Polkadot Growth Strategy Report: Building a Continuously Growing Future for Polkadot
Introduction
Greetings to all friends who are concerned about Polkadot. We are the Polkadot Ecology Research Institute, a dedicated team focused on researching development opportunities and prospects within the Polkadot ecosystem. We have been consistently supported by the Polkadot Treasury on six occasions.
As a team that has been studying Polkadot for nearly five years, we have heard increasing voices of discouragement in the community recently. Many members are losing hope and even leaving the Polkadot ecosystem, which is something we are unwilling to witness.
However, with OpenGov launched on Polkadot, we have observed that governance rights are being increasingly transferred to the community. This positions us as a driving force behind the development of Polkadot. As a result, we have made the decision to transition from our previous role of passive research to one of active engagement.
This report represents our strategic planning on how we believe Polkadot should grow, many of which are results of our years of research.
This report will directly address the market rather than just technology and ideals. We aim to confront the most critical issues head-on while proposing improvement strategies and suggestions. Of course, we have also noticed that many teams are actively proposing solutions for the current challenges faced by Polkadot in the official forums and community. However, these solutions often target individual problems without considering a comprehensive resolution from a holistic perspective or unified approach within a strategic framework.
We welcome everyone to point out deficiencies in this report and we also encourage any constructive suggestions that could be practically implemented. Our only wish is to make Polkadot better. Together, let us strive for progress.
I. Current Status of Polkadot
In the first half of the year, Polkadot has made significant progress, achieving two important milestones in its Roadmap. Among them, the introduction of OpenGov brought an advanced governance model, providing community members with broader participation and decision-making rights. Additionally, the release of XCM V3 improved the message passing format, enhancing Polkadot’s functionality and interoperability, laying a solid foundation for future development.
Polkadot’s infrastructure construction remains robust, with a significant increase in developer activity. It currently ranks first among public chains, and second in the total number of developers. This indicates continuously growing number of developers being attracted to Polkadot, leading to a continual increase in their contributions to its technical ecosystem.
However, despite the remarkable progress, Polkadot still faces some dilemmas. On-chain price trend of the DOT token is unstable, with significant fluctuations, which may bring a certain level of uncertainty to investors and ecosystem builders. At the same time, user activity has declined, the development of ecological projects is not booming, and there are some urgent issues to be solved in treasury governance.
In general, while Polkadot’s forward path is full of innovation, it has constantly faced challenges.
1. Technical Updates
Polkadot has always been committed to continuously improving its technology and features. In the first half of this year, Polkadot achieved two significant technical updates, releasing OpenGov and XCM V3 on June 15th. Currently, Polkadot announced that it has officially completed the 1.0 version. At the Polkadot Decoded 2023 event at the end of June, Dr. Gavin presented Polkadot’s 2.0 vision.
OpenGov: Polkadot’s new governance model, achieving decentralization through community voting and checks and balances, adopting a structured implementation lifecycle. The Technical Fellowship has replaced the old technical committee and now acts as a developer DAO.
XCM V3: The latest version of the Cross-Consensus Message format XCM, which has been activated on Kusama through governance. The release of XCM V3 brings innovative designs that support external network bridging, NFT transfers, and asset locking.
With the full delivery of Polkadot 1.0, Polkadot will enter a new development stage. Polkadot 2.0 is a multicore computer, transitioning from chain-centric to application-centric, introducing several new concepts and technologies.
Accord: A voluntary treaty across multiple chains, where chains voluntarily comply with the treaty and ensure its faithful execution. In implementing the Accord, Polkadot introduced two key technologies: SPREE and Project CAPI.
SPREE: A runtime logic segment based on the relaychain, like a secure tunnel, ensuring safe passage of information and value between different parachains.
Project CAPI: A middleware project aimed at promoting the development of decentralized applications (DApps) based on Polkadot. It provides developers with a lightweight client solution, enabling them to create cross-chain applications with a good user interface.
In the vision of Polkadot 2.0, Polkadot reiterates its commitment to building a resilient application platform. Polkadot will focus on building the ZK primitive library. Currently, the first library is nearing completion, providing privacy protection for the on-chain Fellowship. Polkadot will also invest in Hermit Relay, Smoldot lightweight client, Sassafras consensus, and Internode Mixnet technical updates.
Additionally, parathreads, system parachains, and asynchronous backing technologies developed by Parity are also being fully supported and await realization.
2. On-Chain Data
As of this writing, according to Messari’s report for Polkadot 2023 Q2, Polkadot’s on-chain progress has been some ups and downs. Here is a brief overview of Polkadot’s on-chain situation in Q2:
Development Activity: The developer participation for Polkadot and Kusama has maintained a steady upward trend, reaching peak active developer numbers of 613.71 on May 28th and 600.29 on June 16th. The number of core active developers reached its all-time high of 181 on March 22nd, and has remained relatively stable. Polkadot
ranks first in terms of submissions and the number of active developers for both protocol and ecosystem.
User Activity and Financial Status: Polkadot’s daily active accounts in Q2 decreased from 6,290 in Q1 to the current 5,810. Polkadot’s income in Q2 has dropped from over $120,000 to nearly $81,000.
Parachain Total Locked Value (TVL): Among the Polkadot ecosystem’s parachains focusing on DeFi, the top 6, including Moonbeam, Astar, Parallel, Acala, Moonriver, and Karura, are dominant. The TVL in parachains experienced an increase followed by a decline in Q2, dropping from a peak of $236.12 million on April 14th to $146.77 million on June 30th.
DOT Staking Rate and Return: In Q2 of 2023, DOT’s staking rate was 46%, which is lower than the ideal staking rate. The current rate of return is around 9%, but it varies with the change in the staking rate.
For more details, please refer to:[Links]
3. Developer Situation
According to data released by Electric Capital, in the first half of 2023, Polkadot has a substantial developer base in the industry. As of September 17th, Polkadot currently has 645 full-time developers, ranking second in the number of full-time developers; the total number of developers is 1,923, which is risen from third to second place, and the proportion has remained relatively stable compared to last year, with full-time developers accounting for approximately 33.54% of the total.
These data indicate that Polkadot’s developer community is continuously expanding and playing a significant role in the development of the Polkadot ecosystem.
4. Ecological Situation
The Polkadot ecosystem is a fast-growing and diverse blockchain ecosystem, aiming to offer cross-chain interoperability and innovative solutions. According to PolkaProject statistics, there are currently 580 applications related to Polkadot, including DeFi developed based on Substrate, infrastructure, NFT, browsers, wallets, forums, etc.
On June 15th, the release of XCM V3 received widespread attention, providing advanced programmability, bridging capabilities with external networks, cross-chain locking, improved fee payment mechanisms, and support for NFTs. In terms of TVL in parachains, Moonbeam and Nodle have the most active account numbers, with Moonbeam being a long-standing leader in TVL, and Acala, Astar, and Parallel also maintaining a high level.
Slot auction is the process of allocating relaychain access rights, and the winners will gain the right to run a parachain. Moreover, Polkadot ecosystem projects are drawing increasing attention and collaboration. Significant progress has been made by projects like Mythical Games, Kilt, Frequency, Composable Finance, Aventus Network, etc.
Overall, the Polkadot ecosystem is growing and developing rapidly. The Roadmap is progressing smoothly, with several key projects successfully implemented.
5. Market Value Situation
As of the current date (October 11th), Polkadot has a market capitalization of approximately $3.375 billion, ranking 14th in the Crypto market. Over the past few months, it has been on a decline, with prices relatively stable from early May to mid-June. Overall, DOT’s price has dropped by 31.87% in the past several months.
Polkadot and Cosmos are both dedicated to solving the cross-chain communication problem, but they have taken different technical paths. Compared to Cosmos, ATOM’s price is in a relatively low state, with a decline of about 27.42% so far this year (except for a brief rise in June). However, overall, Cosmos’s market capitalization performance has fallen, with a current market cap of approximately $2.598 billion.
The migration of stablecoins to Layer2 solutions has been a highlight of 2023, such as Optimism. OP is one of the best-developing crypto projects of 2023, with an increase of up to 227% since the beginning of the year. Optimism’s current market capitalization is about $1 billion.
Arbitrum (ARB) is another high-profile Layer2 solution, with a transaction volume of over $1.7 billion and a current market capitalization of $1 billion.
6. Social Media Situation
The official Polkadot media mainly includes the Polkadot official website, Kusama network, Polkadot Twitter, Web3 Foundation Twitter, Reddit, YouTube, and other channels. The official website provides detailed information about the Polkadot project, including technical documents, news updates, community governance, ecosystem construction, etc.
Twitter, Reddit, and Medium, and other social media platforms are used to release the latest Polkadot news and significant events, engage with the community, and expand influence. YouTube offers various video resources for Polkadot team speeches, technical sharing, community events, etc., to help users better understand the Polkadot ecosystem.
The main social media subscription data is as follows:
In addition, there are platforms such as the Polkadot forums, discussing technology and the future of Polkadot; Polkadot’s GitHub platform, and Polkadot Support Knowledgebase, which provide tutorial support and help for users to understand the Polkadot ecosystem. Overall, Polkadot’s official social media is diverse, offering users various ways for participation and communication, which is essential for strengthening community consensus and expanding influence.
7. Treasury Governance
OpenGov, a novel governance system introduced by Polkadot, which was launched on the Kusama network in November 2022. It holds significant advantages in enhancing governance efficiency and promoting community participation. However, OpenGov faces challenges such as uneven voting rates and rapid treasury expenditures.
Efficient Governance Processing: Compared to the original governance system, Gov1, OpenGov has increased the operational efficiency of the governance system. Referendums can be processed in parallel, and the large number of referendums greatly improves the efficiency of governance.
Current issues with OpenGov governance include:
Noticeable voting rate discrepancies: Voting rates for referendums on different tracks show clear discrepancies, especially those related to treasury expenditures. This could result in some treasury funds being spent without sufficient community attention, and some expenses may not be reasonable.
Decrease in treasury balance: OpenGov has changed the way treasury funds are spent, and combined with the fact that treasury spending equals a certain amount of DOT in USD terms. It is affected by a decline in the DOT price. This leads to a need for more DOT expenditure, accelerating the spending rate and reducing the treasury balance. Some predict that if this rate is maintained, the treasury funds might be depleted by November 2023.
Low approval rate: In OpenGov, the proportion of approvals and abstentions in total token issuance is relatively low, which results in a low pass rate. Polkadot averages 1.44%, Kusama 3.33%, with the lowest pass rate for treasury tracks.
To improve the governance system, maintain Polkadot ecosystem development, it becomes crucial address the low voting rate, ensure the sustainability of treasury funds, and increase interest and participation in OpenGov.
II. Challenges faced by Polkadot
Based on the above situations, community feedback, and our observations, we have summarized the following challenges faced by Polkadot:
1. Economic Model Issues
Many users and the community have expressed concerns regarding Polkadot’s economic model, including a relatively high inflation rate, limited DOT token use cases, and concerns about the DOT’s value.
Polkadot’s DOT adopts an inflationary monetary policy, with a current inflation rate of approximately 7.38% (based on data from Subscan.io), which is considered much high.
Polkadot uses a Nominated Proof of Stake (NPoS) mechanism, where validators and nominators participate in network validation and receive rewards in the form of tokens. These rewards contribute to the inflationary nature of the token. Polkadot’s initial design was to maintain moderate inflation to incentivize participants and ensure network security. However, some observers believe that a high inflation rate might have a negative impact on the value of DOT tokens.
In comparison, other public chain projects have lower inflation rates. For instance, after Ethereum’s Merge phase, it introduced a burning mechanism, gradually reducing its inflation rate. It currently stands at approximately -0.21% (based on data from https://ultrasound.money/), indicating a deflationary state. BTC’s inflation rate is also decreasing, currently around 1.7%, which will further decrease with the next halving event scheduled for the coming year.
Ethereum, being one of the largest smart contract platforms, has a wide range of use cases including DeFi, NFTs, decentralized applications, etc. These use cases provide more practical purposes and demand for Ethereum tokens.
On the other hand, Polkadot’s DOT token currently has relatively limited use cases, primarily focusing on governance, staking, and parachain bonding. In comparison to other public chain projects, DOT token use cases are somewhat restricted, which may raise concerns among users and investors about its practicality and long-term value.
2. Operational Issues
①Poor On-Chain Data Performance
Polkadot has shown relatively weak on-chain data performance in the first half of the year. According to the mainstream public chain activity statistics of Chainalytics Labs in May this year, from the aspects of user activity, developer activity, financial status, and social activity, Polkadot ranks relatively high in developer participation. However, its scores are significantly lower than BNB and Solana in other areas, with user activity even ranking at the bottom, leading to an overall ranking of third.
In terms of transaction volume and the number of active addresses, Polkadot lags behind other mainstream public chains. In the DeFi field, the number of Polkadot’s DeFi projects and the total locked-in value are also relatively low, showing weakness compared to other public chains.
Overall, Polkadot currently faces some challenges, especially its performance in user activity and financial sectors is below expectations. However, it is worth noting that developer participation remains strong.
②Poor Social Media Data Performance
At present, the official social media platform performance of the Polkadot community is not prominent. The discussion and engagement levels on platforms such as Polkadot’s Twitter and Discord communities are relatively low.
On Polkadot Twitter, the official account @Polkadot currently has about 1.4 million subscribers. Even with a high subscription count, the average tweet views are below 50,000, with interactions and comments even below 50. Despite the Twitter account regularly posting about Polkadot’s ecosystem, technological advancements, and important events, the engagement and discussion falls slightly short compared to other major projects.
Similarly, besides Polkadot’s official Twitter, follower counts on other social media platforms are relatively low. For instance, Polkadot’s canary network, Kusama’s official Twitter, has only 250,000 subscribers, and the Web3 Foundation has 130,000. The social media platforms are scattered across multiple platforms, making it hard to attract a sufficient number of users to participate in centralized discussions and interactions.
Observations suggest that discussions and engagement within the Polkadot community are also relatively limited. For example, the Reddit forum shows a relatively low level of activity, with daily discussions averaging less than five in the past month. Although there are some in-depth technical discussions, compared to other public chain projects, like Solana’s performance on Reddit, Polkadot’s level of discussion is much lower.
③Lack of Data Presentation
The current situation mainly has two problems. First, poor social media performance fails to attract enough attention and participation. Second, there is a lack of websites providing a comprehensive overview of the Polkadot ecosystem.
Even though Polkassembly has mentioned in its Roadmap the introduction of an ecosystem overview, there is still a lack of a detailed and comprehensive website showcasing the entirety of the Polkadot ecosystem. This makes it challenging for users and industry insiders to gain a full understanding of the Polkadot ecosystem. For instance, the Polkadot ecosystem lacks data display websites similar to L2beat in Layer2, and also lacks websites like DeFillama that provide a detailed presentation of the development of various parachain projects in the Polkadot ecosystem. After all, those who follow the Polkadot ecosystem do not have a unified and comprehensive place to understand the true situation of Polkadot, making research quite difficult.
To better understand the industry’s development trends and compare with other ecosystems, the Polkadot community can exchange data with other projects, further enhancing data analysis and visualization capabilities. They can launch an ecosystem overview website (the previous one stopped updating), providing in-depth analysis and a comprehensive view of the Polkadot ecosystem. This would help increase community attention and recognition, providing more resources and support for the ecosystem’s construction.
3. User Barrier Issue
Polkadot’s current high level of professionalism is not user-friendly for newcomers, and the Polkadot barrier exists in terms of both usage difficulty and learning challenge.
The functionality and tools provided by Polkadot may have a relatively high level of operational difficulty for the general users. For example, interacting and managing through Polkadot’s official Polkadot.js and other tools, creating and managing wallets, making transfers, and participating in governance, etc., require certain technical knowledge and familiarity with the tool’s operation. This can be challenging for non-technical users, requiring considerable time and effort to learn and understand.
Furthermore, Polkadot’s ecosystem is relatively complex. To fully grasp how Polkadot works and its technical details, users need to learn about blockchain’s basic concepts, consensus algorithms, cross-chain communication, etc. Additionally, Polkadot’s technical documents and tutorials might be overly specialized, making it hard for ordinary users to understand. Technical documentation and tutorials for Polkadot are typically aimed at developers and tech professionals, filled with technical terms and intricate concepts, undoubtedly increasing the learning cost for general users.
From the perspective of user perception and promotion, there is a communication gap between Polkadot and its users. On the one hand, as a proactively evolving blockchain project, Polkadot fails to timely convey its latest developments such as new concepts, technologies, and community activities to users. This might lead to a lack of understanding, especially among new users, about Polkadot’s technological advancements and project progress, and even creating a sense of exclusion.
On the other hand, Polkadot’s promotional materials are often too technical and specialized, making it challenging for ordinary users to comprehend. This leads to insufficient understanding and awareness among users about technologies and concepts. For instance, even though the OpenGov governance mechanism has been online for nearly three months, many users still lack detailed knowledge about OpenGov, such as how to participate in OpenGov and its significance.
4. Treasury Governance Issue
Polkadot’s treasury governance mechanism is considered one of the most advanced in the blockchain industry. However, due to its pioneering nature, it currently faces challenges, which include low voter participation, game theory attacks, and non-representativeness (whales).
Despite Polkadot adopts the decentralized governance model OpenGov, allowing community members to participate in decision-making process, in reality, there is a lack of active voter participation and proposal submissions. This may lead to centralization of the decision-making process and lack of widespread community involvement. In referendums related to treasury spending, the voting rate is low, hence, whether the treasury funds are spent appropriately is questionable. At present, low voter participation is a serious challenge.
Game theory attacks are another pressing issue. Due to the incentive mechanism in Polkadot’s treasury, some holders may attempt to influence the voting results by exploiting system rules, bribing, and other means to gain benefits, which may distort and make the decision-making unfair, affecting governance outcomes.
Another challenge in Polkadot’s treasury governance is its non-representativeness, where a minority holding a significant amount of tokens (whales) might have an oversized influence on decisions. This could lead to decisions that favor a few, not the entire community, potentially undermining the democracy and fairness of governance.
III. SWOT Analysis of Polkadot
Considering the current situation and problems, we tried to use the classic strategic analysis SWOT to understand Polkadot’s overall development.
Strengths
- Technical innovation: Polkadot has made significant technological advances, including the introduction of the new OpenGov governance model and the XCM V3 messaging format. Concurrently, Gavin has proposed Polkadot 2.0, continuing to bring more new technologies to Polkadot. These technological innovations will further enhance Polkadot’s functions and efficiency, giving Polkadot a unique technological edge.
- Strong developer foundation: Polkadot has a large and active developer base, with a significant increase in developer activity, and the total number of developers has risen to second place, providing strong support for the development of Polkadot’s ecosystem.
- Relatively rich multi-chain ecosystem: Utilizing the high degree of customization provided by the Substrate framework, Polkadot boasts various categories of parachains, offering a more diverse range of projects compared to other multi-chain systems.
Weaknesses
- Below-expected token price: The price trend of DOT has significant fluctuations, which might be a reason for the decline in user activity and unclear financial conditions.
- High user barrier: For new users, there is a certain barrier to understand and use Polkadot’s technology and functions, which might limit its user growth and adoption.
- Immature DeFi ecosystem: The Polkadot ecosystem lacks a mature DeFi environment, as seen on Ethereum, not only in terms of the diversity of DeFi sub-category projects but also in terms of overall TVL.
Opportunities
- Increase user participation: Through the OpenGov governance mechanism and increasing user participation, Polkadot can further strengthen decentralization, community involvement, and decision transparency.
- Innovative concepts and technology: Polkadot has introduced a new vision for 2.0 development, incorporating numerous innovative concepts and technologies, offering opportunities for its future.
- Sufficient available precipitation funds in the Polkadot ecosystem: As an NPoS public chain, Polkadot has a substantial amount of staking funds, which can be utilized by some DeFi projects and then reinvested into the ecosystem. Additionally, Polkadot’s unique treasury mechanism continuously provides development funds.
Threats
- Challenges in treasury governance: Polkadot’s treasury governance faces challenges such as low voter participation, game theory attacks, and non-representativeness. These could lead to centralization in decision-making, lack of widespread community involvement, and unfair decision outcomes.
- Competitors: Polkadot faces pressures in a competitive market from various quarters. Compared to Ethereum, leading multi-chain ecosystems, and Layer2 cross-chain protocols, Polkadot is at a disadvantage in terms of user numbers, community activity, and ecological application scenarios. New projects or users might be more easily attracted to other projects with stronger network effects.
- Unfavorable market conditions: Despite the rapid development of the Web3 industry in recent years, it is still in a trough period, and Polkadot also faces the test.
In summary
Polkadot has strengths in technological innovation and developer foundation but faces challenges in price volatility, technical barriers, treasury governance, and an unfavorable market environment. However, through the introduction of innovative concepts and technologies, increased user participation, and effective utilization of funds, Polkadot has the opportunity to further develop and solidify its position in the Web3 industry.
IV: Macro Analysis of Polkadot’s Situation from Two Perspectives
Besides looking at the current status of Polkadot, we should observe from the height of the entire Crypto industry, so that we can clearly understand Polkadot’s position and infer its future development direction. We will analyze from two perspectives.
1. Endgame Perspective
When formulating strategies, we first consider what the final form of the industry will be. If there’s a clear vision of endgame, we can deduce how to develop at present. As for the public chain level where Polkadot is situated, there are varying opinions on the market. However, with the recent downturn performance of many public chains and the increasing prominence of Layer2, more and more people are discussing Ethereum’s dominance in the future.
On the other hand, Layer2s are issuing their tokens and building their multi-chain networks to capture value for themselves, indirectly draining Ethereum. Moreover, DYDX’s complete migration to Cosmos, along with its record-high performance, makes the future public chain landscape uncertain.
Nevertheless, if we view the public chain’s final form from a higher dimension, our thinking may be clearer.
Firstly, different public chains represent different technical communities and are supported by corresponding resources. Even if they’re not doing well currently, it does not mean they will disappear, but rather they may be affected by market cycles.
Secondly, there indeed are some public chains with unique features. Many application chains and decentralized foundational infrastructures are gradually evolving. Ethereum cannot cater to all blockchain use cases. The future must be multi-chain.
Apart from the multi-chain ecosystems represented by Polkadot and Cosmos, Layer2 projects are also building their multi-chain ecosystems.
Furthermore, more and more cross-chain protocols, such as Layerzero, Celer Network, Wormhole, Circle’s CCTP, Chainlink’s CCIP, are emerging, connecting different public chains/Layer2s.
Ultimately, we can roughly sketch out a future (medium and long term) final form where different public chains/Layer2s are considered as points, different cross-chain methods as lines, and multi-chain ecosystems like Polkadot, Cosmos, and Ethereum + various Layer2s form an entity made of many points and lines.
Thus, in the future, all points will be connected by various lines, and we can call this map the “Omnichain map”, which is the endgame for public chains, Layer2s, and so forth.
Based on this endgame, we need to think about Polkadot’s role plays in it.
Different points (chains) and lines (cross-chain solutions) have varying attributes in security, decentralization level, performance, and rates. These attributes determine user preferences.
Observing Polkadot, its unique relaychain + parachain architecture allows parachains to enjoy public-chain-level security. The security levels among these parachains are consistent, and the internal cross-chain within Polkadot has a higher security factor than other cross-chain solutions.
Thus, we can conclude that Polkadot is the multi-chain ecosystem with the highest internal security coefficient in the Omnichain map, and the security among its parachains is consistent.
Blockchain is adept at facilitating collaboration among distrustful entities. Previously, such collaboration meant multiple parties maintaining a ledger on the same chain (like consortium blockchain) or participating in an application on the same chain to establish trust.
With the years’ progress, we find that Crypto applications tend to have their chains, as they can independently control security and even develop their ecosystems. However, current solutions lack inter-chain trust, especially when these chains need consistent security. After all, with varying security levels, the side with higher security will always bear certain risks, which can increase obstacles to cooperation. If everyone has the same level of security, many collaborations become easier to achieve without considering security issues.
Currently, only Polkadot seems to solve this issue, as its parachains have equal security, equivalent to public-chain-level security, and its inter-chain messaging has a high security. And the Accord proposed by Dr. Gavin in Polkadot 2.0 is more suitable to solve this problem. This solution is crucial for real-world businesses or organizations seeking fair trust online, as everyone hopes to collaborate under equal security.
That is to say, there are indeed scenarios exclusive to Polkadot’s solutions. These scenarios align with the trend of traditional sectors entering the blockchain world, indicating that Polkadot will definitely have its place in the Omnichain map.
Therefore, since we have outlined the possible endgame for public chains and Polkadot’s role in it, our strategy should focus on how Polkadot should develop to transition into its future role.
2. Cycle Perspective
Cycles have always been a timeless topic of discussion. The development of anything is inseparable from its cycle. For a public chain like Polkadot, two cycles need to be studied. One is the macroeconomic environment cycle, and the other is viewing the development of the public chain as an industry, which has its development cycle. To formulate Polkadot’s development plan more precisely, we need to understand the current stage of the cycle in which Polkadot is situated.
Macroeconomic Environment Cycle
The development of any industry cannot be separated from the funds entering this industry. If we liken the industry to a container and the funds entering the industry to water flowing into the container, the change in the volume of water will determine the height of the entire industry.
In 2020, due to the economic downturn caused by COVID-19, the US had to adopt exaggerated quantitative easing measures to counteract the economic impact of the virus. Meanwhile, traditional institutions and companies, represented by Grayscale and MicroStrategy, began pouring substantial funds into the Crypto industry. The massive inflow of funds quickly expanded the Crypto market, directly triggering the last bull market.
However, quantitative easing is a double-edged sword. It subsequently led to terrifying inflation. To curb this inflation, the Federal Reserve began a lengthy interest rate hike process, prompting funds with traditional financial attributes to start leaving the Crypto market. The prices of Crypto assets fell as a result, many core assets used for DeFi depreciated, liquidity began to drain, and the bear market started.
In this process, we can observe that the same incentive mechanisms or gameplay, in a bull market environment, will attract more optimistic fund sentiment for the future market, and the fund will further engaging in incentive mechanisms or gameplay. Conversely, in a bear market environment, the fund sentiment becomes more panicked. Investors are more likely to cash out and exit after receiving rewards from participation in incentive mechanisms, or they might opt out of many gameplays.
This indicates that the same incentive program, during unfavorable market conditions, will backfire, but at the right time, it will be doubly effective. Hence, we can’t blindly offer incentives but should take different measures in different cycles.
Public Chain Development Cycle
In 2021, emerging public chains such as Solana, Polygon, and Avalanche experienced varying degrees of growth. By observing the early development of these public chains, we can summarize a general growth logic for public chains. Then, by determining what stage Polkadot is in, we can clearly understand why Polkadot is in its current state and the measures it can take for rapid development.
In the following section, we will focus on dissecting what Polkadot can learn from the public chain development cycle.
V. What innovations have public chain developments had in recent years?
1. Ecosystem Empowerment + Public Chain Incentives
Public chains can empower projects within their ecosystem. These projects can generate demand for public chain coins in their business models, thereby achieving the situation where the ecosystem empowers the public chain in return. Polygon, Avalanche, Fantom, and other public chains have collaborated with mature DeFi to launch incentive programs to attract users to participate in DeFi and obtain corresponding incentives.
This gameplay started from Polygon. On April 14, 2021, Polygon announced liquidity mining rewards for the lending protocol Aave, with rewards totaling 1% of the reserved total supply of MATIC (approximately 40 million USD). Polygon’s locked-in value soared afterward. The success of the incentive program led Polygon to venture further, subsequently offering liquidity mining rewards to well-known DeFi projects like Sushiswap and Curve. Within just over a month, Polygon’s locked-in value skyrocketed, surging by more than 30 times.
Following that, on August 18, 2021, the Avalanche Foundation announced the launch of a 180 million USD liquidity mining reward program called Avalanche Rush, encouraging more applications and assets to join the thriving Avalanche DeFi ecosystem. With the explosive growth of Polygon as a precedent, Avalanche’s event was quickly pursued by funds, and its TVL also steadily and rapidly climbed.
Avalanche’s performance once again confirmed that, at least in that environment, public chain incentive programs were very effective. Later on August 30, 2021, the Fantom team announced an investment of 370 million FTM to better adjust the incentives among users, builders, and the network, which also yielded similar results.
2. Exchange Empowerment + Ecological Empowerment
Apart from the aforementioned public chains, BNBChain (formerly known as BSC, henceforth referred to as BNBChain) and Solana experienced significant ecological growth in 2021. Although their growth was largely attributed to DeFi, drawing in vast amounts of capital, the true explosion of their ecosystem was majorly propelled by a special external force: exchange empowerment.
An exchange inherently possesses a massive user base, abundant capital flows, and to some extent, institutional trust. Being centralized, it can freely create various marketing or promotional methods to empower an ecosystem. Moreover, exchanges are the upstream entities in the Crypto ecosystem. They not only understand how to empower projects at the secondary market level but also significantly invest in the primary market level. For instance, in the entire Crypto market, Coinbase and Binance are among the top investors in startups.
To empower a public chain, exchanges can invest in projects or applications on it, then list these projects on their platform. Through various marketing activities, they guide their vast user base and capital to empower these projects. After successful exits from the secondary market, they then reinvest the fresh fund into other projects on the same public chain.
Under favorable market conditions, this strategy unfolds as follows: Projects on the public chain that receive empowerment perform better in the market. Exchanges attract more users and fund. These users and fund are then focused on new empowered projects, and exchanges, with a higher probability, attract more teams to this empowered public chain to create new projects or multi-chain deployments of existing projects, culminating in a win-win cycle for both the exchange and the public chain’s ecosystem.
This strategy was initially implemented by BNBChain, which got a highspeed growth in 2021, leading the growth of public chains besides Ethereum. Subsequently, the FTX exchange also discovered this strategy. In this paradigm, a public chain does not have to be one issued by the exchange itself; any chain will suffice, as long as the exchange is willing to support it.
Thus, the narrative unfolds with FTX wholeheartedly supporting the Solana ecosystem. Both entities catalyzed a flywheel effect. Even without cloning mature Ethereum projects to Solana via EVM compatibility, Solana achieved remarkable success.
3. Wrong Empowerment Cases
However, not all well-performing ecological applications can reciprocally empower their public chains. During this period, some public chains, such as Flow, lagged behind the majority. Flow was launched by the team behind the once-popular NFT project, Crypto Kitties, namely Dapper Labs. They also launched the well-known NFT project NBA Top Shot on Flow, which amassed millions of users and, at one point, achieved monthly revenues surpassing a hundred million.
Despite such outstanding applications on the Flow chain, Flow’s performance was disappointing. We can identify some potential influencing factors:
Firstly, prominent projects like NBA Top Shot on the Flow chain were mainly launched by Dapper Labs. These projects were more of blockchain versions of already matured business models in the traditional domain. The attracted users were primarily traditional Web2 users, who used conventional Web2 login and pay methods, such as email and credit cards. These users, unfamiliar with Web3 operations, mostly stayed within the application and did not engage in asset interoperations like genuine Web3 users.
Secondly, these projects’ business models seldom required the use of the FLOW coin. So, even if these projects had a plethora of users and significant revenue, they neither benefited FLOW holders nor empowered other projects on the Flow chain. They simply generated substantial revenue for the project’s operating team.
Lastly, Flow did not develop a comprehensive DeFi system. Thus, it could not emulate other public chains, which rapidly initiated ecosystem growth through DeFi integration and chain incentives.
VI. What Exactly is the Growth Logic of Public Chains?
1. Public Chain Value Addition Logic: Transformation of Public Chain Coin Nature
After analyzing the experiences of various successful and unsuccessful public chains, it becomes evident that those with robust ecosystems have always grown in tandem with DeFi. There has been a significant shift in this process. If a public chain is perceived as a Web3 computer, then the original function of its coins is merely to serve as a resource payment when anyone uses the computer, i.e., gas fees.
During the rise of DeFi, public chain coins evolved to play a new role: acting as the most trustworthy native Web3 assets on the chain, widely used in DeFi as foundational collateral. This evolution marked a critical transformation, analogous to gold transitioning from a primary industrial raw material to a financial asset, subsequently enhancing its value significantly.
With this shift, it becomes clearer that the rise of a public chain is inevitably tied to the growth of DeFi. The reason being that, as the most trustworthy assets on the chain, these public chain tokens would be in high demand as DeFi flourishes, getting extensively locked within these applications.
The resulting demand is immense, sufficient to boost the initial development of a public chain. This is a major reason why BNB’s market capitalization entered the top ten. Its nature transformed from an exchange platform coin to a widely demanded public chain coin by numerous DeFi ecosystems. Conversely, a significant reason for FLOW’s underwhelming performance is its underdeveloped DeFi, resulting in insufficient FLOW coins being locked within DeFi.
2. Understanding Coin/Token Appreciation Logic from a Different Perspective
Since DeFi can bring a considerable demand for public chain coins, does this effect apply to all types of applications? Not necessarily. This brings us to how we should judge the appreciation logic of coins/tokens.
Above all, we need to review the relationship between stocks and listed companies. The business operations of a listed company will to some extent be reflected in its stock price. However, the stock price won’t affect its business operations, which is why Luckin Coffee can still make a comeback.
Similarly, if we regard Web3 projects as companies, then the business operations of the Web3 project and its coin/token price are somewhat related. However, Crypto projects are much more unique than listed companies.
First, there are many business models for Web3 projects. A project might operate well and earn a lot of money, but this money may not have any direct impact on the coin/token or might have a minor impact. Uniswap is a prime example. Uniswap’s business model mainly involves collecting transaction fees. The team behind Uniswap and the LPs make a lot of money through this model. Still, this revenue is unrelated to UNI holders, and there’s no scenario in Uniswap’s business model where UNI must be used. (The need for governance is weak.)
Second, if a Web3 project often requires coins/tokens in its business operations, the demand for coins/tokens will increase as the project thrives. This demand then affects the price. However, the irrational aspect of Web3 projects is that once operations are linked with coin/token prices, not only can operations affect the prices, but the prices can also affect normal business operations.
For instance, during bullish market conditions, the fund sentiment in the market is more aggressive due to the optimistic outlook. Many DeFi or GameFi projects’ incentive mechanisms attract users to continuously participate, investing more funds.
Conversely, during bear markets, conservative market sentiments prevail. Given the same incentive mechanisms, users might opt out or invest less money, quickly cashing out once they receive incentives. Therefore, normal business operations of the projects can be influenced by market conditions, which in turn are directly subject to the macroeconomic performance of traditional finance.
In addition, we just mentioned that if there are many scenarios in which coins/tokens are used in the business operation of a Web3 project, the more demand for tokens, will its price necessarily increase?
This varies.
Using tokens for payment is a common scenario. For example, a project might have a core feature that requires the project’s tokens for payment. However, in such situations, person A buys tokens and trades them to person B, who then sells the tokens to earn revenue.
In essence, the number of tokens bought by the buyer equals the amount given to the seller. The demand and supply are balanced in this trading scenario. Therefore, even if the demand for payments increases, it won’t lead to a rise in the token’s price since the supply and demand are equal.
Hence, not every token usage in operations can add value to the token. Only when the number of tokens bought by buyers is more than the number of tokens held by sellers will an increase in business operations lead to an upward trend in the token’s value.
In general, if one wishes for a token to appreciate in value, the primary precondition is that the project’s business operation must involve scenarios where the token is used.
Next, there are two aspects to boost the token’s price. On one hand, at the operational level, one can strive to improve the project’s business operation, which would increase the demand for the token, thereby propelling price growth.
On the other hand, at the trading market level, one need to focus on the project’s prospects, trying to enhance expectations for the project’s future development as much as possible.
Finally, one must wait for the macroeconomic performance of traditional finance to improve. Only with the right timing, favorable conditions, and harmonious human factors can the project achieve the maximum growth momentum on both the operational and trading levels.
3. What Public Chain Ecosystem Contributes More to its Development?
We’ve described a general coin/token appreciation approach, which can be applied to public chains. Many mistakenly think that if there’s a use case for paying gas fees with public chain coins, so as long as there are enough applications on the public chain, then there will be a high demand for gas fees, leading to an increase in the price.
However, the logic of gas fees is similar to the payment logic mentioned earlier. Users buy public chain tokens to pay gas fees for certain features, but these fees eventually go to miners. The amount received by miners as sellers equals the amount bought by users as buyers, so increased use does not guarantee growth.
But now, Ethereum has introduced EIP-1559, where gas fee allocation is redefined. A portion of the gas fee will be burned, resulting in a higher buying volume than selling. Today, as more and more applications on Ethereum require more gas fees, the amount of Ethereum burned increases, resulting in a higher buying volume than selling, making Ethereum genuinely more valuable with ecosystem development.
However, the discrepancy between buyers and sellers due to gas fees is subtle and hard to notice. What really makes a visible impact is the previous notion of public chain coins being extensively used as underlying assets in DeFi and being locked therein. This demand and the resulting buyer-seller discrepancy are more significant and direct.
DeFi business models are typically mature, often involving locked tokens. Following this thought, other than DeFi, which kinds of ecosystem projects have similar effects? Other project types like NFTs, Web3 applications, and blockchain games have varied business models with no fixed pattern, requiring case-by-case analysis.
For most PFP class NFTs, they are minted or sold directly using public chain coins, and their revenue goes to the NFT team. This is similar to a transaction scenario, which doesn’t greatly empower the public chain tokens. However, a few projects, such as NounsDAO, invest funds into its treasury and are governed by DAO, leading to a significant amount of public chain coins being locked. Projects of this kind empower the public chain coins more effectively.
The situation with blockchain games is more unique. Their economic model design is among the most complex, without a particularly fixed design method. It might involve a project having multiple tokens or a combination of NFTs and tokens. Most often, their economic models create a closed loop, integrating gameplay with their own NFTs and tokens. The connection between these models and public chain coins is generally minimal, with public chain coins mainly being used for purchasing or minting game NFTs or tokens. Hence, such projects offer limited empowerment to public chain coins.
Therefore, DeFi, which inherently involves locking up assets, is the most important application category for public chain development. A public chain with a rich array of DeFi projects can attract and hold massive funds, and not only test the business model but also validate the product’s stability in extreme cases, including the safety of the smart contract language.
On the other hand, DeFi can empower other projects on the chain, providing more composability and higher asset utilization rates. It can also leverage more funds for the entire public chain. DeFi for a public chain is as essential as financial institutions such as a bank are to a city, which is an important financial infrastructure. So, given limited resources and time, prioritizing DeFi development should be the primary goal for a public chain.
4. Why didn’t Polkadot thrive in the last bull market?
Based on the above, we can deduce a clear rationale about why Polkadot didn’t perform well during the last bull market.
First, poor timing gave Polkadot, which was just starting, a setback. As mentioned earlier, the current Crypto industry is heavily influenced by traditional finance. Most public chains that rose in 2021 did so amidst significant quantitative easing in the U.S., leveraging funds from outside the Crypto industry, in conjunction with DeFi.
Polkadot did not support smart contracts itself, and it wasn’t until December 2021 that the first batch of Polkadot’s parachain slots was auctioned off. By early 2022, the smart contract-supporting parachains in the Polkadot ecosystem started to come online.
Polkadot was half a year late. Subsequently, a series of events plunged the market into a pre-bearish phase. The outbreak of the Russia-Ukraine war in February 2022, which spurred the flow of dollars back. Then the U.S. Federal Reserve began its tightening cycle in March 2022, laying the groundwork for the stagnation of the entire industry. The most significant blow, however, was a series of black swan events triggered by Luna in May 2022. A large amount of capital quickly left the Crypto industry, leading to a bear market.
Polkadot was facing a bear market just when it should have been focusing on growth. Despite the market downturn, some parachains adopted public chain incentive measures similar to Avalanche, but their effectiveness was severely diminished. Most of the funds in the Crypto market became conservative, leading to lesser participation in incentives. Even those who received incentives preferred to cash out, negatively impacting Polkadot’s growth during the bear market. Thus, going against the trend is challenging, and Polkadot needs to follow the trend for its development.
The second point is that DOT has not undergone the nature transformation of a public chain coin, and its financial value has not been fully reflected. Even though the market’s anticipation for Polkadot once pushed it to a relatively high position before the slot auctions went live on Polkadot, Polkadot at that time, due to its undeveloped ecosystem, could not transform such advantages into an actual ecosystem. Furthermore, it failed to shape a mature DeFi with DOT as the core asset. However, blessings might be hidden in misfortune, and vice versa. This point, while being a current shortcoming, could also be a key factor for Polkadot’s potential resurgence in the future.
Ethereum’s success is attributed to its rich DeFi ecosystem. On Ethereum, projects like Lido dominate as a significant DeFi category, with stETH, a staking derivative of ETH produced by Lido, widely used in other DeFi platforms. In contrast, Polkadot has abundant staking assets. If a project could capture half of Polkadot’s LSD market based on its current staking ratio of around 50%, it would achieve a TVL of an astonishing 681M DOT, equivalent to a value of 2.72 billion U.S. dollars, ranking it the 7th largest in the Crypto industry by TVL.
Achieving this would mean bringing an additional 2.72 billion U.S. dollars into the Polkadot ecosystem, boosting other DeFi developments. Hence, Polkadot still has immense potential. The right timing for developing Polkadot’s LSD Projects and incentivizing more DOT staking derivatives for use in other DeFi is key to Polkadot’s resurgence.
Developing with the rhythm of cycles is very important, which means how much resources should be expended in what kind of environment to achieve the maximum utility of resources. The second most important thing is when and what kind of incentives should be adopted. However, at present, the timing is not appropriate, so this report will not discuss it for now.
VII. How can Polkadot break through the current market?
1. Overall strategy: Uniting the power of governance
To make Polkadot more resilient, it needs to be more decentralized, which gives Polkadot some advantages when facing regulatory uncertainties. For instance, when the U.S. SEC tightened its grip on exchanges like Coinbase and Binance.US, many public chain coins were delisted, but DOT was not among them. This is one of DOT’s strengths. Therefore, we must fully understand the idea of Polkadot’s official drive to decentralize its operations.
On the other hand, with the launch of OpenGov on Polkadot, we see opportunities for change. OpenGov, with its open stance, allows many DOT holders to participate in governance, decentralizing power and offering greater freedom and possibilities for on-chain governance. Although some negative events have occurred on OpenGov, the chaos is acceptable as on-chain governance is still in its early exploratory stage. However, furthering this, we should look at the other side of the coin, which also permits non-official entities to proactively drive Polkadot’s operations.
Thus, decentralized governance can be seen as an unofficial force propelling Polkadot’s development, and the effective operation of Polkadot relies on both the official and decentralized governance forces.
One of Polkadot’s core advantages is the treasury, ensuring continuous funding for ecosystem development. However, the use of treasury funds has been broad, often without clear objectives or only vague ones, such as supporting hackathons and some tools. Basicly, voters judge which proposals benefit Polkadot’s development and then support them, hoping they will achieve the desired effects.
However, such an approach is more haphazard, relying too much on luck and isolated proposals without clear unified goals, which can’t generate effective synergies. Therefore, the governance of the Polkadot treasury should also have a strategic development plan. Only by managing treasury funds around this plan can Polkadot’s governance evolve.
Thus, for Polkadot to improve, it must progress towards synergistic development between the official and decentralized governance. While the Polkadot officials have their roadmap and operational approach, the treasury governance should also have its roadmap and approach. The officials raise Polkadot’s ceiling, while the treasury governance raises its floor.
2. Balancing Price and Development
Firstly, we need to respect the consensus reached between the Web3 Foundation and the SEC: Polkadot’s native digital asset (DOT) has transformed in nature; DOT is not a security. It is merely software.
Hence, at the official level, discussions related to DOT’s price cannot occur, as it might touch upon sensitive areas with the SEC, potentially leading to DOT’s regulation. We need to understand the official’s dilemma.
However, for non-officials, understanding DOT can be different. Thus, we need to emphasize that DOT is not just an asset but also an indicator of people’s confidence in the Polkadot ecosystem. As previously detailed, price affects business operation. By not considering boosting the price, one might implement measures at inopportune times, making efforts inefficient. Therefore, our strategic reports are designed from the standpoint of facilitating Polkadot’s growth.
Many projects, despite working very hard, do not act in accordance with growth logic and neglect the issue of how project operation relates to price. As a result, the project teams work hard, but the project prices do not rise, and the projects cannot take off. There is no direct relationship between how advanced the technology is and how high the price rises. There are too many such cases, and anyone who delves a little deeper into the crypto industry will have a profound feeling about this.
3. Strategic Positioning and Goals
Polkadot’s positioning should not merely be viewed as a multi-core computer but should be seen from the Omnichain map perspective, where it functions as a multi-core computer for the Omnichain map.
To achieve this positioning, a goal must be attained: to consolidate genuine users and funds for Polkadot, forming a network effect. However, this implies the necessity for DOT’s value to grow. Growth can solve most problems. Therefore, our strategic goal is singular: let Polkadot grow, focusing primarily on increasing token prices and market capitalization to attract more gold diggers. Otherwise, if the market capitalization isn’t appealing, existing users will leave, and outsiders will be hesitant to build and participate on Polkadot.
Having communicated deeply with dozens of startups or teams deeply entrenched in Polkadot, many startups deliberate deeply on which chain to deploy. One critical factor is where there are more users, more funds, and a higher chance of project success.
Even though Polkadot offers tremendous support to startups, many teams still opt for Ethereum and its Layer2, given Ethereum’s ecosystem network effect.
Simultaneously, many teams that initially deployed on Polkadot are now considering moving onto Layer2s. Due to DOT’s immature ecosystem and its current price discouraging many users, teams building on Polkadot are also seeking growth in other ecosystems.
Thus, there’s only one goal for Polkadot — — Growth.
To achieve this objective, we need two types of tasks: maintaining stability, ensuring steady development to retain existing users, assets, and applications on Polkadot, and constructing a more attractive developmental prospect for Polkadot.
Our Polkadot Ecology Research Institute hopes to offer some suggestions, and collaborate with organizations and individuals eager for Polkadot’s enhanced development, building a stable and promising future for Polkadot.
VIII. Solutions or Approaches
In response to some prevalent issues or potential areas of improvement in Polkadot. We would like to propose several solutions or thoughts for discussions.
The current treasury governance of Polkadot allows anyone to submit proposals, while DOT holders can only vote Aye or Nay to these proposals. However, this situation is akin to spending money on development, but what it develops into is rather random. There’s a risk that money is spent without achieving the intended results, or repeating the awkward situation of “reinventing the wheel” or not forming a collabrative efforts.
Relying on chance makes it difficult to success. Only with strategic planning, focusing all resources and strength around a particular goal, can we increase the likehood of achieving the desired results.
Therefore, we need to outline a strategic development plan for “How Polkadot’s treasury should be governed.” The governance process of the Polkadot treasury can be decentralized, but the governance of the Polkadot treasury needs to have a central strategic idea. Instead of passively waiting for people to make proposals, governance should be proactive and driven by a strategic development outline to better utilize governance for growth.
1. The “Governance Framework” of Polkadot
How should we proceed? Our ultimate goal with the treasury governance is to ensure Polkadot develops effectively. In fact, this goal is consistent with the project’s overall objective. So what departments are needed to operate a project, we can also build a similar system based on the governance of the Treasury. For example, there are technical departments specializing in research and development, and there are marketing departments specializing in publicity.
However, the author prefer to see this entire governance process as the governance logic of a nation. It is not only about categorizing tasks into different departments, but also involve building a new role identity within the Polkadot ecosystem: “Citizens.”
Why “Citizens”? A scenario that happened in China between 1991–1993 might provide insights. Hainan, experienced a gold rush due to the reform and opening-up policy. The rapid rise of housing prices attracted speculators, pushing housing prices to exorbitant levels. However, after the regulating policies were introduced, the housing prices plummeted. The previously hot money and speculators scattered like monkeys after a tree falls, leaving behind a large number of unfinished buildings and bad debts, ultimately affecting local residents.
Similarly, in the crypto industry, many new projects attract attention through airdrops, as well as a large number of opportunist investors. However, once the airdrops end, these speculators sell their assets. When these people leave, what remains is a mess, casting a shadow over the early development of the new projects and leaving the genuine supporters of these projects speechless.
How do countries deter speculators and incentivize genuine contributors? They use a household registration system. The benefits of property appreciation, as cities develop, are reserved for those who are genuinely willing to settle down and contribute to the city’s growth. Furthermore, various welfare policies are tailored exclusively for local residents holding household registration.
In the same way, it is proposed to grant citizen status to DOT holders who actively participate in the Polkadot ecosystem, distinguishing them from mere speculators. Citizens would have an associated credit system and citizen rights.
This framework, which is similar to national governance, is also an important reference that the author proposes for the decentralized governance of the Polkadot Treasury.
This framework treats the governance of the Polkadot Treasury as the governance of a nation, establishing different government departments, including: Technical Department, Publicity Department, Investment Department, Governance Department, and Activities Department.
Each department will evaluate proposals related to them (this requires new proposals to be submitted to the corresponding department and apply for funds). No department has a specific leader, but there needs to be a set of evaluation criteria. These criteria are based on the strategic goals that governance aims to achieve, and each department will also have a corresponding portion of the Treasury funds to use. (Welcome to add)
- Technical Department: Directing technical experts and members of the Technical Fellowship to develop necessary tech products, tools, projects for Polkadot (including tech training support).
- Public Relations Department: Organizing and managing media and communities funded by the treasury, setting promotional tasks to spread Polkadot’s message.(including supporting media, community)
- Investment Department: Attracts more outstanding projects to be born or migrated to the direction needed by Polkadot through strategic investment and establishing funds similar to government industrial funds.
- Governance Department: Updating and iterating policies related to governance, encouraging users to actively participate in Polkadot governance.
- Events Department: Mainly supporting hackathons or events required by the official and ecosystem.
This approach ensures treasury funds are used for Polkadot’s construction in all aspects, and the use of treasury funds is planned, adjustable, and avoids excessive or imbalanced allocation of funds.
2. Ten Strategic Objectives for Polkadot’s Treasury Governance
So, around what specific strategic goals should these departments execute? We emphasized earlier that we aim to create a stable and primising future for Polkadot. Therefore, our strategic goals revolve around the themes of “stability” and “primising future”. The specific strategic objectives are:
① Launch policies to support LSDFi projects and other DeFi projects (lending, AMM, decentralized stablecoins) within the Polkadot ecosystem.
② Introduce a public chain incentive program when the timing is appropriate.
The growth of DOT’s price is not an unknown factor. We discussed in detail how several emerging public chains adopted similar methods to rapidly develop during 2021, and more than one public chain has verified this approach. Thus, by adopting similar measures in a favorable macroeconomic conditions, the rapid growth witnessed by these chains can be replicated. This presents a definite opportunity and aligns with the objective of achieving “stability” in Polkadot’s development.
To achieve this, there needs to be support from DeFi projects on Polkadot that can back DOT as an asset. However, since Polkadot’s relaychain does not support smart contracts, DOT can only be used in DeFi through the issuance of derivative assets corresponding to DOT. This is why it is significant to encourage LSDFi projects.
③ Launch policies to encourage the development of RWA, Web2.5, and DePIN.
Some might say the second objective essentially waits for a bull market for effective implementation. If the bull market delays, how will Polkadot develop?
As mentioned earlier, the bull market of 2021 was born out of significant external funds entering the crypto field. Similarly, attracting more external funds will fuel growth, with RWA and Web2.5 being the two best ways.
RWA can attract a plethora of traditional assets and financial products into the Crypto industry. As evident from MakerDAO introducing US Treasury bond yields, this can effectively enhance the returns of some on-chain projects.
Furthermore, the functionalities of RWA on-chain are also practical in traditional sector. For instance, on-chain funds are permissionless and can reach global capital, making participation and withdrawal convenient. Additionally, RWA on-chain can further utilize other DeFi combinations to form products with higher yields, and this process is open and transparent. It doesn’t combine poor-quality products with premium ones like the subprime crisis did, which created a “black box”, thereby avoiding issues similar to the subprime crisis.
In traditional finance, inter-business interactions among entities are cumbersome. But using blockchain technology can solve trust issues, significantly reducing trust costs (shortening processing time and transaction costs). The Bank for International Settlements (BIS) has released a report in collaboration with the central banks of France, Singapore, and Switzerland exploring how Central Bank Digital Currencies (CBDC) and Automated Market Makers (AMM) technology can reshape foreign exchange trading.
Therefore, the development of RWA is not only needed in the Crypto field but also in the traditional sector, it’s like a two-way commitment. Since the development of RWA is an inevitable trend, indicating a large amount of money will enter the crypto field in this manner, Polkadot also needs to prepare in advance for this trend, capturing the inflow of funds into the ecosystem, which will enable Polkadot to grow.
The logic of Web2.5 is similar. Web2.5 refers to projects where traditional companies utilize Web3 technology. Even in a bear market, we can still see many traditional businesses exploring Web3 marketing methods using blockchain technology. This is because, fundamentally, such projects are closely tied with business and are not significantly affected by market trends. However, Web2.5 also brings in a significant amount of fund into the Crypto Industry.
Both RWA and Web2.5 need to be cautious about how they design mechanisms to empower their projects and the public chains they reside on, so as not to repeat the mistakes of Flow.
DePIN-like projects can provide the Crypto industry with more decentralized storage, computation, network transmission, and other network resources. They expand the hardware capabilities of the Crypto industry and have the potential to bring about more innovative projects beyond DeFi, blockchain games, and NFTs, etc.
Many DePIN projects require building an additional resource network. Deciding how to incentivize participants who provide resources for these networks often requires a consensus mechanism, which typically necessitates the project team to design a specialized consensus mechanism to meet their needs. The Substrate framework behind Polkadot supports project teams in adopting their own consensus mechanisms, a feature not available in tools like Cosmos SDK and other Layer2 development tools such as OP Stack.
Therefore, if we were to closely observe the composition of projects in different multi-chain ecosystems, Polkadot stands out as the most diverse in terms of ecosystem projects and hosts the highest number of DePIN projects, such as decentralized computing network Phala, decentralized storage CESS and so on.
Hence, DePIN is not only Polkadot’s strength but also a crucial avenue for elevating the development ceiling of the crypto industry. Polkadot should further support DePIN to maximize its inherent advantages.
This objective aims to build a promising future for Polkadot.
④Build public goods on a long-term basis.
An enterprise has multiple departments, with some departments responsible for generating revenue and others responsible for spending money. It is not possible to expect all departments to be profit-generating, and the same applies to project operations.
This is also the case with some of the teams supported by the Polkadot Treasury. The teams supported by Polkadot’s treasury play a crucial role, even though they do not have the ability to independently generate revenue and achieve a balance of profits and losses. It’s quite demanding to expect these teams to be self-sufficient. Without the support of these projects, basic operations would be affected. Therefore, essential and crucial matters should be categorized as public goods.
This includes data websites, tool-based projects, community and media organizations in various languages, and technical training organizations. All of these contribute to the necessary support for the fundamental operation of Polkadot. The Polkadot Treasury should also provide long-term support for such projects to ensure a more thorough safeguard of Polkadot’s basic operations. This goal aims to offer a stable foundation for Polkadot’s ongoing operations.
⑤Establish a Citizen System.
It’s not only about establishing methods for citizens to acquire or renounce their status but also about providing them with relevant rights and a credit system. These rights might allow citizens with a certain credit rating to traverse the Polkadot ecosystem at zero gas fees, or granting them priority access to certain incentives and opportunities.
⑥Design Polkadot’s Long-term Odyssey Plan.
Continuous incentives should be provided to projects and citizens who genuinely wish to remain within the Polkadot ecosystem, and stimulate their participation in governance, promote discussions related to Polkadot, and engage in Polkadot ecosystem projects.
⑦Make Polkadot More Open and Maintain its Technological Advance.
Polkadot needs to be more open to accepting and investing in new technologies. Through investment and incentive policies, all of the latest technologies in the Crypto industry should be incorporated into the Polkadot ecosystem. Even if those technologies originate from other public chains, they should be absorbed into the Polkadot ecosystem or connected to Polkadot, ensuring Polkadot remains technologically advanced. For instance, technologies like ZK and account abstraction.
Polkadot doesn’t need to reinvent the wheel; it only needs to collaborate with the best group of people who have already done so, to explore and promote these technologies within the Polkadot ecosystem. Ultimately, what other chains don’t have (in terms of technology), Polkadot should have; what other chains do have, Polkadot can also have, and future newly emerging technologies, Polkadot can possess as well.
⑧Make Polkadot the Core of Omnichain Map.
Polkadot, being the most secure multi-chain network in the Omnichain map, offers its parachains with the same level of security as Polkadot itself, which has a unique advantage. Therefore, we can view the Polkadot ecosystem as the safest neutral zone in the whole chain map, allowing any organization to have fair on-chain interactions on Polkadot. If projects from any chain wishing to interact fairly under the same level of security with another can choose to transition to Polkadot.
Admittedly, such scenarios may be relatively rare. However, we see more and more traditional businesses are entering Web3. These businesses might lean towards building their own appchains, and some DApps/DeFis are also moving to their independent appchains, indicating that appchains are the future trend.
When two different appchains aim for fair interactions, or even form an alliance to collaborate under a single governance framework, it requires consistency in their respective security levels. Fairness and collaboration of this nature are common needs in traditional business environments. Therefore, Polkadot will definitely be an ecosystem for these appchains to participate in.
To achieve this goal, the first and foremost step is to pave the way for Polkadot, raise the banner for all chains, integrate almost all cross-chain technologies (like Layerzero, USDC issuer Circle’s CCIP, Chainlink’s CCTP, etc.) with the Polkadot ecosystem, making it easy for other ecosystems to link with Polkadot.
In addtion, policies should be introduced to encourage projects from the Polkadot ecosystem to expand outward and also encourage other ecosystem projects to come to Polkadot (similar to a country encouraging imports and exports). At the same time, offer internal zero gas fee transactions within Polkadot, and zero-cost XCM. Ultimately, Polkadot will achieve seamless and cost-free connectivity throughout the Omnichain map. Let other projects not worry about the cost issues and channel issues when they need to first move to Polkadot for collaboration, thereby promoting Polkadot to become the largest center of security and fair trade on Omnichain map.
⑨Mobilize all ecosystem participants to promote and popularize Polkadot together.
Currently, the promotion of Polkadot mainly relies on its official channels. Individual ecosystem projects are essentially acting on their own without collective effort. Therefore, a method needs to be devised to unite capital sources, public chains, ecosystem projects, and users to jointly promote and empower, thereby creating a win-win situation for all.
⑩ Establish a feedback iteration mechanism.
During the development process of Polkadot, there will inevitably be many areas that need improvement. However, feedback often cannot be received promptly, leading to long-standing issues, which is not conducive to Polkadot’s rapid iteration. Therefore, a comprehensive feedback and iteration mechanism is needed, allowing all participants to provide their views on specific matters, and eventually identify urgent issues that Polkadot needs to address at a certain stage.
Considerations can be made to regularly post opinion summaries on the Polkadot Forum, followed by a voting process after a certain period of time. This will help identify the most important issues for users at the current stage, and then propose targeted solutions.
Additionally, it is important to spread the discussions related to Polkadot governance, such as Polkadot forums, polkassembly, on social media to engage more people in the feedback process.
Regarding governance, there are many aspects that can be improved. For example, feedback processes during governance need further refinement, such as setting preliminary rules (or on-chain laws), implementing secondary voting for certain actions, and considering audits for potential bribers or disruptors (with a supervisory reward system, where any skeptic can choose and flag actions, similar to a reporting mechanism, with a reporting reward. If the report is validated, someone will receive a portion of the reward) to prevent malicious interference or whale manipulations.
Of course, there are many governance issues to consider. However, we should not let many problems persist while waiting for a perfect solution. Instead, we should propose urgent solutions and address prominent and challenging issues first. For example, projects with significant opposition can undergo secondary voting to assess malicious opposition, among other measures (which can be expanded).
Note
Regarding these strategic objectives, some can be implemented specifically, some can be further discussed, and some are preliminary solutions that require more time for exploration. We have some ideas about some of them but due to space constraints, we will not expand on them here. Additionally, some questions still require further research and study. Based on these strategic objectives, we will develop a roadmap for Polkadot Treasury governance to accelerate the decentralized governance momentum of Polkadot’s development in the future.
3. Three areas for improvement
① Improving inflation: dynamically adjust inflation.
According to data from subscan.io, Polkadot’s inflation is approximately 7.38%. We conducted a survey about Polkadot at the end of August 2023. The participants, mainly loyal users who have been involved with Polkadot for over two years and hold an average of over 10,000 DOTs, with only about 11% of them believing that the current Polkadot inflation rate is reasonable. From this, it’s evident that inflation is a major concern within the community.
In fact, inflation has a profound impact on project tokens. Although staking in Polkadot can yield returns double the inflation rate, meaning participants can offset the inflation, this perspective does not consider the effect on the DOT’s price itself.
For those who holds DOT without staking, they may perceive the DOT in their hands as devaluing too rapidly due to high inflation, leading them to sell, causing the price to decline. Meanwhile, those consistently staking and supporting the Polkadot network, despite receiving staking rewards, can suffer capital losses due to the falling price.
As a result, those firmly supporting the Polkadot network can be negatively impacted by others who opt to sell DOT due to high inflation. This is irrational and goes against human nature. Therefore, measures need to be taken to prevent such situations from happening repeatedly.
Additionally, inflation affects the entire ecosystem’s development. For instance, Polkadot’s high inflation leads to staking yields of over 10%. When staking yields are high and other DeFi returns can’t match these rewards, users are incentivized to stake more than participate in other DeFi projects, hindering the public chain’s ecosystem development. Reducing the inflation rate to a more moderate level would be more conducive to the development of DeFi projects.
As seen in previous examples of rising public chains, like Avalanche and Polygon, they were able to experience significant growth by collaborating with DeFi. Thus, Polkadot’s rise also depends on DeFi and its ecosystem projects, not just attracting users through staking. Reducing the current inflation rate aligns with the well-accepted viewpoint that “moderate inflation can stimulate the economy.”
Therefore, adjusting Polkadot’s inflation rate is essential. The subsequent question then becomes, what extent should inflation be adjusted, and how should it be done? This topic warrants community discussion, but allow me to offer some insights for consideration:
a. The original design of Polkadot sets the inflation rate at 10%. However, due to non-optimal staking ratios, some of the inflated funds flow into the treasury. Additionally, a portion of the transaction fees and funds from slashed accounts are collected in the treasury. Furthermore, the treasury fund is burned by 1% every 24 days, allowing Polkadot to have an inflation rate lower than 10% (as shown on subscan.io, the inflation rate was 7.38% at the time of this writing).
Now the inflation ratio is capped at 10%, so we can divide it by two and say that the ceiling is 5%. Combining with the continuous burning of funds in the treasury, the inflation rate of Polkadot can be controlled at around 2–3%. The staking rewards would not be too high, and would be limited to a maximum of 10%. Essentially, the formula for the ideal annual staking return is adjusted to 10% (assuming an optimal staking ratio of 50%, and referring to the official inflation design formula: [link]).
(The inflation model when the ideal staking annual return is 10%)
x-axis: Proportion of DOT staked
y-axis: Inflation, annualized percentage
Blue Line: Annual inflation rate of NPoS, i.e. total amount of tokens minted to pay validators and nominators.
Green Line: Annual rewards rate for stakers. For instance, 0.2 corresponds to 20% of annual returns on the staked tokens.
b. Secondly, Polkadot will cancel the slot auction and adopt the sale of time for allocating block space in the future. However, it is still unclear how the DOTs participating in the sale of coretime should be disposed of. The author believes that these DOT should be treated similarly to slashed funds and some of the transaction fees: collected in the treasury and then burned every 24 days at a rate of 1% of the treasury’s total, thus reducing the need for parameter adjustments.
c. Why make such adjustments? Developed countries generally believe that 2% inflation rate is a moderate level, and the U.S. Federal Reserve also hopes to keep inflation between 2%-3%, a ratio that can slightly stimulate the economy. Moreover, by reducing the Staking rate of return, more development opportunities can be given to projects. Some projects with lower returns are more likely to thrive. Crucially, it makes space for more traditional funds to enter Polkadot. For instance, if the returns of some RWA projects are lower than staking returns, it would suppress the development of RWA projects on Polkadot.
d. Of course, this adjustment method is not what the author perceives as the final ratio. The author hopes to control the inflation rate within ±2%. On the one hand, if inflation is within 2%, DOT holders will not sell off due to excessively high inflation. On the other hand, the logic of public chain tokens differs from traditional fiat currency. When there is some deflation in public chain tokens, they tend to hold value better in transactions, thus attracting more buyers. However, if the deflation is too much, such as exceeding 2%, it will not be conducive to the development of applications other than DeFi.
So how to adjust the inflation rate to ±2%? Because all the burns of Polkadot currently occur in the treasury, the current parameter is to burn 1% of the total treasury every 24 days. Therefore, we can change this fixed value of 1% to a destruction parameter that can be adjusted at any time. Suppose this parameter is b. The adjustment rule is as follows:
The adjustment rule is that a cycle starts after a certain burn, recording the total DOT amount after this burn as M1. A cycle consists of 15 treasury burns (15 multiplied by 24 days is roughly a year). Let’s call the Nth burn An (where n=1,2,…,15) and the total DOT amount before the Nth burn as Kn (n=1,2,…,15). Then, when the An burn is about to begin, calculate (Kn-M1)×15÷n. Let’s call this value H. If H>2%, then b=b0; if -2%≤H≤2%, then b=b1; if H≤-2%, then b=b2. The relationship between b0, b1, and b2 should be b0>b1>b2.
In short, this formula calculates an approximate annual inflation rate before each burn. If the inflation rate is greater than 2%, burn more this time. If the inflation rate is already within ±2%, burn less. If the inflation rate is already less than -2%, burn even less.
Using this dynamic adjustment of the burn parameter can ensure the annual inflation rate is controlled within ±2%. As for the value of b, since DOT obtained from “core time” sales will be pooled into the treasury, thus changing the amount to be burned, the specific design of parameter b can be determined after the “core time” is officially launched.
② Enhance Operations and Lower Barriers
This suggestion is intended for the official Polkadot team. It’s advised that Polkadot considers boosting its visibility and user engagement on traditional media platforms, particularly on Twitter. It would be beneficial to provide more frequent feedback on Polkadot’s latest developments including key updates and expected launch dates.
Additionally, for both new and old users to understand every aspect of Polkadot, the amount of information they need to learn is vast. A lengthy learning path is not conducive to its spread. It’s necessary to consider measures to reduce the learning barrier for users. For instance, offering a simplistic overview of many of Polkadot’s new technologies and mechanisms, and introducing content that is more concise and easier for non-technical people to understand; or constructing a continuously updated set of materials that quickly enlighten beginners about Polkadot’s past, present, and future; or by organizing Q&A sessions to disseminate crucial information.
Currently, there are some projects working to address these issues, such as the Polkadot App discussed in the Polkadot forum (for details, please check: https://forum.polkadot.network/t/polkadot-app-for-onboarding/4032). However, more needs to be done in terms of simplifying operations so that users can simply state their intentions and have an application execute them without requiring complex on-chain operations.
③ Improve Governance Features
The current proposal voting process is overly simplified. For any proposal, besides simple Aye or Nay, more nuanced feedback should be considered, such as feasibility and cost. This would enable proposers to optimize their proposals accordingly and propose suggestions that have a higher possibility of being implemented.
Moreover, there should be a standardized format for how proposals are written and what content should be included. The approval of proposals should follow a standard approval process with inspection and feedback mechanisms. For instance, additional feedback indicators such as feasibility and cost can be added, along with a richer set of options to demonstrate how the proposal performs across these various metrics.
4. Potential Criticisms of the Plan
① How to ensure that Treasury support does not affect the DOT price?
After the launch of OpenGov, many DOT holders believe that the treasury’s support for numerous proposals has led to a significant sell-off, which resulted in many opposing votes on proposals. However, such sentiment is not possessed by just one or two individuals, thus simple preaching cannot persuade the many who think this way. Therefore, only by addressing the issue of the selling pressure possibly brought about by the treasury’s funding at the mechanism level can this situation be alleviated. Here, the author offers two approaches:
a. Extend the distribution time for all treasury support, changing it to distribute a portion of the rewards in every block over a certain period. This not only elongates the redemption time, ensuring that all reward recipients continuously receive rewards, preventing them from easily claiming the full rewards immediately and exiting by selling, but requires them to wait for a period before claiming all the rewards, enhancing the retention of participants. It also spreads the selling pressure over a longer duration, preventing panic-induced steep falls from concentrated sell-offs.
b. Vigorously promote decentralized stablecoins similar to MakerDAO and distribute rewards in the form of these over-collateralized stablecoins. In this way, the funds from the treasury won’t lead to selling pressure, and if the proposer is further bullish on Polkadot and is willing to use the acquired stablecoins to buy DOT, it will, in turn, create buying power.
However, the downside of this approach is the lowered capital utilization rate because MakerDAO’s mechanism is over-collateralized, meaning when the treasury support is $10k, it might require collateralizing more than $10k of DOT to generate $10k of decentralized stablecoin.
In this way, to some extent, can solve the Treasury support will cause obvious selling situation.
② Are these strategies too proactive and contradictory to the principle of decentralization?
Decentralization does not imply a passive stance and being proactive does not equate to being centralized. All the strategies mentioned in this report require governance voting to be implemented. They merely serve as strategic references. Polkadot needs to take active measures now. Because the present public chain map is dominated by Ethereum and its Layer2s. They possess the most extensive network effect, namely users, projects, and funds. When Ethereum was first introduced, there wasn’t a massive public chain that supported smart contracts, so Ethereum only needed to focus on its own development, for it was the pioneer in the market.
However, today, for other public chains, there’s already a highly mature Ethereum with a rich ecosystem and a robust network effect. Thus, other public chains cannot merely focus on their technological advancements to attract users, projects, and funds. New projects would prefer a mature market to increase the likelihood of success. Therefore, other public chains, including Polkadot, must adopt more proactive strategies to attract users, funds, and developers.
③ These strategies carry a lot of incentives. What if there is a transfer of benefits?
Firstly, achieving 100% fairness and justice is impossible. No matter how sophisticated the measures are, there will always be loopholes that can be exploited. Secondly, compared to avoiding mistakes or just being a bystander conducting research, we at the Polkadot Ecology Research Institute prefer to continuously explore future possibilities, even if it means facing criticisms due to errors. Lastly, these strategies can undergo rapid iterations. Instead of sacrificing 50% of iteration speed for an additional 5% fairness, we prefer mechanisms that allow for swift trial and error and rapid iterations, evolving into a more stable and error-free system rapidly.
Afterword
When the author finished this report of nearly 30,000 words, there is a profound sense of reflection. For Polkadot, some might perceive it as a successful representative, having once ranked among the top ten cryptocurrencies in global market capitalization and been hailed as a potential “Ethereum killer.” However, the actual development process is much more challenging than we imagine, facing many criticisms and doubts.
This mirrors the challenges that Polkadot, like many other startups, inevitably confront.
Over the past few years, we’ve personally witnessed the construction of Polkadot from scratch. Although it is still in its early stages of development (in our view), compared to many similar Web3 startup teams, it has already gained a reputation and received considerable praise.
Nevertheless, there are still many challenges in its growth. As participants in this ecosystem, we do not want to be mere “bystanders” or “critical spectators.” Instead, we aim to be actively engage and explore new possibilities guided by the spirit of Web3. It is a path taken by few, but we continue to move forward, hand in hand with that minority.
Once again, we thank you for patiently reading through this lengthy report. We believe you must be deeply concerned and expectant about Polkadot’s present and future. It’s an honor to us and serve as the driving force behind Polkadot’s progress. Since Dr. Gavin proposed the concept of Web3 nearly 10 years ago, we are still on the journey of advancement and encourage you to maintain patience and perseverance.
“Pessimists are always right, optimists keep moving forward.”
About Us
The Polkadot Ecology Research Institute is a research entity focusing on studying and analyzing the development of the Polkadot ecosystem. Established in 2020, the team consists of early participants and investors from the Chinese Polkadot community. With years of immersion in the blockchain industry, we’ve built a professional research and content creation team. To date, we’ve published over 150 original reports or reports (with an average word count of over 5,000 words), garnering over 60 million readings online. Our content has received attention and recommendations from multiple renowned media platforms in the industry and has received the support of the Polkadot treasury six times. We aim to be one of the most influential Polkadot Ecology Research Institutes globally.
Our content primarily introduces Polkadot’s technology and developmental prospects in a manner that’s easy to understand. We persist in studying and researching the progression of the entire Crypto industry and continuously summarize a developmental path suitable for Polkadot. We have also provided strategic consultations and incubation empowerment for various projects over the long term, having served dozens of projects valued at tens of millions of US dollars.
With the launch of OpenGov, we will focus more on leveraging Polkadot governance to propel its development. We will develop more strategic development strategies and specific policies for Polkadot governance. We welcome everyone to continue supporting us in empowering the Polkadot ecosystem.
Contact Us
If you have any suggestions about this report, please feel free to raise them for further discussion. For any business collaboration, please contact us on WeChat: btcisthetruecoin, or Twitter: https://twitter.com/Zou_Block
