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What is Polkadot?

While during DeFi Summer 2020, a vast majority of projects were built on Ethereum. One year later, new contestants are on the block, with protocols aiming to solve the problems of Ethereum. In this post, we will cover one of them: Polkadot.

Polkadot describes itself as a “next-generation blockchain protocol connecting multiple specialized blockchains into one unified network”. This means that Polkadot isn’t just a simple, smart contract blockchain but a platform with a flexible architecture that facilitates the development of smart contracts and other technologies. Proponents of Polkadot believe that it could help accelerate the pace of innovation in the world of smart contracts, dApps and other Web3 technologies.

But how did Polkadot come to be, and how does its platform work?

History behind Polkadot

During the ICO bubble in 2017, many “Ethereum killers” have come and gone. But few of the new blockchain protocols benefitted from unique insights into the flaws of Ethereum like Polkadot. Polkadot is Gavin Wood's brainchild, who played a crucial role in the early days of Ethereum as its co-founder and initial CTO. Gavin Wood coded the first implementation of Ethereum and invented Solidity, the smart contract programming language.

Gavin Wood

However, in 2016 he left Ethereum to dedicate his time to new ventures. Later that year, he had the first idea for Polkadot while waiting for the Ethereum community to specify how they would implement sharding. He took inspiration and started designing something completely new. He finished the first draft of the Polkadot Whitepaper in 2016.

To drive the development of Polkadot and Web3 technologies, Gavin Wood co-founded EthCore, a for-profit blockchain company that later turned into Parity Tech or just Parity. One product they developed was a multi-sig wallet smart contract. Not long after the launch of that smart contract in 2017, a vulnerability was exploited, exposing more than 500 wallets leading to a loss of $300 million worth of Ether.

In the same year, Polkadot conducted its Tokensale raising $145 million worth of Ether. To manage the proceeds of the ICO and oversee further Web3 development, Gavin Wood, together with Parity’s Peter Czaban, founded the web3 foundation, a non-profit.

Unfortunately for the newly founded foundation, just 10 days after the ICO completion, the multisig was attacked again. This attack led to a combined loss of $150 million. The foundation was most affected, seeing 90 million of their funds frozen. While there have been various proposals on how to unfreeze the tokens, so far, all of them were rejected over fears of splitting the community again — as happened after the DAO hack.

Despite a major loss of funds, the web3 foundation remained optimistic and reported that they would still deliver the network.

In 2018, the first Proof-of-Concept launched, and the BBQ birch testnet gave developers the capability to build and deploy a web assembly smart contract chain with Substrate.

In December 2018, the Polkadot grants programme awarded its first two grants to Chainsafe and Soramitsu to build on the Polkadot ecosystem.

In 2019, with the second PoC, the Polkadot team reached a major milestone, and it launched improved governance and a consensus finality gadget. Finally, nearly 4 years after the first idea, Polkadot main net went live on the 26th of May 2020.

In 2021, we’ve seen the first Parachain actions and projects like Polkastarters, Ocean Protocol and Reef Finance building on Polkadot. Why they picked Polkadot over other networks? The architecture might offer some clues.

How does Polkadot work?

As mentioned above, Polkadot isn’t a typical smart contract blockchain but a network connecting blockchains. It relies on the architecture of parallel chains connecting to the main chain, which occurs high transaction throughput and is expected to be similarly secure to Ethereum 2.0 in the future.

To understand how this architecture facilitates throughput, one has to look at the existing constraints of blockchains. Ethereum and other chains like Bitcoin currently rely on every node processing the same information to verify transactions. Even when Ethereum introduces shards, a set of nodes will still be working on the same transactions, a process that’s made faster by splitting the workload across the network, regardless it still imposes some constraints.

On the other hand, Polkadot relies on parallel chains, short para chains, that run in parallel to the main chain. Parachain nodes only validate the transactions on their own chain, which means that transactions can be verified and executed simultaneously on different parachains. Consequently, the network as a total can scale easily and verify more transactions at the same time.

Parachains are connected to the main chain, called the relay chain. This chain stores the headers of all parachain blocks and enables different parachains to communicate with each other seamlessly.

The relay chain uses Proof-of-Stake as a consensus mechanism. Validators are randomly assigned and validate blocks on different parachains—Proof-of-Stake on Polkadot functions differently from the mechanism in other protocols. Having seen what downsides the dPOS of other protocols had, the Polkadot team came up with nominatedPoS, where so-called nominators would nominate up to 16 validators and delegate their tokens to them in return for a share of the block rewards.

Unlike in other protocols, nominators will lose capital if a validator they picked behaves maliciously.

Other important network participants include:

  • Collators: cerate the blocks on parachains and attach them to the relay chain. They maintain the essential connection between relay and parachain by ensuring that transaction data is always updated. To become a collator, node operators have to stake the platform token DOT. Once they verified blocks on their parachain, they will supply them to validators who sign them off.
  • Fishermen: are tasked with overseeing the block creation and verification process on parachains and ensuring no invalid transitions are included. Fishermen are full nodes on parachains that receive a reward for pointing out badly behaved validators.

BABE & GRANDPA

The Polkadot network reaches consensus in two stages. The first part concerns block production, and the second one is for finality. The algorithm is named after its acronyms.

  • BABE (Blind Assignment for Blockchain Extension) is an algorithm for generating blocks on the relay chain. It includes the headers of all valid parachain blocks. The right to produce blocks is randomly assigned to validators, inspired by the Cardano PoS protocol. As long as more than 2/3 of the stake belongs to honest validators, the network is secure, making it byzantine-fault tolerant.
  • GRANDPA ((GHOST-based Recursive Ancestor Deriving Prefix Agreement) is part of the consensus that introduces finality. Instead of voting on a block, each validator votes on the highest one they believe is valid. Therefore, they are also voting on all their ancestor blocks. All blocks that receive more than 2/3 of the stake in votes will be validated.

Governance

To achieve transparency and accountability, all changes have to be approved by a stake-weighted coin vote. Approved changes are made binding by a built-in upgrade mechanism that is part of the Polkadot node software. The network governance includes a council of elected officials, who fulfil a role similar to an executive board of directors in a traditional corporation. The council of elected officials is responsible for proposing sensible referenda and cancelling malicious proposals.

The officials are also elected through a stake-weighted approval vote and serve a fixed one-year term.

Polkadot also addresses voter apathy; many token holders don’t participate in votes by adding an adaptive quorum biasing mechanism. This means that the threshold for a supermajority increases the lower the voter turnout is. To prevent vote-buying, the protocol includes a time-locked vote multiplying and a delayed enactment of proposed changes.

Parachain Auctions

While Polkadot is highly scalable, parachains on the network are limited. Therefore, any project that wants to build on Substrate, has to go through a slot auction.

When they secure a slot, they will be able to connect to the really chain for a set amount of time. Auctions have a specified time period during which bids and crowd loan contributions are submitted.

Crowdloans enable projects to draw on their community for funding. Their community can pledge DOT tokens to help the project secure a slot.

The exact end of the auction close is then determined by a verifiable random function, the highest bid at that exact moment in time wins which increases fairness and facilitates more accurate price discovery.

A bonus for investors in crowd loans is, that their DOT is locked up for the period the project is using Polkadot and will then be released back to them. A project has no way of taking investors funds and run. The only cost to participating in crowd loan is opportunity cost — losing out on potential staking rewards on DOT.

DOT Token

The native token of the Polkadot platform DOT serves three distinct purposes

  • Governance: decisions on fees, auction dynamics and on the schedule for adding new parachains
  • Staking: facilitates consensus by incentivizing nodes to maintain the network
  • Bonding: the process of projects locking up their DOT to secure a parachain slot.

The maximum supply of DOT is 100 million, and it is a native token to the Polkadot platform.

Summary

Polkadot is a highly scalable, fast and cheap platform that facilitates the idea of “specialization enables optimization”. On Polkadot, each Parachain can be specialized to best serve its purpose, which isn’t always possible on other chains.

It’s estimated that it will be able to scale up to 10,000x the capacity of a single PoS chain and with its security model, new parachains can launch without having to bring on new validators. New parachain projects don’t have to compete for resources and can easily communicate with other parachains which creates network effects.

The governance process takes into account voter apathy and vote-buying to be as fair and accurate as possible.

However, it’s also worth noting that Polkadot is competing with other general-purpose blockchains such as Tezos, Cosmos, Cardano and of course Ethereum which benefits from a massive existing community.

Additionally, the limited number of parachains available might price out smaller teams.

Regardless, the broader industry seems to maintain a bullish view on Polkadot as the very active parachain auctions illustrated. Projects that can’t afford to go for Polkadot, might want to look at Kusama, which is a separate project built using substrate that tests various of Polkadots elements in a real-world environment.

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