Robert Steinadler, a year ago

Polkadot explained: DOT is powering an interoperable blockchain

Polkadot has been in the making for over 5 years, and it was just in December 2021 when the first Parachains went live after the respective companies won the auctions. The aim of this particular blockchain project is to play an important role in the so-called Web 3. Web 3 is an umbrella term that includes new technologies that are supposed to change the internet from the ground up. This includes AI, virtual reality and blockchain technology. The basic idea is that Web 3 will decentralize all available applications and that the whole internet will go through an evolution that will eventually leave big tech companies behind who usually promote quite the opposite, namely centralized solutions.

For this to happen, there needs to be a platform that offers users to own their data and give them the freedom of choice whether they like to use a decentralized app and share their personal data. This is where Polkadot steps in.

Its major purpose is to provide a platform that is highly interoperable in order to allow any decentralized application to fit in and create a network of different solutions rather than trying to be the one blockchain to solve all remaining problems at once.

What is Polkadot?

Polkadot is a blockchain with a focus on interoperability and decentralized applications. It also has smart contract capabilities and a unique concept that aims to allow for higher scalability than other layer-1-solutions on the market. Polkadot uses a so-called relay chain to connect so-called parachains. While the relay chain secures the network and verifies all transactions, each parachain can serve a specific task without having the need to secure the network.

The Polkadot blockchain is based on a proof of stake algorithm, and its native token is called DOT. The DOT token can be used for a variety of purposes. Here are the most basic use-cases:

  • Governance: You can exercise voting rights in the network
  • Staking: You can earn rewards by staking DOT and securing the network
  • Bonding: New parachains need DOT in order to connect to the relay chain

The relay chain is also capable of interacting with other blockchains that won’t follow the Polkadot framework through bridges. This would allow a bridge to any other network like Ethereum, Solana, or even Bitcoin.

The relay chain

The relay chain is limited to the task of securing the network. It offers an interface to parachains, bridges, and parathreads. It secures the whole network by verifying all transactions using proof of stake to reach a consensus between the network’s validators. The relay chain provides a couple of basic but vital functions:

  • Wallets
  • Accounts
  • Governance
  • The DOT token

The relay chain is really the core of the system, but it is not capable of complex operations like smart contracts.

Parachains and parathreads

Unlike the relay chain, each parachain can serve a specific purpose that can be defined freely. A use-case that has become typical over the last two years might be any kind of DeFi protocol that could run as a parachain. Parachains are limited, meaning that 100 slots are available for these specific services that can run on Polkadot.

In order to get a slot for a parachain, companies have to bid in an auction. Winning an auction will allow the company to run its parachain for 96 weeks. This way, there is always some sort of competition for the best applications.

There are also parathreads. Basically, they are about the same as parachains, but unlike parachains, the parathreads can share a slot. The idea is to run applications as parathreads that are not always needed or only needed on-demand — in effect, making it possible for more applications to run on top of Polkadot by sharing slots for different threads.

Polkadot staking – securing the network

Polkadot is making use of nominated proof of stake (NPoS), which effectively allows every holder of DOT to take part in the network’s consensus. Staking on Polkadot is very similar like on other platforms, but it includes functions that other networks don’t have.

One remarkable difference is slashing. Proof of stake rewards honest stakers with a block reward. This is very similar to mining. But what if a staker is malicious? A malicious miner usually wastes energy and mining hardware, but a malicious staker just risks not being rewarded. To increase the costs for malicious actors, slashing allows the network effectively to reduce DOT holdings of a validator with ill intent.

There are two different types of stakers in the Polkadot network. Validators and nominators. A validator runs a node very similar to the nodes of validators on Ethereum 2.0. A nominator delegates his DOT tokens to a validator in return for a share of the reward.

Running a validator is a complex task that also comes with costs. Being a nominator, on the other hand, is relatively easy and allows even retail investors to benefit from staking.

Polkadot has a system for governance

The governance of Polkadot allows all participants to take part in a democratic system that controls all aspects of the network. This includes its future development and also the maintenance of the blockchain.

There are three groups. Each has a unique role in the governance system:

  • The Polkadot council
  • The technical committee
  • The Polkadot community

You can think of the council as the parliament, which has the right to elect the technical committee and can make proposals that have to be voted on by the community. In case of emergency, the council can also make a referendum to protect the network.

The technical committee can also make proposals, but it can also intervene in case a referendum is dangerous to the network. Generally, the committee is supposed to look after any technical issues and keep the network in good health.

The community, on the other hand, elects the council, can also make proposals and can vote during referendums. All in all, the whole system is meant to provide checks and balances so that each investor in Polkadot has a voice one way or another.

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