DeFi Token Spotlight: Polkadot
A Detailed Dive into one of the fastest growing Layer 1 Blockchains
The key characteristics of DeFi
Polkadot: The Interoperability Layer 1 Blockchain
Avalanche at a Glance
Co-Founded by Anatoly Yakovenko in 2017, Solana is a high-performance, permissionless layer 1 blockchain that aims to achieve scalability through implementing several novel design mechanisms. Existing blockchains, such as Ethereum, can only process 15 transactions per second. This limitation often results in a congested network, and the ramifications are exponentially rising transaction fees as well as slowed confirmation time on transactions. Solana’s goal is to solve these issues by implementing several unique designs.
Solana has 8 key innovations that allow it to perform as one of the fastest, cheapest blockchains despite rising demand and usage. The in-depth analyses of these innovations can be found here, written by Anatoly Yakovenko. Solana differs from Ethereum starkly and requires a different programming language to build on. This means all new infrastructure must be developed from the ground up, something Ethereum began in 2014.
In summary, these innovations allow the current state of Solana to sufficiently process 2,000+ transactions per second, without the threat of exponential rising transaction fees. In time, as processing chips become more advanced due to Moore’s Law, the Solana network’s throughput capabilities will tenfold, allowing it to potentially achieve 50,000+ transactions per second.
In 2021, Solana saw exponential growth within several key areas. This growth can be seen by the increase of wallet address, Total Value Locked (TVL), and Solana’s market capitalization.
Polkadot at a Glance
Polkadot (DOT)
Introduced in 2016 by Ethereum Co-founder Gavin Woods, Polkadot was determined to solve one of the most challenging issues in blockchains: scalability. Being able to scale with mass adoption in such a nascent, disruptive technology has proven to be quite challenging. Many of the world’s brightest computer programmers are working towards finding a solution to this prominent issue, and yet many of today’s blockchains still struggle with scaling with increased user demand and network activity.
Polkadot is often referred to as a Layer 0 blockchain and can be thought of as a network of blockchains. Layer 0 blockchains provide the infrastructural needs for Layer 1 blockchains to exist and allow a seamless cross-chain interoperability amongst blockchains that exists within the network. At the heart of Polkadot is the relay chain, or main chain for the Polkadot ecosystem. Polkadot’s relay chain serves as a security service to other parachains that exist within the Polkadot ecosystem. Parachains are blockchains that run in parallel to the Polkadot relay chain. In essence, Parachains are clients of the relay chain, and the main service provided by the relay chain is security. DeFi applications, cryptocurrencies, NFTs, and other blockchain-specific applications are built on top of the Polkadot parachains.
Polkadot is a heterogeneous multi-chain that aims to achieve scalability without the tradeoff of reduced security. By multi-chain, this refers to the entire network of parachains and relay chain that exist within the Polkadot ecosystem. Parachains are their own blockchain with cross-chain interoperability with other parachains in the Polkadot ecosystem. This type of system is referred to as sharding, where it splits up the network activity amongst many different Polkadot parachains that all have high transaction speed and low transaction costs.
By splitting the workload into many different parachains, this allows the overall Polkadot network (parachains + relay chain) to scale rapidly as user demand increases. One of the largest Polkadot parachains today is an experimental, community focused research and development network, known as Kusama. The idea of Polkadot is to create an ecosystem of blockchains that have a seamless way to communicate with one another without having to sacrifice security.
Polkadot’s Use Case
The main cryptocurrency in the Polkadot ecosystem is DOT and has three main use cases. The first utility for DOT is governance. DOT token holders are the maintainers of the protocol. They have the authority to vote on network upgrades, bug fixes, etc. Usually, this power falls into the hands of network miners, but for Polkadot this responsibility falls onto DOT holders. To make such proposals, like network upgrades or bug fixes, one must hold a certain amount of DOT. Proposals that are successfully submitted are voted on by other DOT holders.
The second utility for DOT is staking. Polkadot runs on a variation of the Proof-of-Staking consensus mechanism, known as Nominated Proof-of-Stake (NPoS). A fixed number of Polkadot validators participate in the creation of blocks and DOT token holders can stake their DOT to nominate which validators are eligible for block creation.
The last main utility for DOT is known as bonding. For new parachains to be added to the Polkadot ecosystem, they must bond DOT tokens. Bonding tokens is a form of Proof-of-Stake (PoS) and allows the parachains to maintain a connection to the Polkadot relay chain. Parachains that become outdated or fail in driving user adoption can un-bond their DOT tokens to disband the parachains from use. Bonding and un-bonding can be thought of like staking and un-staking.
FEATURED EDUCATION
DeFi 101: A Guide to Decentralized Finance
Decentralized Finance, or DeFi, has been rapidly gaining traction amongst the investment community. DeFi protocols, like Solana, Chainlink, or Uniswap, have real-world utility (and revenues) that are quickly displacing their traditional counterparts that require intermediaries to function.
In this digital resource, we’ll cover:
