Connecting the $DOTs — Polkadot Fundamental Analysis
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6 am, your alarm goes off to drag you into the new day. You prepare yourself by ensuring you have the tools to meet the expected demands of your workday.
You pull out of the driveway to make your way to the train station to catch an express directly into the city’s heart.
Taxis and buses run the roads, ensuring those on the grind can efficiently travel to the office to power through their 9–5.
Scores of people, just like yourself, are participating in various economic activities to make a living.
Although, what would the city be like without the trains that reach into its heart?
What if everyone just decided to drive their car into the city whenever they needed to get somewhere?
Would we still be able to go about our daily routines if there were no roads at all, or public transport to reduce the volume of traffic from everyone trying to drive their cars at the same time to traverse the city?
Without the infrastructure or the methodologies to scale the movement of people with public transport, it would be chaos.
Untold levels of human productivity would diminish. While it may be great for our health to rely on ‘two-feet and a heartbeat’, the time spent travelling on our own steam would significantly impact our potential to be productive.
This generic tale about sums up the state of the blockchain. Some have the infrastructure to deal with large volumes of network activity. However, we quickly find ourselves trapped in a walled garden without the rails to traverse between other blockchain ecosystems.
Layer 0, or interoperability protocols, are the roads, rails, and scalable means to transport not only units of value to other blockchains but data.
A major goal in cryptocurrencies and developing distributed ledger technology is to create conditions whereby the end-user is hardly aware or does not require knowing they are operating on the blockchain.
This seamless transfer of data and value across networks brings us back toward considerations around the evolution of the next internet. By and large, our understanding of blockchains is confined to the flow of value as a currency. The market has yet to fully conceptualize how the free flow of data between networks creates a viable alternative to the existing internet infrastructure that is highly centralized, which invariably leads to network interference.
For any new or emerging technology to scale, we refer to the ‘Three-As’:
Access, application, and adoption.
Polkadot are building the rails to effortlessly access alternative blockchain networks, all without needing to leave the comfort of your home or host blockchain.
By design, each Parachain is application-specific and shares security with the relay chain that opens bridges outside of their immediate ecosystems.
The dream for developers is to have people using the blockchain without knowing they are using it. This focus on the rails data travels along is critical toward adoption and having users realize non-fungible value through activities and functions enabled by emerging applications.
Throughout this fundamental analysis, we will discuss Polkadot deeper within the context of the ‘Three As’ and how Polkadot will lay the groundwork for the next generation of the internet through interoperability, known by the broader term ‘Web 3.0’.
Your TLDR summary, D.I.S.R.U.P.T. key takeaways. 29/35
An Oasis in the Desert Envies the Plumbing.
An undisturbed body of water in the middle of the desert is potentially a lifesaver.
Some of the more heart-wrenching images of human poverty are born from experiences of people walking for hours of a day to retrieve a bucket of water from a well. Societies built closest to freshwater sources often thrive compared to counterparts afar from freshwater.
But civilization as we began to know it did not form around water sources and stayed put. The Mesopotamians used clay pipes to transport liquid across distances to save the leg work from retrieving it, making it viable for settlements to form further away from primary water sources.
Similarly, roads and train rails enable easy access to frequented destinations in a buzzing city.
What enabled humanity to flourish was the deployment of infrastructure that eliminated time-intensive tasks.
Polkadot is both the water and the pipes that carry them. Parachains are the faucets or points of access for water moving through the pipes.
Polkadot is an interoperable hub secured by the Relay Chain. The Relay Chain achieves consensus through an Asynchronous Byzantine Fault Tolerance (aBFT) algorithm. In the simplest of terms and thinking back on previous discussions on the Byzantine General’s Problem, this consensus message allows some messages to get discarded and delayed under the assumption honest actor nodes will come through. Validators are selected on the Relay Chain to secure the network based on a nominated proof of stake, like Designated PoS, except validator selection is deterministic and less frequent. Further, the consensus layer performs automatic hard forks of the network to break up the ledger’s state into fragments that increase validator synchronicity.
There is a lot of depth to the underlying technology, but Polkadots Relay Chain is the heart of a bent and spoke model. The spokes consist of Parachains with three types; Common Good Parachains that host bridging and other vital functions, Parathreads that enable a collective of projects to lease out an ecosystem, and Parachains that are application-specific blockchains.
The latter requires a particular mention as Parachains are sovereign blockchains that can host their tokens and optimize their functionality to meet the desired output. We discussed a very similar arrangement in our recent Cosmos Fundamental Analysis. There are many differences at the architectural level, but the manner Polkadot leases out Parachain slots through $DOT crowd loans is a unique method of applying utility to the token.
These are selected through Parachain slot auctions, similar to real-world auctions instead. Except that the tender currency is $DOT, winning projects are chosen at random toward the end to prevent front running. Those who crowd loan their $DOT to a Parachain auction receive their $DOT back after a period of up to 96 weeks. During this time, participants are rewarded with the project token for the Parachain they helped secure. Neither Polkadot nor the crowd loan project can use the $DOT staked. Many erroneously use ‘free-money’ to describe various DeFi income streams. Still, distribution of a project’s token following a Parachain auction is one example that greatly approximates this truth, in the sense that no $DOT once the bonding period expires.
It is essential to be across the mechanics of consensus for Polkadot. It prides itself on being a disruptor for centralized systems, their lightpaper channels angst towards the improper usage of user data by centralized providers. These ideologies are what centres them at the forefront of the Web 3.0 revolution, not just in exchanging units of value seamless across networks but all types of data.
Thinking of how data transfers today, when we look up a website, we typically access stored data from a network of centralized servers. In essence, a person or centralized entity owns this data. Furthermore, how it is kept is vital to discern network resilience. If AWS hosted half the world’s websites, it would cripple the internet if they were to cease operations suddenly.
Decentralization through application-specific blockchains with their network of nodes maintaining their operations creates resilience in the network. If one node goes down, it will essentially be inconsequential to the state of the overall network, where one server would be just one of many nodes in the network that operate in all kinds of conditions.
The relay chain lays the foundations to link up with alternative ecosystems through their Virtual Parachains. This capability is significant as not only units of value flow across these bridges, but so too does data.
Many Shades of DOT
Polkadot is a fully sharded blockchain. As we alluded to when discussing consensus, partitioning the network has many advantages from a validator standpoint but is immensely complex to implement. The internet requires flexibility in terms of permissions and functions. In essence, sharding is taking a small part from a whole and programming functionality independent of the ledger’s state.
This has far-reaching implications beyond value transfer. Creating permissioned and customizable networks is essential to optimize functionality and enterprise utility.
Remember, the goal of emerging technology is to facilitate adoption. Typically, this involves onboarding users to tap into the functions of a Dapp. A successful instance of adoption occurs when the end-user is unaware they are operating on the blockchain, reducing the required knowledge to participate meaningfully.
The relay chain shares security with these sovereign shards that also have their means of adjusting consensus mechanics in their ecosystem to fit their intended use case.
For this reason, Polkadot is favoured by larger institutions that view the underlying infrastructure as a solution to enhancing the resilience of their systems and functions. Enterprise solutions that interface through Polkadot have access to many decentralized applications within the Polkadot ecosystem and beyond into EVM and non-EVM runtime environments.
It is no coincidence that the Web 3 Foundation is the primary coordinator of development for Polkadot. Transitioning from Web 2 will be ongoing, and Polkadot has an army of developers and contributors growing the network, second only to Ethereum.
Further, the projects that have secured their Parachain slots can apply use cases novel to their ecosystem, not limited to DeFi DApps. Decentralized Cloud Computing solutions will play a big role in maintaining uptime for websites and enabling access to private cloud servers that business can build their entire operations on. We have mentioned in the Metis fundamental analysis the development of Decentralized Autonomous Companies (DACs), Parachains that seek to deploy enterprise solutions are taking a very similar path.
However, if we are to assume it will be one interoperable protocol to rule them all — which is unlikely given the overlapping network effects that will likely take place, we look towards Cosmos. In the previous FA, we drew comparisons to Polkadot. As such, we will not linger. However, it is worth noting that Polkadot themselves have a page in their documents discussing its differences with Cosmos. You can find a link in the references.
It is worth considering Ethereum 2.0 as a “rival” to Polkadot. In a sense, their network architecture through sharding is quite similar, although some key differences are around state transition functions (STF). Polkadot shards have an abstract STF, which gives them flexibility in assimilating to new states, whereas on Ethereum, each shard is hardcoded to incorporate to fixed states. Governance is another area of difference where Ethereum will continue to execute proposals achieved off-chain through hard-forking the network. However, Polkadot conducts governance entirely on-chain that is executed autonomously. In other words, Polkadot is trustless, whereas an Ethereum hard fork still requires trust that the code will run per the conditions of the approved proposal. Finally, Polkadot is said to have greater availability and validator guarantees as each shard enlists a smaller number of validators to secure the ledger.
As we know, what gives a network its value are the use cases available. Kusama, the testing grounds for Polkadot, held their Parachain auctions, but we will touch on the winners of the Polkadot Parachain Auctions so far for practicality and relevance.
Acala won the 1st auction — it raised $500 Million in funding from the community. One of their fundamental value propositions is liquid crowd loan DOT. This trustless staking derivative allows people to stake their locked DOT into another crowd loan or trade the receipt of bonding freely that the owner can later redeem. They also have their stablecoin, $aUSD, in the works that will be able to extend across multiple networks, similar to $UST.
Moonbeam won the 2nd auction — early investors secured 10x returns. Operates in Smart Contract space with their live mainnet helps build cross-chain developments tools for all types of DApps.
Astar won the 3rd Parachain auction — a substrate run time library. The substrate provides tools that let developers build Parachains for Polkadot. Enables the creation of structural incentives for a blockchain to grow organically.
Parallel Finance won the 4th Parachain auction — Credit protocol and derivatives.
Clover Finance won the 5th Parachain auction — their cross-chain infrastructure makes it easier to port DeFi DApps on Ethereum to Polkadot. They have a working product, the Clover Wallet, with EVM compatibility.
Finally, Efinity secured the most recent 6th Parachain auction — it is a Parachain developed by Enjin, which acquires a consensus algorithm based on the validators of the Polkadot Relay Chain. This consensus arrangement lets Efinity possess a unique state, data, and economic framework. Efinity seeks to solve some of the most significant problems in the NFT ecosystem, such as interoperability, impeding fees, inflexible smart contracts, and much more.
$DOT Tokenomics
$DOT as of 22/03/2021:
· Price: $19.27
· All time high: $54.98
· Market cap: $21,079,978,840
· Circulating supply: 1,095,412,558
· Total supply (inc vesting): 1,176,361,691
· Maximum supply: UNCAPPED
· Inflation Rate: 7.78% APR. — emissions vary through governance and proportion to % of total supply staked.
$DOT has three primary functions: Governance, staking, and Parachain bonding (crowd loans and Parachain auctions).
A Canvas of DOTS Reveals 1000 Paths — Discussion
A road doesn’t judge the brand of buses running or it, nor do train tracks consider the vehicle on top of it. Polkadot could be conceived of in the same terms.
The primary motive is not to compete with other cryptocurrency projects but instead become the rails for them to communicate with one another. As we’ve touched on at length through our series of FAs, interoperability is critical for building future infrastructure.
If we could not communicate between different networks, it would hardly be thought that distributed ledger technology would replace Web 2 infrastructure. The pertinent variable is who controls the network and who approves the validity of the network. DApps deployed on blockchains do indeed have an application, but if new users cannot easily access these products, how will we foster adoption?
Interoperable protocols we have discussed at length, but few have considered the implications in the context of the Three As.
For example, many people have reservations and speculate on the Terra ecosystem regarding the $UST maintaining peg, which we have previously published on Terra. But many pundits calling it a Ponzi or making the case it is unsustainable fail to acknowledge that Do Kwon is behind the Chai app, with over 2.5M users in South Korea. More than 50 e-commerce outlets accept $UST as payment. Further, the app is so user-friendly that participants are either unaware or require no knowledge that they are using a decentralized application on the blockchain. They have an application that is easy to access and has applications in e-commerce — this is how adoption will take place when DApps can scale toward this benchmark.
Polkadot is likely to exceed this benchmark. With use cases not limited to value exchange or DeFi smart contracts, there are many reasons why a user in the future may download an application that a Polkadot Parachain powers. This attracts non-crypto users into the fold.
Clover Parachain is designing their substrate-based wallet that will likely have on-ramping features to enable a range of payments. This may sound benign; however, Acala is releasing their stablecoin; $aUST. Very similar design to $UST, there is potential that $aUST will be useful in payment DApps on Acala.
While Cosmos is indeed a highly viable alternative, both projects believe that it will not be one project to rule them all. They understand network effects when functionality overlaps, as Cosmos will have substrate compatibility. In theory, you could execute a function of Cosmos that routes through Polkadot to achieve the desired outcome on another blockchain or even across Parachains. Or vice versa. This overlap of interoperable protocols that enable access to any blockchain is what we mean by web 3.0. Front ends can be deployed and stored on-chain, and the back end allows smart contract interactions.
With all things considered, we have only really scratched the surface, but it appears that Polkadot will retain darling status among the blue-chip cryptos. Polkadot did experience a significant downside during the previous market-wide correction. With uncertainty still afoot due to unstable macroeconomic conditions, it is challenging to assign short-term assurances to Polkadots price action.
This downside may have been a by-product of bonding periods coming to an end and institutions unwinding exposure during unfavourable market conditions.
The same could be said for many blue-chip projects that the current price of $DOT is a gift. Polkadot has a constant inflationary schedule that we need to be mindful of, and this risk factor needs to be weighed against the percentage of $DOT locked up in bonding and staked in validator nodes.
Currently sitting around the $19 mark, down from an all-time high of $54.98, a 2–3x at these levels is not an unrealistic expectation on return. Network effects take time and will be contingent on increasing usage of Parachains on the network. The relay chain secures these Parachains and cannot operate without $DOT (a stark difference to $ATOM). Keeping an eye on upcoming Parachain auctions and Initial Dex offerings (IDOs) will be critical for those with the risk appetite to enter low-cap positions.
For a protocol that will become a vital piece of infrastructure going into the future, and judging by the exponential levels of developer activity, compared to early days Ethereum, it is not farfetched to hypothesize that the underlying network could scale into being worth hundreds of billions in the future.
But let us ease our grip on the rope attached to the rocket for a moment. Many things need to happen before then. There is still a high degree of regulatory uncertainty throughout the cryptocurrency space, and the only thing that we can be sure of is that they are indeed imminent. Polkadots acknowledgement and future-proofing compatibility with anticipated regulations is a proactive step in the right direction, short of entirely decentralizing operations, which is indeed something that regulatory bodies have zero means of preventing. Further developments around making the hub user friendly so that users are not feeling overwhelmed by the complexities of operating on $DOT is critical to adoption.
The network still has some way to go before it becomes the go-to hub for all things crypto. The quest to achieve Web 3.0 is no small undertaking. While we have touched on several different Web 3.0 projects and capabilities throughout our previous FAs, it appears that Polkadot will serve a vital role in making the internet truly free and accessible to all.
References
Coindesk, ‘Digital Asset Funds Hit by Record $142M of Outflows’, Dec 21st 2021, https://www.coindesk.com/markets/2021/12/20/digital-asset-funds-hit-by-record-142-million-of-outflows/
Coindesk, ‘Jutta Steiner Leaves Polkadot Builder Parity Technologies’, Nov 26th 2021, https://www.coindesk.com/business/2021/11/26/jutta-steiner-leaves-polkadot-builder-parity-technologies/
Cyberbumb, ‘POLKADOT: DOT FUNDAMENTAL ANALYSIS & PRICE PREDICTION IN HINDI — Polkadot Cryptocurrency Explained’, October 16th 2021 https://cyberbump.net/polkadot-dot-fundamental-analysis-price-prediction-in-hindi-polkadot-cryptocurrency-explained/
Messari, ‘Crypto Theses for 2022’, https://messari.io/crypto-theses-for-2022
Polkadot Docs, https://wiki.polkadot.network/docs/getting-started
Polkadot Lightpaper, https://polkadot.network/Polkadot-lightpaper.pdf
Polkadot Whitepaper, https://polkadot.network/PolkaDotPaper.pdf
Polkadot Wiki, ‘Polkadot and Cosmos’, https://wiki.polkadot.network/docs/learn-comparisons-cosmos
Polkadot Wiki, ‘Polkadot and Ethereum 2.0’, https://wiki.polkadot.network/docs/learn-comparisons-ethereum-2
The Coin Republic, ‘Efinity is the Winner of Polkadot’s Sixth Parachian Auction?’, December 31st 2021, https://www.thecoinrepublic.com/2021/12/31/efinity-is-the-winner-of-polkadots-sixth-parachian-auction/
Youtube, Coinbureau, ‘Polkadot: What’s Up With DOT?! Potential in 2022!!’, 18th Feb, 2022, https://www.youtube.com/watch?v=H7S5k5jWp48
Youtube, Fin Tec, ‘What’s Next for Polkadot?’, https://www.youtube.com/watch?v=Xo6fhqbQEEk
Youtube, InvestAnswers, ‘Polkadot: Should I buy it? Is DOT worth it? A detailed study and Price Prediction out to 2025’, 11th May 2021, https://www.youtube.com/watch?v=98F6h9uCi6A
Youtube, Whiteboard Crypto, ‘What is Polkadot? DOT Explained with Animations’, 19th Sep, 2021, https://www.youtube.com/watch?v=YlAdEQp6ekM
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