Polkadot ecosystem deep dive
This first deep dive will introduce you to the Polkadot project and the ecosystem that is building around it. It is one of the most anticipated blockchain projects and is at the time of writing just about to be fully launched. If blockchains are a completely new thing for you, I recommend starting out from my previous blog post.
The more the merrier
Instead of trying to build one perfect blockchain for all use cases, Polkadot’s approach is to provide tools to create multiple different types of blockchains tailored to each use case. In the core of this ecosystem is the Polkadot relay chain that provides the security and communication channels for all the connected blockchains.
To start off, here is simplified story for a basic use case:
Want to create a custom blockchain for your own coin? Polkadot has got you covered. Just use the pre-built modules that come with their provided Substrate framework and you are running it in no time. Now people are questioning whether you are changing the history of the transactions since the blockchain is only run by you. No worries, just connect your blockchain to the relay chain and no one can question that anymore. You would need to be able to mess with the history of the relay chain to change history on your blockchain. Everyone now also gets the ability to transfer your blockchains coins to your friend’s Polkadot connected blockchain.
At least for the first part this is how it works. One could really do this. But in reality connecting to the relay chain requires a bit more than just ambition. More on this later.’
Who or what is behind the project?
Key figure behind Polkadot is Dr. Gavin Wood who is co-founder of Web3 foundation and Parity technologies. He is also co-founder and was CTO of Ethereum and created the widely used programming language Solidity for smart contracts.
Polkadot project was created by nonprofit web3 foundation in 2016 which has the goal to to create a more decentralized, verifiable and secure internet. Founding members of Polkadot are Dr. Gavin Wood, Robert Habermeier and Peter Czaban.
Parity technologies, as the name suggests, provides the technologies used for Polkadot. Parity offers most of its work for use as open source and accepts community contributions. Parity also works on other projects like OpenEthereum client.
Features that fit
The Polkadot relay chain works as the center of the ecosystem. It uses Nominated Proof of Stake (NPoS) where validators stake Polkadot’s native asset DOT to show that they are honest. They will lose some of their staked tokens If they are proven to have made malicious actions in the network. All DOT holders can nominate validators of their choosing by staking their DOT tokens with them. To incentivize staking, new DOT tokens are given to stakers over time. The relay chain’s sole purpose is to provide security and connections to other compatible blockchains. To achieve high security, it offers only limited functionality and does not support smart contracts.
Most of the end-use in the Polkadot system will happen on the parachains. These are tailor-made blockchains by each project. Depending on the project, it can be made to specifically support for example financial transactions, identity verification, smart contracts or IoT. The developers can set their own rules from fees, latency to things like governance methods and how they process computation. If the Rust based Substrate framework is used in the creation of the parachain it automatically comes with the modules to connect to the relay chain. Using Substrate is not required but makes it easier for developers to use the protocol.
On top of security, parachains get the ability to exchange information between other connected parachains through the relay chain. This enables interoperability meaning transactions and functions can be used cross-chain. At the beginning the information is stored in the relay chain which can take up a lot of space. This is one of the reasons that there is a limited number of parachain slots available at the beginning. The projects that offer to bond the most amount of DOT tokens get to connect to the relay chain and be part of the network. To acquire enough DOT tokens for the slot, most projects use the built-in crowdloan mechanism. In this mechanism the project supporters can loan their DOT tokens to the project and get them back at the end of the bonding period.
Kusama – “for experimental development”
As the security of all of the parachains rely on the Polkadot relay chain, it is useful to stress test the technology as well as possible. This in mind, Kusama was created to initially serve as the real world testnet for Polkadot. Kusama has most of the properties of Polkadot like providing a relay chain for parachains. Kusama launches and receives all the upgrades first. This way everything is tested first in a live environment before getting implemented on Polkadot. Everything is set to run four times faster in Kusama compared to Polkadot to speed up this testing.
Source: Polkadot DeFi Chicago Meetup
Even though Kusama is used like a final testnet, it has real value. 1% of DOT supply was earmarked to incentivise Kusama network by Web3 foundation. So in theory, in the worst case it should have at least 1% of DOT tokens total value. Many Polkadot based projects have also decided to create in similar manner secondary Kusama projects that use to launch first as Kusama parachain and there they test out latest features before rolling them out to their Polkadot project.
At some point Kusama will diverge from Polkadot if Kusama blockchain’s KSM token stakers agree to do so. This way Kusama would have served its original purpose as live testnet at the launch. In the end it would also provide a lower barrier to entry option for projects that also want faster iteration and the latest technology.
Nearing the beginning
It has been five years since the release of the Polkadot white paper. At the time of writing Polkadot is nearing its auction for first parachain slots which can be described as the final step on the roadmap for the network to be complete and fully functional. This is an exciting time for those that have been following the project and mostly the reason to write this blog post now. It will be interesting to see how the Polkadot ecosystem grows from here on out.
Which projects will get parachain slots for themselves? Will there be bugs found on Kusama that need to be fixed for Polkadot? How fast will the development of parachain projects be when they launch?
How are they different from competitors?
Most of the competitors deserve a similar deep dive on all of them but here are key points when comparing them to Polkadot. Cardano’s founder Charles Hoskinson and Polkadot’s Gavin Wood both were also co-founders of Ethereum. Thereafter they have diverged to create their own projects.
Ethereum – ETH is the second biggest cryptocurrency by market capitalization which is 19 times bigger than DOT at the time of writing. It uses Proof of Work consensus mechanism but is in transition to similar Proof of Stake that of Polkadot. Ethereum has a massive arsenal of ERC20 tokens created on top of it. Although there are many polkadot projects, their parachains are not connected yet. So currently only DOT tokens can be transferred on Polkadot. Ethereum has scaling solutions that offer some functionalities of parachains on Polkadot. In short, the main difference between the two is that Ethereum tries to have every functionality built into its blockchain. Whereas Polkadot focuses more on offering security through their relay chain and providing tools to build functionalities into parachains. Ethereum is planning to release similar scalability as parachains with sharding in the future.
Cardano – ADA, the native token of Cardano is the fifth biggest cryptocurrency by market capitalization, meaning that it is around three times bigger than DOT. Much like Ethereum, Cardano will offer all functionalities, like smart contracts, in one blockchain. Cardano uses their Ouroboros consensus algorithm which is similar to the NPoS used by Polkadot – described earlier – but with some differences. Cardano still has much more steps left in their roadmap than Polkadot but is in a similar situation where they are starting to enable usage of smart contracts. This means the start of end-user applications. In a later phase Cardano is planning to enable similar scaling as Polkadot using sidechains.
Harmony – Is already offering similar scaling with their sharding as Polkadot is going to have with parachains. Instead of offering developers to create shard blockchains Harmony offers tools to create applications that run on their prebuild shards. At the time of writing DOT has around 19 times bigger market capitalization than Harmony’s ONE token. Harmony is in its complete form plans to improve on adoption, interoperability and decentralization this year according to their roadmap.
There are many other platforms competing and potentially cooperating with Polkadot such as: Binance Smart Chain, Solana, Cosmos, Avalanche and Terra. Main thing where Polkadot stands out is their angle of encouraging projects to create their own blockchains with their own rules. This in theory should minimize the impact of Polkadot’s influence on each project. They can even decide to run on their own without even connecting to the relay chain if they have enough security on their own and do not need fast connections to other parachains.
What can you do with it now?
- DOT and KSM tokens can be transferred on the blockchain and are available on numerous exchanges.
- Users can participate in the consensus and decision making, by staking their DOT and KSM tokens, and voting for proposals.
- The first end user functionalities of the parachains are rolling out at the time of writing on Kusama and later on Polkadot.
- Developers can create blockchains that provide the features needed for their specific use cases.
Who are going for the parachain slots?
Acala – “Acala’s all-in-one DeFi platform to help you stake, swap, borrow, lend, earn, and more – all with micro gas fees.” Karura, the Kusama version of Acala, was the first project to win a parachain slot and is now operating. Based on Karura’s performance, Acala has good chances on being one of the first parachains on Polkadot.
Moonbeam – “an Ethereum-compatible smart contract parachain on Polkadot“. Moonbeam’s Kusama based project Moonriver was the second to win a parachain slot from the Kusama relay chain. Smart contracts on Ethereum are also compatible with Moonbeam so this could be interesting for many projects that want to run on Polkadot and use development tools from Ethereum.
Pontem – “The Experimentation Platform for Facebook Backed Diem”. There was a lot of talk about Facebook’s Libra token a few years ago but it has since changed the name to Diem. Pontem is where the development and experimentation happens for this stablecoin that has massive potential for adoption through Facebook’s network. Potem is not planning to get a parachain slot but instead they plan to use a pay-as-you-go slot called a parathread.
These are only a few of the projects in the Polkadot ecosystem. Here is a full list from polkaproject. Many of the projects offer decentralized finance systems and blockchains to build applications on top of.
“Polkadot will enable a completely decentralized web where users are in control.
Polkadot is built to connect private and consortium chains, public and permissionless networks, oracles, and future technologies that are yet to be created. Polkadot facilitates an internet where independent blockchains can exchange information and transactions in a trustless way via the Polkadot relay chain.
Polkadot makes it easier than ever to create and connect decentralized applications, services, and institutions. By empowering innovators to build better solutions, we seek to free society from its reliance on a broken web where its large institutions can’t violate our trust.”
That concludes my deep dive on the project. I hope it brought some new information to those that were familiar with Polkadot before and was at least somewhat understandable also for those new to it.
Incase you want to learn more about Polkadot I recommend these sources: