What is Polkadot ($DOT) and Is It Worth Investing In?

What is Polkadot ($DOT) and Is It Worth Investing In?

9 minutes to read | 05.28.2022
TL;DR Polkadot is a network that allows users to build their own blockchains that can exchange information with each other, and other blockchains off of Polkadot's network. The token, $DOT, is used for governance and staking. These user-created blockchains are called "parachains" and they are connected to Polkadot's main chain called the Relay Chain. Parachains have their own designs, uses, and tokens. They can process their own transactions, which allows Polkadot to be scalable and incredibly fast. Polkadot is great for allowing blockchains that are normally incompatible, like Ethereum and Bitcoin, to talk to each other. These blockchains can also send and receive data from parachains built on Polkadot's network. Polkadot is compared with many different blockchains, but most notably with Ethereum 2.0. However, Polkadot does have its advantages like better governance, and more flexibility. Polkadot is just getting started and is in a phase where they are rolling out parachains. The future of Polkadot will be interesting, but one con is not much is built on it yet. As more parachains are added, more projects will be built on the network.
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Polkadot ($DOT) is a crypto that gained popularity super fast. It was launched in May of 2020 by creator Gavin Wood, an Ethereum co creator. A few months later it was already a top ten coin by market cap. Currently, Polkadot is the 11th most popular crypto by market cap. So, what is Polkadot, how does it work, what does it hope to accomplish, and is it worth investing in?

What is Polkadot ($DOT)?

Polkadot is a network that allows users to create their own blockchains and for data to be transferable across those blockchains and external blockchains. Polkadot is a layer 0 blockchain. Polkadot is a host to a large number of blockchains, called “parachains”, that can each be individual projects themselves with their own cryptocurrencies. This means that decentralized applications (dApps) built on the Polkadot Network can also transfer data across these parachains. Parachains are connected to the Polkadot Relay Chain (Polkadot’s blockchain itself) and benefit from Polkadot’s speed, scalability, and security. Its token is called $DOT, and it's used for two main reasons, staking and governance. Staking is for validating blocks, achieving consensus, and issuing new DOT into the circulating supply. Governance allows people who hold DOT to propose and to vote on the future changes of the project. DOT is available to be bought and sold on most major exchanges. Polkadot has a total supply of 987.6 million coins and a market cap of $10 billion making the price $10.12 as of May 2022. There is no max supply of DOT.

How does Polkadot work?

Polkadot is the network that connects its ecosystem of parachains. Parachains are individual blockchains with their own tokens, designs, or uses. Some can be dApps, some can be bridges, or perhaps “mini Polkadots”, which can have their own chains. Chainception! Right now, Polkadot can handle 1000 transactions per second. How? The parachains connected to the relay chain are their own separate blockchains processing their own transactions using their own validators. This allows the Polkadot network to process multiple transactions at once spread out across the parachains. The Polkadot relay chain itself is responsible for swapping data between parachains. It’s also designed to be scalable. In fact, this is one of the main problems Polkadot is looking to solve. Since all the parachains are processing their own transactions, as more and more parachains are added to the network it’s possible for Polkadot to achieve 1,000,000 transactions per second. Depending on how many parachains are allowed to be on Polkadot’s network, the number of transactions per second could theoretically be infinite. Polkadot provides better security than a standard blockchain because the security of the parachains is pooled together and verified by the relay chain. This means that the individual chains don't have to create their own security from scratch. One parachain’s security cannot be breached since its data is connected to and validated by Polkadot’s relay chain. Polkadot uses a proof of stake consensus method. Consensus is getting everyone to agree on the transactions on the chain. Proof of stake, or staking, allows users to put up some of their DOT as collateral in order to have a chance of randomly being selected to validate the block. If a validator successfully validates a block then they are rewarded with DOT. If a validator fails to validate a block for some reason, they are punished by losing their DOT. Polkadot uses a lot less energy than proof of work blockchains, like Bitcoin and Ethereum, and because of that can have a good impact on the environment. It uses the same amount of energy as 6.6 United States households per year.

Why is Polkadot important?

Polkadot is useful for something like allowing blockchains that cannot normally exchange data, like Bitcoin and Ethereum, to talk to each other. For example, you cannot send Ethereum based tokens to a Bitcoin blockchain or you will lose those tokens forever. Some parachains built on Polkadot will be “bridges” that allow these blockchains to interact. So, Polkadot can be a compliment to other chains rather than a competitor. In fact, Polkadot is not designed to replace any blockchain or cryptocurrency. Some other possible use cases of Polkadot are to transfer verifiable, private data between doctors and pharmacists, between a high school and a university, between different state governments, transfer digital assets between games, allow you to log into multiple websites seamlessly with one avatar, transfer different country’s currencies using stablecoins, allow websites to connect with each other, or allowing data such as real life information to be used by multiple blockchains. Some of these examples are the main principles of Web 3.0.
Polkadot logo

Is Polkadot worth investing in?

Many people compare Polkadot with Ethereum 2.0 because they have similar features. However, Polkadot isn’t looking to compete with Ethereum, but rather connect what is built on Ethereum with what is built on the Polkadot network. If you did have to compare Ethereum 2.0 with Polkadot, it has some advantages over Ethereum. One advantage is better governance, since Polkadot’s governance will be on-chain and can be added by itself, rather than Ethereum’s off-chain governance which requires a hard fork, making validators upgrade their nodes in order to add changes. Another advantage is that on Ethereum you are building apps that use smart contracts, whereas on Polkadot you are building a full blockchain where you are in control of the environment and economics of your chain. Polkadot is a lot more flexible than Ethereum in this aspect. Some cons of Polkadot are that there aren’t that many parachains built on Polkadot yet. In fact, as of May 2022, Polkadot is still in the Parachain Rollout phase, which will allow only 100 parachains to be built on Polkadot. This number will increase in the future once Polkadot has proven its concept. Polkadot sounds really great on paper, but has no proof of concept currently. Polkadot is very much still in its early days, so, like many other altcoins, investing in Polkadot is investing in a hope that Polkadot’s concept will work as promised and that many blockchains are built on its network.

The Future of Polkadot

Polkadot is looking to help projects that want to build blockchains using the network’s security, scalability, and connectivity. These projects themselves, the parachains, could become massive blockchains with large market caps themselves. Big projects that have many investors could create a demand for Polkadot because the future of Polkadot has an effect on their project. A higher demand for Polkadot means a higher price to obtain Polkadot. There are parachains that can also have parachains themselves. They are called parachain hubs and can be the hub for an entire industry, like a medical or financial industry. Parachain hubs are what call allow medical records to be securely sent from one hospital to another. One parachain hub project is called Acala and is trying to become the hub for decentralized finance apps, allowing those apps to share financial data. Other apps that are currently being built on Polkadot’s network are Statemint, a parachain for providing digital assets like NFTs or stablecoins, and Moonbeam, a parachain that provides smart contracts that are compatible with Ethereum.

What does the Polkadot network have planned for the future?

Once parachains have fully been launched, the next step in Polkadot’s roadmap is to launch parathreads. Parathreads are pay-as-you-go parachains that are for projects that do not need a full parachain. Users would only need to pay when they needed to add a block. This works similarly to paying a fee to execute a transaction on Ethereum or Bitcoin. Even though they aren’t full parachains, parathreads still get Polkadot’s security and connectivity. All in all, on paper the future of Polkadot looks good. I am personally excited to see where Polkadot is in one year, two years, five years, and maybe in ten years all blockchains will be built upon the Polkadot network. Remember, this is not a recommendation, and you should make your own choice when investing in any crypto.

Possible Future Prices of Polkadot

Polkadot is a cool project and I do hope to see it succeed, so I thought I’d have a little fun with its market cap and potential future price. Again, this is just for fun and in no way a price prediction. This is just for fun playing around with market cap. Since Polkadot has no maximum supply, we will use Polkadot’s current circulating supply of 987.6 million coins. Polkadot has almost 1 billion coins in circulation, so it's safe to say that you can estimate that for every billion dollars invested the price will increase by about $1. If Polkadot's market cap is 1 billion dollars, the price per token would be $1.01. At a 5 billion dollar market cap, each DOT would be worth $5.06. Right now the market cap of Polkadot is about 10 billion, so the current price of each token is $10.12. If Polkadot can increase its market cap and receive more investing then we would be looking at some pretty interesting prices. At 25 billion dollars in market cap, every DOT would be about $25.31. A 50 billion dollar market cap would put the price of DOT at $50.62. Polkadot's all-time high was $55.00, which means at this time the market cap was 54.3 billion dollars. If Polkadot can reach 100 billion dollars in market cap, then it would be worth $101.25. At 250 billion dollars, DOT would be worth $253.13. At 500 billion, it would be priced at $506.27. If Polkadot manages to reach a 1 trillion dollar market cap, the price per DOT would be $1,012.55. Crazy! Polkadot could reach $2,025.11 if it gets to a 2 trillion dollar market cap. And lastly, if a big chunk of the world is run using Polkadot and the market cap reaches 5 trillion, then the price of DOT would hit $5062.77. Lambos anyone? Summary Polkadot is a network that allows normally incompatible blockchains to be able to transfer data. Its token called DOT, is used for governance and staking. Polkadot uses parachains that are their own separate blockchains that can handle their own transactions. These parachains can exchange data through Polkadot's main chain, called the Relay Chain. Polkadot is important because it gives security, scalability, and connectivity to blockchains without needing to build these features from scratch. It can be used to exchange data between blockchains like Bitcoin and Ethereum. Polkadot could be worth investing in because of a few advantages like governance and giving developers the ability to build entire blockchains on its network. If some of these apps get popular it could cause demand for DOT. Polkadot is still in the phase where it is rolling out parachains, but once finished will start to roll out parathreads. There are currently a few apps being built using the Polkadot Network, but this number is expected to rise as more parachains are added.
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