DeFi Decrypted: Polkadot and DOT — AAX Academy
Polkadot has been making some serious waves recently. It describes itself as the next-generation blockchain protocol which aims to connect multiple blockchains into one network. They have a vision to build a Web that is safely secured from central authorities, where a user’s data and identity is owned by no one other than the user.
Polkadot aims to make DeFi even better
Polkadot was founded in 2016 by some of the foremost builders in the blockchain space including Robert Habermeier, Peter Czaban and Dr. Gavin Wood. Particularly Dr. Gavin Wood has helped raised Polkadot’s profile early on as one of the co-founders of Ethereum having built fundamental components such as Solidity, Whisper, and Proof-of-Authority consensus.
The protocol is built as a bridge across all other blockchains including private, public and permissionless networks, as well as oracles and consortium chains. Through Polkadot’s relay chain, multiple blockchains are able to exchange information and transactions in a trustless way, operating in a parallel manner. The idea is that the unification multiplies the strengths of individual blockchains, while at the same time mitigating their weaknesses.
What it aims to do for DeFi is accelerate innovation by making it easier than ever to develop decentralized applications and services, and then connecting those across blockchains. It is a project built by developers for developers, and aligns perfectly with the overall mission of the DeFi movement and the composability baked into the infrastructure currently in place.
The role of DOT, the Polkadot Token
Native token DOT has a total supply of 10 million, and serves three distinct functions: governance, staking and bonding.
Governance
All holders of DOT have the ability to govern the platform to a greater extent than what most other platforms offer. These capabilities include managing network fees, auctions, compatibility with other blockchains and exceptional events such as protocol upgrades or system maintenance issues.
A good example of how decentralized governance works is the recent redenomination of the DOT token. A community poll started the process of redenominating DOT which was finally voted on positively leading to a new version of DOT. As of 21 August, the new version of DOT is 100 times smaller than the old DOT.
Staking
Polkadot uses Nominated Proof-of-Stake as the algorithm for validation. DOT holders are rewarded for staking DOT in the protocol, risking their holdings for the validation of the network. This incentivizes token holders to behave honestly, as bas actors will lose their stake in the network.
Bonding
As a form of Proof-of-Stake, bonding is the process of tying up DOT in order to add parachains i.e. connecting to other blockchain protocols. Outdated or non-useful parachains are removed by removing bonded tokens.
Projects being built on Polkadot
Polkadot is the flagship project by Web3 Foundation, a Swiss Foundation founded to facilitate a fully functional and user-friendly decentralized web. The Web3 Foundation is partnering with players such as Parity Technologies, ChainSafe and Soramitsu to build Polkadot and stimulate the development of DApps that will run on the protocol.
Polkadot already has broad interest and usage, with over 188 projects being built on it across DeFi, wallets, infrastructure, Oracles, DAOs, exchanges, gaming, and much more. One of those projects that has recently been making a name for itself is Stafi. Short for Staking Finance, Stafi is implementing liquid staking which would allow users to maintain the ability to transact with their tokens while also participating in consensus and receiving staking rewards on their money. Other well-known projects being built on the Polkadot protocol are Chainlink, Digix, Edgeware, 0x protocol, and Blockchain.com.
Altogether, Polkadot aims to have a revolutionary impact on blockchain addressing true interoperability, greater transactional scalability, easier innovation and a more secure environment that protects everyone. It’s mission to enable a completely decentralized web where users are in control is DeFi in its purest form, and we should expect to hear a lot from this project over the next few months.
Originally published at https://academy.aax.com on August 26, 2020.
