Teun Kerkhof - 3 November 2021

Why Sentiment Around Polkadot Is Expected To Stay Bullish

Recently, the Polkadot token (DOT) surpassed the previous all time high of $49 and is now trading at $51 per token. From a year-to-date standpoint the token quintupled in value and is currently ranked 8th of all crypto currencies in terms of market capitalization. 

The recent surge in price can be explained as anticipation to the auctions of parachains. A vital part of Polkadot’s tech. In this report, we go briefly over what Polkadot is, how their parachains are crucial to the project, and what we can expect from the token in the future.

Polkadot’s value proposition

Polkadot is an open-source blockchain protocol that facilitates a network of scalable purpose-built blockchains that have shared security and can work together seamlessly while also being able to interact with external blockchains.

It has a Nominated Proof of Stake consensus algorithm. This algorithm selects a set of validators that become candidates for block production. Nominators then have the chance to vote on these validators through delegating tokens. The candidate validators with the highest stakes become block producers. This system boosts security as nominators have an incentive to vote on validators with a strong reputation. Polkadot also has high tps (transactions per second) and extremely low transaction fees. 

As you probably know, smart contracts are a very important component in the crypto space. This feature on blockchains allows other developers to build their product or service on the chain. As of writing, Ethereum  is still the biggest smart contracts platform. Ethereum hosts thousands of decentralized applications and has over $100bln in digital assets locked in smart contracts. However, Ethereum as a network is currently not that scalable due to its design. As dApps became really popular and more users have been using the Ethereum network to utilize those dApps, it made Ethereum network reach near full capacity. This translates into high fees and users often have to pay over $100 for transactions on the network. 

Architecture

Relay Chain

One of the projects tackling these scalability issues is Polkadot. The team behind Polkadot developed a unique way of blockchain construction. The Polkadot blockchain consists of two types of blockchains: the main blockchain and second order blockchains. The main chain is referred to as the Relay Chain and is responsible for the security of the entire ecosystem and for facilitating cross-chain operability. 

Parachains

The ‘second order‘ blockchains are referred to as Parachains. These chains run parallel to the Relay Chain and rely on it for connectivity and security. They are also the only ones capable of running smart contracts. The Relay Chain is thus solely used for security and interoperability, while the dApps and other smart contract related products are deployed on the parachains. The cool thing here is that all these parachains are highly customizable, whilst being scalable. This makes them very attractive for other blockchain projects as they can design a parachain completely to their own needs and desires. 

The parachains are attractive for DeFi projects as they are cheap, fast, and offer the optionality for cross-chain interaction with other parachains. In addition, it is also a very good option for private, enterprise blockchains. They do not have to worry about security as parachains rely on the Relay Chain for that. Those private blockchains can be used for internal use and permissioned access for other parties only. 

In total there will be 100 parachains in the first year. This creates a huge gap between supply and demand as there is way more demand for these types of customizable chains. 

Crowdloans

In the coming months, slots for these parachains are auctioned off. Currently, there is a limited number of parachains. Hence, the auction for projects to bid on the slot and lease it. Projects can acquire a slot by winning the auction through a crowdloan. The team, investors, and community members can temporarily lock their DOT tokens and that is used to bid on the slot. After a project has won the auction, the tokens are returned to the depositors. 

Interoperability

A great aspect of Polkadot’s blockchain design is that it allows for interoperability of all the chains in the ecosystem. The parachains can communicate with each other through the Relay Chain thanks to the Horizontal Relay-routed Message Passing. This is important as assets and applications can be transferred between the chains, increasing economic efficiency, optionality, and activity across the whole Polkadot ecosystem. 

Popularity

The launch of the Polkadot ecosystem is highly anticipated as people have a lot of faith in the succession of their tech. The way parachains work and the capability to have interoperability is relatively new and much needed to tackle the current scalability challenges on Ethereum. This also explains the surge in price the past couple of months as the auction period was closing in.

Polkadot is founded by Gavin Wood, former co-founder of Ethereum and inventor of Ethereum’s solidity smart contract language. He released the first draft of the Polkadot whitepaper back in 2016 as he started developing a better alternative to Ethereum. Over the years, Wood created a solid team of people from all walks of life to help build Polkadot. It is an extremely reputable team and has not disappointed their investors. 

Lastly, there are millions of dollars waiting on the sidelines to fund developers and projects built on the Polkadot ecosystem. There is a $774mln fund, mainly targeting DeFi projects, that will be distributed as time goes on and parachains are launched. It will help establish fundamental projects and reliable products for people to use on Polkadot and close the gap with other blockchain networks that already have good projects. 

Conclusion

Polkadot is a very promising blockchain project with strong technology, a promising developer team, and a great community. The blockchain is designed to be a more scalable alternative to Ethereum through the use of a Relay Chain and multiple parachains. By design, Polkadot is a robust, secure, and fast blockchain. Currently, the ecosystem is still in its early stages as the parachains have yet to go live. Over the coming months, the parachain slots are auctioned off to projects and we expect the winners to go live with their parachains over the course of 2022. 

The DOT token is used and locked up in the auctions to secure a parachain slot, since a limited number are available. As these auctions happen over the next few months we expect an increase in demand for the DOT token. On a blockchain level the token is used to pay for transactions and as collateral for staking. At the time of writing 56% of the token supply is staked. We expect the project to grow in the coming years as the parachains launch and the Polkadot ecosystem expands.