Polkadot (DOT) Review: Security, Scalability, Innovation
We chose to review Polkadot due to the coin making some huge waves in the crypto space. In a little under a year this coin's value in USD has increased just over 1200%. That jump in percentage is due to not only the underlying technology but public adoption as well.
Polkadot (DOT) is a growing coin with a very technical use case. DOT's genesis block was launched mid 2017 and its market cap has since grown to nearly $22,000,000 in just 4 years. With a growth of around $5.5 million per year, you may wonder why so many people are talking about it. In this article we will give a few examples explaining DOT inflation and protection of wealth. With that being said, let's jump into the technology!
Polkadot is an open source project founded by the Web3 Foundation. The Web3 Foundation funds research and development (R&D) teams who build the foundation of the decentralized web. This foundation has assembled 5 teams and over 100 developers to build the Polkadot network including Parity Technologies, ChainSafe, Soramitsu, and Polkadot JS. These teams are some of the industry's foremost builders in the crypto space.
The Polkadot project is largely based off of 3 main tiers that power the network, Governance, Staking, and Bonding. Polkadot token holders have complete control over the protocol, whereas with other protocols, those rights are given exclusively to miners. With DOT, that privilege is given DOT holders. These rights allow the community to upgrade, fix, and advance the DOT protocol without any central authority interfering. This means that investors who hold the DOT coin have a voice and all stakeholders can vote on what is best for the network. Polkadot's development reflects the community's drive and values with this governing protocol.
Polkadot is slightly different from other technologies in a way that DOT uses 2 different chains, or process threads, on its network. The first is called a Relaychain, and the second is called a Parachain. These both work in tandem to create the Polkadot network. The Relay Chain is the central chain of Polkadot. All validators are staked on the Relaychain and validate for the Relaychain. The Relaychain processes a limited amount of transactions, generally only transactions that interact with the governance mechanism and Parachain auctions are processed through the Relaychain.
Parachains attach themselves to the Relaychains and have specific use cases that are only able to run one process at a time. This could mean that one piece of the Parachain can improve security while another could work closely with smart contracts. This takes load off of the central Relaychain and allows the whole network to run more smoothly.
One of Polkadot's main goals is to be scalable and secure. Polkadot makes this very easy by creating the two chains mentioned above. The Relaychain is the main structure, it houses most of the code. When you want to scale this network, you are able to add various functions or smart contracts in a way that you won't have to re-write any of the code. Instead of introducing the new technology directly onto the Relaychain, which is the main network, you add it to the Parachain. This makes it easy for developers to add to the network without changing the whole structure.
This could be looked at like a parking garage, it's one structure with multiple spaces in it. If you want to park your car there, you pay a small fee and you can then use the space. Parking your car does not change the main structure of the building. In the Polkadot network, the parking structure would be the relay chain and the parking spots would be the Parachains.
DOT staking is a great incentive for people to join the community. If token holders behave in honest ways, they are rewarded. Oftentimes this means that you are choosing a staking pool that is trustworthy and does not report false numbers or data. If the individual or pool of individuals falsify numbers or data, the staking mechanism will make sure that bad actors will lose their stake in the network. This allows the network to self regulate and keep itself secure and stable for everyone with good intentions.
Adding new Parachains can be done by reserving a slot on the network, this is done by bonding tokens. When you bond tokens, you are giving your tokens to the network. Old or outdated Parachains are removed by removing the bonded tokens. This means that the old Parachains can be removed without removing from the main source of the network, this also allows space to become clear for developers to add or improve their slot in the Parachain.
Polkadot uses Nominated Proof-Of-Stake instead of Delegated proof of stake. Nominated Proof-Of-Stake is the process of nominating different validators to take part in the consensus Protocol. This sounds complicated but as an example, let's say there are 10 people standing in front of a wall. Out of the 10 people, 8 of them say that the wall is blue, while the other two people say that the wall is green. These 8 people will be rewarded, and the other 2 will be removed from the group. Nominated Proof-Of-Stake essentially lets you nominate the people you think are more trustworthy to tell the truth.
The network also pays out each validator roughly the same amount of rewards regardless of total stake. Payout between validators is roughly the same and because of this, validators are encouraged to have fewer nominators and gain trust with their specific nominators. This allows the network to stay secure and diversify in order to avoid a concentration of power. Many services claim to have a 12-15% APY though one thing to keep in mind is Polkadot's built-in inflation of around 10% yearly. This means you are actually receiving 2-5% APY and not the advertised numbers. An easy way to visualize this is by using our staking calculator.
In order to explain Polkadot's inflation, let's take an example using the United States Dollar. USD has an average inflation rate around 2% per year. Let's say that you have $100 to go shopping, you are able to buy a full cart of food with that 100 dollars. After the first year due to the 2% inflation you will still have the $100, but now you will only be able to buy .98 carts of food instead of one full cart. You have the same amount of money, but year after year it is worth less.
Similarly, if you keep all your money in a safe in your house, you are still subject to inflation. This is called loss of wealth. If you took your money and entered it into an investment with a 2% annual return, you would not make money, but you will also not lose any money, this is called protection of wealth. Now let's say you invested your money with a 4% annual return. You would then be protecting your wealth from the 2% rate of inflation, and after that you would be growing your wealth with the other 2% return. This is called growth of wealth. This is where staking is helpful.
Polkadot advertises between 12% to 15% annual return, but the way it was designed it has around 10% inflation per year. Similarly to USD you will have to take your base annual return and then subtract the average rate of inflation, in this case about 10%. This leaves you with a 2% to 5% return per year. Unlike USD, the price of DOT can change as the public adopts the coin. In recent years, the price growth of polkadot has more than beat the rate of inflation. If you were to invest 100 dollars into DOT in early 2020 and sold early 2021 you would have seen around $800 returned. This is a much greater return than the 15% advertised. This is due to the price drastically increasing over the last year. If DOTs value had stayed the same you would have been left with around $102 after inflation.
- Web 3 Foundation Team
- No lockup for staking
- Your voice matters.
- Built for both broad and specific use cases.
The Polkadot documentation is over 75 pages of very dense information. We decided to choose a few of the top questions from our community and answer them for you.
- Kraken (Able to stake DOT)
- Bitfinex (Able to stake DOT)
- KuCoin (Able to stake DOT)
- OKEx (Able to stake DOT)
Polkadot's main use case is to allow various blockchains to transfer messages such as current price or value in a trust-free fashion.
Many factors come into play when trying to decide if something is a good investment. Things such as time invested, expected ROI and other factors play a major part in deciding if this coin is the right investment for you. Polkadot is already a much better investment than some other coins due to its ability to be staked and earn a steady return. We urge you to read this article, check out the staking options and do some more research to decide if this coin is the right investment for you.
As of late August 2020, Polkadot has a maximum supply of 1 billion tokens. This maximum supply increased from 10 million after a redenomination. This redenomination was executed in order to make calculation easier by avoiding fractions of a coin in exchange for using more whole numbers.
Polkadot is an interesting topic, in this article we just barely scratched the surface of what Polkadot can do and what it can bring to the decentralized internet. DOT has a dedicated team and the proper funding as well as a small but growing community helping back the project. We believe that some companies could and should be a little more transparent when providing their staking details but overall the fact that DOT is listed for staking already is a great advancement for the Polkadot team, the Web3 Foundation and the crypto community. In the staking section of this article we reviewed the main difference between staking a coin with a dynamic or changing price and a static price. Investing in DOT is a solid opportunity, especially when the rate of inflation is greatly beat by the increasing price of this coin.
If you are an investor looking for passive income, DOT may be one coin to add to your portfolio. In the last year the price has doubled and in the same amount of time, it's been continually upgraded by the DOT team and community. As of right now, DOT's inflation is around 10% but as more DOT is held in staking, that inflation rate should drop to around 7%. Even at a 10% inflation rate, as of writing this in the last 14 days DOT has grown nearly 30%. If you are still unsure about investing in DOT, take a look at their wiki, buy small and average down.
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