This article is sponsored content and should not be considered as financial or investment advice. The opinions expressed in this article are those of the contributor/author and do not necessarily reflect the views of Binance Academy.
TL;DR
Polkadot positions itself as the blockspace ecosystem for boundless innovation
It is capable of connecting many specialized blockchains and applications into a single network, enabling secure communication and transactions across chains.
With a strong focus on building the most viable foundation for Web3 - and originally launched by Web3 Foundation - Polkadot aims to power the movement for a better web.
While blockchain technology has been around since the inception of Bitcoin and has proven to be a groundbreaking technology, there have been many limitations up until now. For one, individual blockchains were developed in isolation and were not designed to communicate with each other. In a world with many different blockchains, each with different strengths and use cases, the need to securely communicate between chains becomes paramount.
Developers have tried to "bridge" blockchains in the past. Doing so allows chain A to work with chain B and vice versa. Connecting hundreds or thousands of blockchains at the same time remains a pressing issue. Nevertheless, Polkadot has developed a solution to this problem and currently hosts a connected ecosystem of many specialized blockchains and apps that can securely communicate across chains.
What is Polkadot?
Described as the blockspace ecosystem for boundless innovation, Polkadot provides everything Web3 innovators need to build applications that transcend the limitations of any one blockchain network. It’s a concept initially envisioned by Polkadot founder Dr. Gavin Wood, who also co-founded Ethereum and coined the term ‘Web 3.0’ in 2014. Originally developed and launched by Parity Technologies and Web3 Foundation, Polkadot’s ongoing development and governance is fully decentralized, managed as a DAO (decentralized autonomous organization) by the network’s token holders through a sophisticated on-chain governance system.
How Does the Polkadot Chain Work?
Polkadot functions through four integral elements which lay the foundation for its innovative approach to blockchain interoperability and scalability.
Proof-of-Stake
Polkadot is a proof-of-stake (PoS) network designed to provide high-quality, flexible, secure, composable, cost-effective blockspace. Blockspace is the core product that blockchains offer the world. Technically, it’s the ability to execute and finalize operations, such as transactions, within the ‘space’ of a block. However, not all blockspace is created equal, as individual chains make tradeoffs that can affect qualities like security, flexibility, and cost (e.g. gas fees).
Blockspace ecosystem
To address these limitations, Polkadot creates a ‘blockspace ecosystem’, a connected network of different blockchains, each with their own blockspace offering that developers can leverage to build applications. Thus, Polkadot functions as a marketplace for blockspace, with individual blockchains in the network serving as blockspace producers. You can think of the way Polkadot allocates blockspace as similar to how cloud computing providers like AWS allocate server space in Web2.
Composability
Composability is a term used to describe how developers on Polkadot can create applications using blockspace from various chains at the same time, leveraging benefits and specialized functionality of multiple blockchains. Related to the concept of interoperability, this means that applications on Polkadot can span multiple blockchains, and are not limited by the boundaries that exist between individual networks.
For this to work properly, these blockchains need to be protected by a system of shared security. Without it, networks of connected blockchains are only as secure as their weakest link: if a smaller, less secure blockchain is attacked, it can create a domino effect that compromises other chains in the network.
Polkadot accomplishes shared security with a shared set of validators that verify transactions across the entire ecosystem. This means every chain in the network is secured by the same high-level of economic stake that secures Polkadot.
Parachains
Individual blockchains on Polkadot are called parachains (parallel blockchains), connected together by another blockchain called the Relay Chain. Parachains and the Relay Chain can easily and securely exchange information at all times. Parachains are similar to individual shards in the planned implementation of ETH 2.0, the difference being that every ETH shard would be exactly the same, while parachains can all have their own specialized design.
Anyone can create their custom parachain with Substrate, a modular development framework enabling developers to mix and match pre-built blockchain components like Lego blocks. This means they can incorporate exactly the right functionality for their use case and get their product to market more quickly. Once the custom chain is connected to Polkadot, it becomes interoperable with all other parachains.
What Makes Polkadot Unique?
Polkadot provides several benefits to Web3 innovators, including security, flexibility, efficiency, cost-effectiveness, and fast time-to-market. Polkadot also provides a high degree of scalability, designed to connect hundreds of specialized blockchains and thousands or even millions of apps, eliminating issues of slow transactions and high gas prices when network usage increases.
Pro app development
App developers can choose from a wide range of tools and platforms to leverage the optimal technology for their use case. Thanks to Polkadot's cross-chain composability, they can integrate technologies and reach users across multiple blockchain networks, taking advantage of opportunities no matter where they exist in the Polkadot ecosystem. Polkadot’s composability goes beyond just cross-chain token and data transfers: it enables app developers to build fully-functional programs that exist across multiple chains.
For chain development
Those who need even more flexibility, performance, and scalability can build their own custom parachain on Polkadot and even create their own full-scale ecosystem that others can build on. By using Substrate, parachain builders can incorporate exactly the right functionality for their use case and get their product to market more quickly.
Parachain teams have complete freedom over their chain's economics, so they can customize their fee structure and create their own token model. This flexibility eliminates high, unpredictable gas fees, and can even remove the need for users to hold crypto or understand blockchains to use an app. It means predictable costs for app developers and low fees for end users.
Use cases, upgradeability, and governance
Because parachains are specialized, Polkadot supports a wide range of Web3 use cases, from DeFi to gaming, NFTs, social media, music, identity, and many more. Polkadot has custom options for early stage startups, established enterprises, and anyone in between.
Polkadot also makes it easy to upgrade blockchains, which has been difficult and slow on previous networks, and created hard forks that can splinter communities. Instead, each chain can be seamlessly upgraded in a frictionless manner. This makes running a blockchain similar to normal software, as developers are free to add new features, fix bugs, and evolve their product as they see fit. Networks can stay future proof and incorporate new technologies rather than fading into obscurity when the next big thing comes around.
Just as Polkadot itself uses an on-chain governance system, each parachain can have its own custom governance system to manage the upgrade process. This benefits adoption as transparent governance procedures are often needed for larger institutions and enterprises to adopt blockchain technology.
The DOT token explained
Polkadot has its own native token called DOT, used for securing the network with staking, to participate in governance, and by parachain teams when connecting the network.
Staking System
Polkadot’s staking system uses DOT to incentivize token holders and validators to help secure the network and follow the rules. Staking rewards are paid out in DOT for securing the network, while malicious actors are penalized with a loss of their stake. Stakers on Polkadot are called ‘nominators’, who participate by ‘nominating’ good validators or joining a native staking pool for a more passive experience.
Governance
DOT holders also use their tokens to vote via Polkadot’s on-chain governance system, including voting on Treasury proposals to support projects that benefit the network. The more tokens that support a particular proposal, the more likely that proposal will pass. Governance decisions on Polkadot are enacted in a decentralized and autonomous way, without the need for any person or group to implement the decision.
Connecting Parachains
The native token, DOT, is also used to connect parachains to the network. Teams launching a parachain ‘bond’ DOT tokens to the network to connect their chain for up to two years, after which the bonded DOT is returned to them. Additional methods for connecting parachains, including a pay-as-you go model, are currently under development and expected to launch soon.
Closing thoughts
There are many things that make Polkadot attractive to developers, small businesses, large corporations, and individual token holders. Polkadot’s parachains began launching in late 2021 and the ecosystem has been steadily growing since then, with hundreds of applications currently live and several significant enterprises joining the network.
However, Polkadot remains a very young ecosystem and cross-chain applications are still a relatively new innovation. While the network boasts hundreds of projects both live and in-development, it may take some time to see Polkadot’s ‘killer apps’ reach the masses and demonstrate Polkadot's goal of providing the most viable foundation to reach Web3's full potential.