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Polkadot is a cross-chain ecosystem founded by the Web3 Foundation, that reflects Web3’s vision of a multi-сhain and the user-friendly future of DeFi. The project was originated by the former Ethereum CTO Gavin Wood. He was the author of the whitepaper (Polkadot paper) in 2016, and later formed a project called Web3 Foundation, the purpose of which was the research and development of decentralized web technologies. Together with the ex-head of Ethereum security Jutta Steiner, Dr. Wood also co-founded Parity Technologies, which handled (and still does) the main development work on Polkadot, whose main goal is to solve the scalability problem.
A year before Polkadot arrived, its canary network Kusama saw the light of day, designed to be a testing ground for the new technologies planned for Polkadot. However, it should be noted that Kusama is not a testnet, but rather a blockchain of the same architecture. It offers real economic rewards, has its ecosystem, in many ways different from that of Polkadot, and is now going its own way, guided by its decentralized community.
Officially launched in May 2020 as a proof-of-authority network, Polkadot, which refers to itself as the first layer 0 blockchain, has made its way to the top ranking within just a year. In just a month after its launch, Polkadot switched the consensus model to Nominated Proof-of-Stake (NPoS). Another month later the network gathered the community of independent validators and transferred the governance to the DOT token holders.
The blockchain that introduced the concepts of parachains and candle auctions attracted a lot of attention from investors like Three Arrows Capital, Polychain Capital, and Pantera Capital. The gradual implementation of Polkadot's multi-chain concept began in late 2020 with the launch of the Rococo parachain testnet and grew strongly throughout 2021 when Polkadot ran its first auctions for leasing its parachains and onboarded five parachains with the second series of parachains expected to be launched in the first quarter of 2022. Kusama did the same, and the auctions resulted in more than 20 parachains.
Polkadot unites many blockchains, all of which are heterogeneous, meaning that each of them can have an individual structure, area of specialization, and tokens. All parachains are secured and connected through the Polkadot Relay Chain, which is a layer-0 blockchain. That is why Polkadot is frequently referred to as a blockchain of blockchains.
The Relay Chain utilizes the Nominated Proof-of-Stake consensus model, where nominators, in exchange for a portion of validators’ staking rewards, create an additional security level by staking their DOT tokens in favor of the most active and reliable validators, thus helping them get to the active validator set. In the Polkadot network, collators collect parachains transactions and provide Relay Chain validators with evidence of their validity. Fishermen, which any parachain full node can become, are involved in monitoring the network for instances of validators' dishonest behavior.
The Relay Chain is built using Parity’s framework for building custom blockchains known as Substrate. Being the backbone of the whole network, the Relay chain is limited in the transaction type capability, as its main responsibilities are bounded by participation in the network’s consensus mechanism and interaction with the governance. Smart contracts are not supported by the Relay Chain. It also provides cross-chain transfers, and not just of tokens, but most importantly - of data. For instance, for trading synthetic assets a blockchain could request data about the stock price and get it from an oracle of a foreign parachain. Parachains can interact regardless of their types, which allows, among others, to share some permissioned information from a private chain with a public one.
The functions of the Relay Chain include providing security for any parachain, no matter how important it is. Thus, it is working as a universal “umbrella” for all the projects it unites and acts as layer zero for the layer-1 blockchains that can be attached to it.
Polkadot provides instruments to anyone wishing to build their blockchain as an individual network or as Polkadot parachain. Parachains are layer-1 blockchains running independently in parallel to each other (hence the name) and being connected to the Relay Chain. This connection with the heart of Polkadot does not however mean that parachains have to be identical or adopt Polkadot’s native token as their own. While parachains rely on the security that Relay Chain provides them through its pool of validators, they have plenty of autonomy in the form of their tokens, economic model, and governance.
Parachains are deterministic state machines, meaning that each has its own state, executes blocks, and achieves a new state, as each new block is executed. The Relay Chain, in turn, links all those states into one state, referred to as the state of states. This algorithm is called sharding, so it is safe to say that parachains are Polkadot’s shards. Parahcains’ network participants that are required to run full nodes and are called collators are responsible for executing transactions (a lot like miners in the Ethereum network) and collecting them into blocks that are later validated by the Relay Chain validators. Thus, collators are not responsible for the security of parachains, the Relay Chain validators are. It is them who check the blocks validity and may reject them in case they are not correct.
There are two toolsets or Parachain Development Kits (PDKs) - Substrate and Cumulus. With the help of the Substrate framework anyone can build their own blockchain, and Cumulus is the extension to Substrate allowing implementation of a new blockchain on Polkadot as its parachain.
Implementation of a blockchain built with Substrate into Polkadot is only optional, which means, this blockchain can exist as an independent entity too. To be able to become a Polkadot parachain the project needs to participate in a parachain slot auction first, as the number of parachains that Polkadot can support is currently limited to 100. Acala Network, now Polkadot’s DeFi hub, was the first project to have won the parachain auction slot in November 2021.
However, the auction isn’t the only way to join the Polkadot ecosystem. Aside from parachains, Polkadot offers an option of parathreads. Technically, they are almost the same as parachains but don’t offer continuous connectivity to the network, which lowers the entry barriers and makes them cheaper for whoever occupies them. Parathreads are being rented without participation in auctions and utilize a pay-as-you-go model, which means that the tenant will have to pay (participate in an auction) for each block of their parathread to be verified by the Relay Chain. Depending on the protocol needs, parachains can switch to being parathreads and vice versa (if there are any parachain slots available).
Polkadot and Kusama's parachain slot auctions follow a similar pattern. Teams wishing to bid for the right to lease a parachain bond DOT tokens for the period the lease is active. Some however decide to opt for crowdloans and count on their community to make that bond for them. To cast your vote for one of the projects, you must lock your DOT or KSM, respectively, in favor of the chosen project. The project with the highest amount of coins locked in their favor wins and leases parachain for a specified period. For Polkadot, this period may vary and get up to 96 weeks (about two years). And those who locked their coins in favor of the winner will sacrifice their right to use these coins for the entire term of the parachain lease. Parachain auctions of 2021 were supported by such exchanges as Binance or Kraken which provided the grounds for the crowdloans.
Although all the Polkadot parachains are united with one layer 0 blockchain called Relay Chain, the system is still not a loop, as the external (autonomous) blockchains (including Substrate-powered) can also be connected with some parachains and/or with each other via bridges. Bridges can be built within the Polkadot ecosystem and between other blockchains. Web3 Foundation-financed developments of the bridges between Polkadot and Bitcoin / Polkadot and Ethereum can serve as an example.
Bridges make Polkadot a continuously growing ecosystem: it can steadily expand, attracting a limitless amount of new projects. Striving to achieve the most seamless interaction between networks, with time it will unite more and more various blockchains, thus moving towards the multichain future. Polkadot also plans to be bridged with Kusama, its experimental platform and “structural clone”, in the future.
Bridges on Polkadot operate via dedicated parachains, connecting other networks like Ethereum and Bitcoin. Due to the architecture of the network, blockchains connected by a bridge are perceived by the system as a parachain.
Although anybody can contribute to the Polkadot codebase as the code is open-source, the network can run forkless upgrades as it was built with the expectation of necessary adjustments to technological innovations, and therefore, changes in code in mind. The Polkadot code could be changed directly on-chain by the on-chain governance decision, without the need to introduce hard-forks and thus create two separate transaction histories.
Polkadot is governed by the Polkadot council of 13 members and the Polkadot community. The job of the Polkadot Council is to represent passive DOT stakers, to initiate referenda, votes, or to interrupt dangerous and malicious proposals. Voting is open to all DOT holders. Also, a Technical Committee influences the governance of the protocol, on which teams that have successfully implemented the protocol on Polkadot and can be added or ousted by a vote of the Council.
Like gas fees, the Polkadot app requires commissions paid for transactions to be included in blocks. However, Polkadot fees are not always paid using the native coin of the Polkadot network DOT. Different parachains having their own government and native tokens, can decide on what to use as a currency for fees. On the Acala parachain, for example, users can decide for themselves in which token they pay their transaction fees and use any token represented on the parachain.
Polkadot's transaction fees are called inclusion fees and are calculated as a sum of various fees called a base fee, weight fee (fee proportional to the weight of the transaction), length fee (fee proportional to the encoded length of the transaction), and optional tips, which can affect the priority of the transaction and increase its chances to be included in the queue.
The Polkadot wallet support includes Parity Signer, Polkadot-ks Desktop, and a web extension for it. There are also wallets that have been supported by either the Polkadot or Kusama Treasury via a proposal, so far these include Fearless Wallet, Polkawallet, Stylo, Nova Wallet, and Talisman.
DOT is Polkadot’s native token and one of the largest cryptocurrencies by market capitalization. The smallest unit of DOT is Planck (similarly like wei is the smallest unit of ether). 1 Planck equals 0.0000000001 DOT, while 1 KSM equals 1e12 Planck. DOT is used for the network governance, staking to ensure the network operation, and ensuring the security of the parachains slots in the network by being held during the slot lease (locking up DOTs in favor of the winner).
DOT is an inflationary token, thus, it doesn’t have a maximum supply capped at a certain number. The inflation rate is not fixed as well, it was set at 10% during the first year of the project operation. Created DOT are intended for the validators, and the rest goes to the treasury. In addition, the treasury is replenished from a portion of the transaction fees and penalties (slashes) paid by malicious actors.
Polkadot lists three founders, including co-founder and former Ethereum CTO Gavin Wood. Gavin's track record includes the creation of the Solidity programming language and the Proof-of-Authority consensus mechanism. Gavin Wood has founded and is now part of the Parity Technologies team and leads innovation for Substrate and Polkadot. He is also president of the Web3 Foundation.
Another co-founder of the Polkadot team is Oxford graduate Peter Czaban. Peter is the Director of Technology at the Web3 Foundation and his extensive experience includes work not only with blockchain technology, but also in the defense, finance, and data analytics industries.
Thiel Fellow and blockchain and cryptography researcher Robert Habermeier is the project's third co-founder and core developer at Parity Technologies.
Polkadot was audited bt Atredis in February 2020
The network is also well-known for its active community, as it is fully run by its users and is open to its initiatives. Stakeholders can join the Council, the on-chain entity assembled from their accounts. The Council allows its participants to put forward their proposals that, if voted on, can be implemented first on Kusama and then on Polkadot. The number of Polkadot Council seats is limited and currently accounts for 13, while Kusama has 19. Besides, the system is fully automated in a way that it is programmed to reward active users with DOTs or apply fines against the participants committing malicious acts.
The closest teams to the project, which in one way or another can be called partners of the platform, are its creators Web3 Foundation and Parity Technologies, as well as teams that have participated greatly in the technical development and maintenance of the network - Web3.0 infrastructure development firm ChainSafe, blockchain-based technology solutions company Soramitsu, and browser-based vault for account keys management Polkadot JS.
On April 6, 2021, Tether announced the launch of its USDT token, the world’s largest stablecoin, first on Kusama and then on Polkadot. Thus, USDT became Polkadot’s first stablecoin, driving the network further towards being a DeFi hub.
At the time of writing, five parachains are running on Polkadot. The first was Statemint, Parity Technologies' generic assets parachain, which was connected to Polkadot without conducting an auction. Statemint has a peer on Kusama called Statemine. These parachains are designed to create assets of various kinds, be they tokens or NFTs, or even CBDTs (Central Bank Digital Tokens).
Polkadot, although it has been around as a project for more than a year, only really came to life in late 2021 with the launch of parachains. Since the Relay Chain cannot host smart contracts, this option appeared with the activation of parachains such as Acala, Clover Finance, or Moonbeam. Acala is an Ethereum-compatible platform that calls itself an all-in-one DeFi platform, offering users all the typical decentralized finance tools - AMM DEX, derivatives (liquid DOT), its stablecoin aUSD, and the opportunity to pay gas fees in any token. You can use Parallel's lending or staking services, and as mentioned above, Moonbeam or Clover Finance are the right ones for building or transferring smart contracts to the Polkadot network.
As for the next steps announced by the project - one of the closest milestones is the launch of parathreads. There are also six more projects planned for activation as parachains in the first quarter of 2022. The project initially stated that Polkadot is capable of accepting no more than 100 parachains and 10,000 parathreads. And by the time those numbers are reached and all the slots are filled, the network will be able to conduct about one million transactions per second (TPS).
A mechanism called ‘nested Relay Chains’ - creating and enabling multiple Relay Chains connected through parachains - is also in the research phase. Thanks to it, it is believed that TPS networks will be able to show even better results. Nested Relay Chains will probably be part of the Polkadot 2.0 upgrade, about which not much is known yet.
The Parity Technologies team is also working on a sophisticated mechanism called Cross-Consensus Message Format (XCM), a way of cross-platform communication.
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Last updated: Aug 22, 2023
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