Polkadot For Dummies
|— Interoperability and scalability are long-standing challenges in the blockchain industry. Right now, most public blockchains like Ethereum and Bitcoin cannot communicate with one another or grow without external technologies.|
— Polkadot was designed to resolve these issues, in addition to several other major challenges, by providing something of a base-layer that can connect all others, thus enabling them to communicate and scale.
— The DOT token sits at the heart of Polkadot, and is used for governance, scalability, and keeping everything secure.
So you’re reading about crypto and keep hearing new names and phrases. What is Polkadot? Let’s dive in and explain one of crypto’s latest offerings.
Whether you’re a complete crypto newbie or a seasoned veteran, odds are you’ve heard about Polkadot—a rather impressive blockchain platform that was designed to solve some of the longest-standing issues in the industry, including interoperability and scalability.
Right now, blockchains come in two major types. They’re either purpose-built and designed for a very specific function—like Bitcoin, which was specifically designed as an alternative payment system and store of value. Or they can be more open and general in their functioning and can be applied to a wide range of uses like Ethereum or TRON, which can be used for building decentralized applications (dApps)—which are basically just blockchain-based versions of regular apps.
Polkadot, on the other hand, is a blockchain that describes a “Layer-0 protocol”. That is, the Polkadot protocol provides an environment that other blockchains, known as “parachains”, can run in. It essentially provides the infrastructure that other blockchains can use to interact with one another securely.
Blockchains can’t talk to each other
We now have blockchains that have been built to tackle a huge range of problems, but there’s one big problem… they can’t easily communicate with one another! This is because the vast majority of blockchains essentially operate as closed ecosystems—whatever happens on one blockchain generally cannot influence what happens on another.
The crypto space is currently like a filing cabinet with hundreds of drawers. Each drawer represents a different blockchain going about its usual business. But in this case, you can’t move the files between the drawers!
What happens in the drawer stays in the drawer!
This is generally because blockchains can vary considerably in terms of how they’re built, secured, and governed (among other things), which poses a major challenge when trying to get them to exchange data or value with each other securely.
But this closed off, siloed approach is radically different from the way most financial platforms work today. After all, there are thousands of different banks, millions of different stores, and dozens of different payment methods—many of which are compatible with one another. Why should blockchains be any different?
This is where Polkadot comes in.
Connecting the Dots
Polkadot was designed with the idea that, as the number of specialized blockchains increases, so too does the need for an interoperability solution—that is, something that can help securely bridge all these platforms together so they can work in harmony.
So they set about tackling the problem by creating a platform that allows blockchains to interoperate with one another—no matter how different they may be. And after three years of development, Polkadot was born.
Polkadot provides a piece of critical infrastructure other blockchains can use to improve their security, speed, upgradeability, and overall capabilities. It achieves this by using three main components: the Relay Chain, parachains, and bridges.
Let’s take a look at what each of these are in turn.
The Relay Chain is described as the “heart of Polkadot” and provides security to the network and helps it stay in sync. It also provides Polkadot’s on-chain governance system—allowing DOT holders to vote on referenda that influence how the network functions. Parachains, on the other hand, are blockchains that are built for a specific purpose and are connected to the Relay Chain. Lastly, there are bridges, a type of parachain used to connect external blockchains like Ethereum or Bitcoin to the Polkadot network.
Tackling another issue
This system doesn’t just allow messages, data, and value to be transferred between the different parachains and external blockchains (again, via bridges), it also tackles another major challenge many blockchains have to deal with—scalability.
Since most blockchains can only handle a rather small number of transactions per second, they can suffer from congestion. Polkadot bypasses this issue by allowing each blockchain to work in parallel, helping to spread the transaction load. The team at Parity Technologies (the development firm that built the initial implementation of Polkadot) predicts that each parachain can achieve over 1,000 transactions per second (tps), which is more than… wait for it, 100x faster than Bitcoin!
With 100-200 parachains, the entire Polkadot network could process hundreds of thousands of transactions per second.
The network is powered by a utility token known as DOT, which has several main functions:
- Governance: DOT holders can table and vote on potential changes to the Polkadot network.
- Bonding: DOT holders can temporarily lock up their tokens to help parachains secure a parachain slot on the Relay Chain.
- Staking: DOT can be staked to earn variable rewards for helping to secure the network.
DOT transactions are also pretty fast, since they’re finalized within 30 seconds or so—compared to around 10 minutes for Bitcoin transactions.
Taken together, these features are part of the reason why Polkadot has been so well received by the cryptocurrency community—having risen into the top five largest cryptocurrencies in current usage, despite launching in mid-2020.
Securely stake your DOT using your ledger device
As we mentioned above, Polkadot tokens (DOT) can be staked to earn rewards. As of January 2021, this is around 13% APR paid out in DOT (Yes, life is good!).
Note that this return can vary considerably over time, it is not fixed or guaranteed.
With Ledger hardware wallets you can now intuitively and safely stake your DOT via Ledger Live—benefitting from an easy to use interface and industry-leading security. You’ll also retain full control over your DOT at all times, unlike when staking via a cryptocurrency exchange!
Knowledge is power – so keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video What is DeFi?