridges. Currently, Polkadot supports Bitcoin and Ethereum, and the team, together with the community, is regularly adding support to build bridges for a variety of different networks.

The Polkadot Relay Chain | Source: Polkadot

Polkadot Consensus

All the parachains on the Polkadot network are secured by the underlying meta-layer or the Relay Chain. The parachains are independent blockchains, and they don't have to worry about consensus security, as they rely on the Relay Chain for consensus and finality.

The Relay Chain has four different consensus roles:

Polkadot Consensus Roles | Source: Polkadot

Nominators: The nominators select validators that are trustworthy. They place risk capital and only provide signaling for whether or not a particular validator is doing his job well.

Validators: Validators are the heart of the Polkadot consensus. They receive, review, verify and publish blocks for finality. For participating in the consensus along with other validators, they have to stake their DOT tokens and receive a reward for every block they publish on the network.

Collators: Collators are like full nodes, as they maintain a copy of the entire blockchain. Validators do not maintain a fully synchronized database of all parachains. Therefore validators rely on collators to provide them with new blocks and generate a proof for them.

Fishermen: Any collator or parachain on the network can adopt this role. Fishermen are the bounty hunters. They constantly monitor the network and report bad behavior to the validators.

Wrapping Up

Polkadot has a native platform token called DOT, which can be used in governance, staking, and bonding tasks. The parachains on Polkadot can have their own currency, and they don't have to rely on DOT to run the economics of their parachains.

Polkadot is building the future of the interconnected blockchain 3.0 era, where information will flow freely between different blockchains, and users will be able to perform near-instantaneous atomic swaps. The Polkadot has a testnet called Kusama, where they are currently rolling out the parachains before they come to Polkadot.