Polkadot

Decentralized Web 3.0

The Polkadot network is currently the most highly valued project focused on blockchain interoperability and its goals are similar to Cosmos, but the Polkadot network is described as the platform for Web 3.0. Gavin Wood, co-founder and original CTO of Ethereum and main creator of Solidity and the Ethereum Virtual Machine (EVM) software, is the founder and lead tech innovator of Polkadot technology. Polkadot enables: 1) interoperability between any smart contract data and tokens on different blockchains 2) project developers to build their own customizable blockchains using their Substrate framework 3) seamless upgradeability without hardforks 4) shared security between all the blockchains that use Substate, but each with their own governance systems and 5) economic and transaction scalability. Although interoperability platforms like Polkadot and Cosmos have a goal of making independent blockchains interoperate, much of the technology is also in competition with most other general purpose smart contract platforms like Ethereum that will eventually allow interoperability and scaling in Eth 2.0 as well as EOS that also has many blockchains that use its technology.

Background & History

Aside from Vitalik Buterin, Gavin Wood was the key technical architect and developer of Ethereum as its original CTO.  Wood wrote the yellow paper for the technical specifications of Ethereum as well as created Solidity and EVM software.  He also founded Parity Technologies, the company that released an Ethereum client based on Rust.  He’s also the founder of the Web3 foundation that funds research and development for the decentralized web and is the main funding mechanism for the Polkadot network.   

Polkadot started with a whitepaper Wood drafted in November 2016 called POLKADOT: VISION FOR A HETEROGENEOUS MULTI-CHAIN FRAMEWORKA year later, Wood and the Polkadot team raised $144.6 million in October of 2017 between a private sale of 2.25 million tokens and a public sale of 2.75 million tokens for a total of 5 million tokens named DOTs.  Unfortunately the entire 513,744 ETH amount raised was frozen due to a critical software bug in the multi-sig wallet that Parity Technologies used to hold the 513,744 Eth tokens they raised.  

Despite proposals by Parity Technologies in the Ethereum community to unfreeze the ETH with a hardfork, the funds are still frozen.   Despite being limited on funds, the Web3 foundation was still able to fund the build out most of the technology.  However, without access to ICO funds, the Polkadot team sold an additional 500,000 DOTs to investors to raise an additional $60 million in January of 2019.  In July 2020, the Polkadot team again raised an additional $43.75 million for 350,000 DOTs.   The Polkadot network launched in July 2020 and on August, 21st  2020 the DOT stakeholders voted to redenominate DOTs on the network  to have100x the original supply of DOTs, similar to a stock split.

Polkadot Overview

A high level overview of the key benefits of Polkadot can be reviewed in its lightpaper. 

The first key core benefit of Polkadot is its accommodative low-level architecture that allows any organization to create highly custom blockchains that will be able to community all types of data with other custom blockchains.  The Polkadot network allows organizations to develop and maintain specialized heterogeneous blockchains used for a variety of applications from web, Internet of Things (IoT), financial and government.  

Polkadot’s heterogeneous sharding allows a variety of different blockchains to run in parallel and be optimized for their specific use cases compared to most blockchain systems that are less flexible and take a one-size fits all approach to their platform.  The core Polkadot network is called the Relay Chain that focuses on quick and efficient consensus validation of all the transactions of blockchains connected to it.  Blockchains use Substrate technology to build custom blockchains that run in parallel (aka parachains) specific to their needs and applications.  These sovereign parachains lease a spot or pay as they go using DOT tokens to connect to the Polkadot Relay Chain.  Bridge chains are specialized blockchains that enable external blockchain networks like Bitcoin and Ethereum to communicate with the Polkadot network ecosystem.

Another key differentiator in the Polkadot network is that it’s future-proof and enables seamless upgradeability.  Most blockchain networks require disruptive hard forks to coordinate software upgrades between all those who run validator nodes in the network.  Polkadot software enables all blockchains that use Substrate technology to be able to upgrade their blockchains without halting the entire network or creating contentious forks.  Polkadot network upgrades are proposed and executed with on-chain governance from stakeholders of DOT.

Polkadot Consensus

The Polkadot network uses a very complex hybrid consensus system.   Fast finality in a blockchain comes at the cost of potentially accepting malicious transactions before they can be reverted, but have the benefit of liveness and preventing delays that can stall the network.  In order to balance the pros and cons of finality and liveness, validators on the main Polkadot Relay Chain uses a Proof of Stake system called GRANDPA to provide finality while validators use another consensus called BABE to enable fast block production, liveness and probabilistic finality for the parachains it produces blocks for.  

The Relay Chain provides finality for each parachain rather than for each block to increase efficiency.   GRANDPA (GHOST-based Recursive ANcestor Deriving Prefix Agreement) works in a partially synchronous network and requires 2/3s of the validators to be honest in order for it to be byzantine-fault-tolerant (BFT) the same way Cosmos is designed.  Once the Relay Chain finalizes a set of blocks for a parachain, all other validators must build from that canonical chain. 

The validators on the parachains are randomly selected to produce blocks under BABE (Blind Assignment for Blockchain Extension) consensus every 6 seconds, but there could be multiple validators producing blocks at the same time and multiple chains could be created in the process.  Hence within the parachain network there is fast but probabilistic finality until there is ultimate and provable finality on the Relay Chain.   A minimum of 5 validators are required for each parachain and there are currently over 200 validators in the Polkadot network.  Validators have to stake DOT tokens to participate and earn DOT rewards and their stake can be taken (ie. slashed) if they misbehave.  There will be a limited number of parachain slots for certain time periods between 6 months and 2 years that will be auctioned off to participants in the network.  

The validators of the Relay Chain are voted in by Nominators who are DOT stakeholders.  Nominators put up their own stake as a bond, select up to 16 validators and share in the rewards or punishments of the validators they select.  Hence Nominators are incentivized to select validators that perform efficiently and don’t misbehave.    

There are also collators in each parachain that gather transactions in the network and put them into parachain blocks and then forward them along with proof of state changes to the validators of the parachain. Collators are similar to full nodes in a PoW network and maintain the entire state transaction history for the parachain.  Finally, collators and other full nodes called Fisherman can monitor the network to identify misbehaving collators or validators to earn rewards. 

Smart Contracts

The Polkadot network does not include native smart contract functionality because the Relay Chain is optimized for specific low-level functionality that allows all the blockchains to interoperate.  Hence other projects are building the smart contract layer as a parachain on Polkadot.  Edgeware is building a web-assembly virtual machine (WASM) that allows developers to write smart contracts in Ink, a Rust-based language.  Moonbeam is another project building an Ethereum-compatible smart contract platform that converts Ethereum transactions into a rust-based EVM to allow projects to port their Ethereum code to the Polkadot Network with minimal changes.   Both Moonbeam and Edgeware have their own governance, token and tokenomics.  Furthermore parachains and parachain auctions have not been implemented yet so it may be some time before Edgeware and Moonbeam are ready to be implemented. 

Governance

Another aspect of Polkadot is it’s balanced governance approach for the network.  DOT stakeholders vote 13 council members to help manage the network and propose how the treasury funds are spent, but proposals are ultimately voted for or against by DOT stakeholders.  DOT stakeholders could also make their own referendum proposals, but there is a 5% cost if the proposal does not pass.  Oftentimes there is a lack of participation for voting on blockchain networks so Polkadot implements an adaptive quorum that requires 66% ‘Yes’ votes when there is a 25% turnout or lower and gradually decreases to a 50% threshold when the turnout approaches a 100% turnout.  Hence proposals need 50-66% approval.  Votes also are weighted based on how long people stake DOTs to vote.  If stakeholders don’t stake DOT tokens to vote it is worth 10% of a vote and the weighting gradually increases the longer the token is staked.  If tokens are staked for 32 weeks it’s worth 6 votes.  

DOT stakeholders also vote for a 3 member Technical committee who can make emergency proposals with ⅔ support and ¾ approval from the council.  These proposals can be fast-tracked for approval by community DOT stakeholders.  The Web3 foundation and other organizations that are involved with Polkadot protocol development are expected to make up the Technical committee.

Token Distribution

The Polkadot team initially sold 5 million tokens to (2.75 million to public and 2.25 million to private) investors in the initial token sale period in 2017 that amounts to 50% of the initial token supply.  30% of the tokens were reserved for the Web3 Foundation and 20% reserved for the Polkadot team.  However 850,000 DOTs were sold to investors in 2019 and 2020 so 58.5% of the initial allocation went to investors, 20% to the team and 21.5% remain for the Web3 foundation.  The token allocation seems generally fair and balanced with enough funding for sustainable growth.  [Note: The DOT tokens were redenominated to have 1 billion in supply instead of 10 million so prices adjusted accordingly.] 

Community

The Polkadot community is highly technical and has a very similar culture and ethos to Ethereum’s developer community.  Therefore the Polkadot network may have an easier time converting those in the Ethereum community to adopt its technology.  However, the Polkadot network has not focused on enabling the Ethereum Virtual Machine Many of those who invested in Polkadot come from the Ethereum community.  The Web3 foundation is the main grant funding source.  You can keep up to date with the grant funding here

Projects

As with all blockchain interoperability platforms and blockchain platforms in general, it’s important to keep track of how many high quality projects use the platform and technology.  Many of the latest projects can be found here at PolkaProject [Note: Market cap as of 9/20/20]:

Kusama ($355 million market cap) is the first high-profile ‘cousin’ chain to Polkadot that was launched a year earlier by Gavin Wood for fast experimentation with the same Polkadot technology.  DOT holders are able to claim Kusama tokens.   Kusama is a standalone chain, but can be used as a testnet chain before projects officially launch on Polkadot.  It is unaudited proving ground for application developers to experiment with.  However project developers can use the platform long term if desired.  

Energy Web ($298 million market cap 9/16/20) – enterprise blockchain platform tailored to the energy sector

Ocean Protocol ($127 million market cap 9/16/20) – a business, technical, and governance framework that is interwoven together to allow data and services to be shared and sold, in a secure manner.

Edgeware ($51 million market cap) – a self-amending web-assembly (WASM) smart-contract blockchain with a built-in identity and governance system.

Akropolis ($27 million market cap) – framework for creating for-profit DAOs, with customisable user incentives, automated liquidity provision enabled by the bonding curve mechanism, and programmatic liquidity and treasury management

Darwinia ($32 million market cap) – cross-chain bridge protocol based on Substrate

Sora  ($25 million market cap) – creating a Decentralized Autonomous Economy (DAE) where community projects get funding through the issuance of new tokens.

Polymath ($29 million market cap ) – makes it easy to create, issue, and manage digital securities on the blockchain

Celer Network – ($20 million market cap) – layer 2 scaling solution using state channel technology

Dock – enables businesses and developers to create verifiable credentials.

Centrifuge – focused on decentralized asset finance 

Plasm – a layer 2 protocol on Polkadot/Substrate that makes applications more scalable using the plasma scaling solution

Acala Network – a stablecoin and DeFi platform

Laminar – Synthetic asset and margin trading platform. 

Nodle – provides infrastructure, software and access to the Internet of Things (IoT)

Kilt – blockchain protocol for issuing claim-based verifiable, revocable, and anonymous credentials in the Web 3.0.

Zerochain – adding zkSnarks to Substrate

ChainX – standardizes interchain asset exchanges and interoperability.

Conclusion

The Polkadot network has a strong open-source developer community that most resembles the Ethereum developer community that currently dominates the cryptocurrency space.   However because of the Polkadot team’s primary focus on low-level architecture, the Polkadot network hasn’t implemented parachains or auctioned off available parachain slots yet.  Furthermore,  the Polkadot team has left the development of the smart contract platforms and Ethereum compatibility to other organizations like Edgeware and Moonbeam.  That may cause application creators and projects to have to depend on smaller projects that have less resources to quickly build out an optimal smart contract platform. Application developers will also have to depend on an extra layer of governance and tokenomics from Edgeware and Moonbeam or have to undertake the complexity of building out a smart contract platform themselves.   Polkadot technology and architecture is complex, but is logically designed and should instill trust and confidence that the most serious attack vectors have been accounted for.  The focus of the Polkadot team on a very low-level framework provides extreme flexibility as a platform and establishes a sustainable, flexible and robust platform for future evolution in technology.  The only question now is if the Polkadot team and the Web3 foundation can build out or support the necessary infrastructure quickly enough to remain a leading destination for future blockchain projects.  

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