In this article, we provide a deep dive into the Polkadot project and how it can be considered the Internet of Blockchains; from the challenges it seeks to solve, to its scalability and near-term outlook.
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Context: Multi-chains and the Emergence of Layer Ones:
- The flawed transaction capacity of the Ethereum Network has tempted crypto and DeFi users to explore other blockchains.
- These ‘layer ones’ (Ethereum alternatives – Solana, Cardano etc) are increasing in adoption and value.
- This has created a multi-chain crypto space where there is heavy demand to transfer value across different blockchains.
Lack of Communication between Blockchains
The trouble here is that blockchains have difficulty communicating with one another.
For example: You cannot play an XBOX game on Playstation. The game’s engineers have to develop separate versions of the same game for each console. Comparably, many difficulties arise when trying to implement a dApp which was designed on Ethereum onto a different layer-one blockchain.
The lack of communication between blockchains is widely understood and has led to a number of barriers for a crypto space encompassing multiple blockchains. Polkadot (DOT) – described as a blockchain superhighway – offers a solution to this problem by delivering superior blockchain interoperability.
Imagine if someone invented a gaming console which could read both XBOX and Playstation games. Gamers would far prefer to use this type of console because they would have the freedom to play whichever game they like on the one device – an all-in-one gaming platform.
Polkadot can be thought of as an all-in-one blockchain. It aims to support all types of dApps and protocols, connecting different blockchains with far fewer cross-chain limitations.
Quick Intro to Polkadot
Polkadot was launched in 2016, by co-founder of Ethereum Dr Gavin Wood. Wood created Solidity (the programming language used by Ethereum). He is a firm believer in crypto being a multi-chain universe and envisions networks being fully collaborative with each other.
It is believed that Wood left Ethereum due to concerns that there was a sense of “crypto maximalism” amongst the community. This is where a community becomes more focussed on competing for dominance over other blockchains rather than pursuing a collaborative and decentralised ecosystem.
Polkadot’s interoperability and scalability
Elements of the Polkadot Network support interoperability between blockchains and are therefore far more in-line with Wood’s multi-chain ideology. Polkadot enables a fully decentralised web, connecting public chains, private chains and oracles allowing them to exchange data and make transactions in a trustless manner.
Polkadot is a multi-chain ecosystem which has superior scalability to Ethereum – which has flawed network capacity as it relies solely on a single network to support all of its apps and transactions. As a blockchain superhighway, Polkadot can process multiple transactions across several different blockchains which can act in parallel (as opposed to a heavily congested single-layer network).
Polkadot’s interoperability and scalability is made possible by its unique architecture, which consists of multiple ‘Parachains’ that are connected to a central ‘Relay Chain’ (see below).
The Relay Chain is the central, ‘layer-zero’ of the Polkadot network. It is responsible for processing very specific and limited types of transactions such as governance and parachain auctions. The functionality of the Relay Chain is deliberately limited to maximise security and transaction capacity of the ecosystem. Connected to the relay chain are a number of parachains which have greater functionality.
A parachain can be customised by a developer for a wide variety of use cases (similar to how a variety of different applications can be built on Ethereum). As can be seen in the diagram, each Parachain has a dedicated slot connected to the Relay chain. Parachain slots are leased out to different protocols that wish to participate in the Polkadot network.
It is expected that Polkadot will support up to 100 parachains however this number is flexible and subject to change. Parachains are leased out to other blockchains through parachain auctions (to be discussed below).
How does the Relay/Parachain model differ from other ecosystems
As mentioned earlier, Polkadot’s architecture allows different blockchains to operate in parallel. This is a superior model because it reduces congestion on the network.
It is useful to compare Polkadot’s architecture with Ethereum, to understand why the superior transaction capacity can occur:
DeFi protocols built on Ethereum are often described as ‘layer-two’ protocols. Because they are built on top of Ethereum’s layer-one network. The problem here is that a single layer-one network can be flawed – it struggles to process too many transactions at once.
An analogy would be if an entire city tried to fit all of its business activity into one tower. There would simply not be enough space for this to occur. You could add more levels to the tower, but this would increase the risk of the building collapsing and would also lead to huge amounts of congestion for businesses (i.e., elevators would be slower, power would be more scarce, etc).
It is far more practical for big cities to have multiple buildings/towers to allow business to operate in parallel. Businesses can run more efficiently as there is less competition for the limited amount of capacity that only one tower can offer.
In the example above, Ethereum is comparable to all of the city’s activity being jam-packed into one tower. Layers can be built on top of Ethereum’s network, but too much of this can have a strain on its transaction capacity.
Alternatively, Polkadot allows protocols to work in parallel – across multiple towers (i.e., parachains). Polkadot’s relay/parachain model can boost development and innovation in the crypto space with its superior transaction capabilities.
Further adding to these capabilities, is the consensus mechanism used by Polkadot – a superior option to that of Ethereum and Bitcoin.
Consensus – What is Consensus on Blockchains?
Blockchain’s are essentially a digital ledger of transactions (They are a form of DLT – Distributed Ledger Technology). A blockchain’s consensus mechanism refers to how its participants agree on the state of the network.
Like an accounting ledger, blockchain transactions are either accepted (and added to the ledger) or rejected/discarded (and not added to the ledger). The consensus mechanism outlines the rules and parameters that determine whether a transaction is to be accepted or rejected. The specific rules/parameters vary across different blockchains.
Most of the major blockchains currently use two different types of consensus – Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work v Proof of Stake
Many of the older blockchains use the Proof of Work consensus mechanism. There are many flaws with the PoW model, including scalability and the environmental impact. While Ethereum is transitioning to a different model, it currently uses PoW.
This presents an opportunity for alternative networks such as Polkadot which use Proof of Stake. The PoS consensus mechanism has superior transaction capacity and scalability. This is advantageous for parts of crypto such as the DeFi space which needs faster transaction speed and lower network fees.
Proof of Stake on Polkadot
Polkadot uses Nominated Proof of Stake (NPoS) which has two types of roles: Validators and Nominators. Nominators nominate their stake in the Network (i.e, DOT tokens) to Validators who take a more active role in verifying transactions.
I.e. Validators ensure that transactions are either valid (and added to the ledger) or invalid (and discarded/removed from the ledger). Nominators nominate their DOT to Validators they trust.
Both parties are crucial to the sustainability and security of Polkadot’s network. For their efforts, they are compensated with attractive staking rewards.
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Near term outlook for Polkadot
With the announcement of their inaugural set of parachain auctions, it will be an exciting end to the year for Polkadot.
November 11 – Kickstarting the Parachain Auctions
It was recently announced that the first auction will take place on November 11th. Polkadot will have at least 5 parachain auctions before the end of the year.
There is heavy competition amongst protocols to secure one of the elusive parachain slots. Of these competitors, there appears to be two front runners – Acala (ACA) and Moonbeam (GLMR) – both can provide immense value to the ecosystem.
Acala aims to become the DeFi Hub of Polkadot. It will allow users to access both DOT-based and cross-chain assets and derivatives. Acala is optimised for DeFi – not only because it can exploit Polkadot’s superior transaction capabilities, but also because it permits continuous upgrades of the protocol (i.e., without the need for forks) to integrate new features. Acala will also provide Polkadot with a native decentralised stable currency (aUSD).
Moonbeam will be a smart contract platform on Polkadot. It aims to build a framework for protocols to build on Polkadot and seamlessly interact with other layer-ones – such as Ethereum. Moonbeam offers developers a scalable and accessible platform to launch their projects. Those who have already built dApps on Ethereum will have the ability to implement them on Polkadot using the Ethereum-friendly development tools on Moonbeam. This blockchain has the potential to bolster large portions of the DeFi space onto Polkadot.
Overall, the future is looking bright for Polkadot with plenty of exciting activity occurring on the network before the end of the year. The price of DOT has surged by more than two-thirds in the last month (over 67%) with plenty of opportunities to come in the near-future.
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