Polkadot

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21 Aug, 2024

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Polkadot refers to a blockchain platform that supports multiple blockchain projects. It aims to promote a multi-chain network that is heterogeneous. This network protocol allows for the transfer of arbitrary data besides tokens. Moreover, Its multi-chain application environment for cross-chain computation and registries.

The Polkadot ecosystem is trying to resolve different limitations currently held by blockchains, for example, security and scalability. This blockchain attracts a lot of interest in the cryptocurrency world for its native currency, DOT. It is one of the most successful projects that aim to enhance the fundamental technology powering decentralized applications or dApps.

Polkadot Definition

Polkadot is a protocol that connects various blockchains and allows them to communicate with each other. It is trying to address the limitations related to scalability and security that multiple blockchains hold.
The Polkadot blockchain utilizes NPoS technology, while Cardano and Ethereum use the PoS and PoW protocols, respectively. Another key difference is that Polkadot can handle more transactions per second than the other two networks.
The four roles played by participants in the Polkadot network are validators, fishermen, collators, and nominators.
A key advantage of this blockchain platform is that it can offer more control and higher flexibility.

Polkadot Explained

Polkadot is a blockchain having a ‘relay chain’ or core network where different blockchains communicate and connect with one another. Its purpose is to establish an internet comprising blockchains that are interoperable for a decentralized web. Besides being a decentralized protocol, Polkadot is a token that one can buy and sell on cryptocurrency exchanges.

The protocol design enables unrelated blockchains, for example, Bitcoin and Ethereum, to communicate securely without an intermediary. The ‘bridges’ or connecting layers within the Pokadot blockchain structure allow for the transfer of data and value between the different blockchains. Also, one must note that its design allows the blockchain to be scalable and quick through the use of various ‘parachains’ or parallel blockchains, which take significant processing demand from the core blockchain.

Besides the relay chain, bridges, and parachains, a vital component of the Polkadot network is the parathread technology. A parathread is semi-autonomous and is utilized for applications that are not very resource-intensive and do not need a constant link with the core network.

DOT serves a couple of key functions within the network. They are as follows:

It is a governance token, enabling the holders to influence the protocol’s future.
This cryptocurrency is utilized for crypto staking, which refers to the way in which the network verifies each transaction and issues new tokens.

Staking On Polkadot

This network uses the nominated proof of stake or NPoS. This operating protocol enables the community members staking their Polkadot tokens to nominate different community members to help operate the blockchain.

The community includes different participants playing these four roles in operating this blockchain.

Nominators: These are DOT holders who stake the currency and take part in the voting procedure to choose new validators.
Fishermen: Fishermen are those monitoring the network to spot bad behavior.
Collators: Collators are the community members accumulating transactions from different sources and compiling them before validators do the processing.
Validators: They process as well as record transactions for the purpose of adding new blocks to the core network.

How To Mine?

The mining process involves these steps:

Acquire a sufficient quantity of DOT tokens.
Select a wallet.
Choose a validator.
Stake the DOT tokens. Remember, the more tokens individuals stake, the higher their rewards will be.
Track the rewards.

How To Trade?

One can follow these steps to become a Polkadot investor:

#1 - Select A Cryptocurrency Exchange

The first step involves selecting any cryptocurrency exchange. When choosing a platform, one must consider the transaction fees, as all exchanges do not assess the fees in the same manner.

#2 - Place The Buy Order

In the next step, individuals must decide the quantity of DOT they wish to purchase. Once they do that, they must place a buy order via the exchange. Note that one can utilize the exchange’s mobile application or website to enter the order preferences.

#3 - Store The Cryptocurrency Securely

All major cryptocurrency exchanges enable Polkadot investors to store the tokens securely. Also, people can transfer the tokens to their hardware or software wallet.

Examples

Let us look at a few Polkadot examples to understand the concept better.

Example #1

Suppose David was optimistic regarding the Polkadot blockchain. So, he invested a significant portion of his savings in DOT cryptocurrency via a cryptocurrency exchange in July 2021, when the token was trading around the $11 mark. In November 2021, he sold the 100 tokens he had purchased at $52, making financial gains worth $41,000.

Example #2

In July 2023, Binance Futures discontinued the support for DOT tokens as a margin asset in the Multi-Asset Mode. As a result, traders cannot trade these tokens utilizing borrowed funds. Following the announcement, holders of DOT cryptocurrency have been making adjustments to their portfolios to ensure they comply with the new update. After Binance made the announcement, DOT token prices decreased to $5.02 from $5.31. Moreover, trading volume dropped 11%.

Advantages And Disadvantages

Let us look at the benefits and limitations of this network.

Advantages

The blockchain offers better flexibility and control.
It minimizes the risk of unauthorized validators and miners.
The network offers better leverage and high security.
It has an experienced leadership team.
Another key benefit of this network is blockchain ‘sharding’, which is a process that involves disintegrating a blockchain into smaller bits.

Disadvantages

The DOT token has various competitors.
Parachains within the network are limited in terms of numbers.
Another noteworthy disadvantage of the blockchain is its relatively new technology and its overall riskiness.

Polkadot vs Cosmos vs Polygon

While individuals might be familiar with Polkadot, Polygon, and Cosmos cryptocurrencies, they might not know how they differ. Not having an idea regarding their distinct characteristics may cause individuals to make incorrect investment decisions, which, in turn, can impact their chances of achieving their financial goals. So, let us look at their critical differences.

Polkadot	Cosmos	Polygon
It is a blockchain platform enabling different blockchains to communicate with each other.	This blockchain facilitates communication between distributed ledgers. However, it does not depend on a centralized ledger.	It is a stack of protocols which aims to resolve the scalability problems concerning Ethereum.
It primarily utilizes the Rust programming language.	This platform mostly uses the C# programming language.	Polygon primarily utilizes the Solidity programming language.

Polkadot vs Ethereum vs Cardano

Ethereum, Cardano, and Polkadot can be confusing for anyone new to the world of cryptocurrency. That said, knowing the key differences between them can help one steer clear of confusion. Hence, the table below shows some of their noteworthy distinct characteristics.

Polkadot	Ethereum	Cardano
It offers higher transaction speeds than Cardano and Ethereum. It can handle around 1000 transactions per second.	Ethereum can process around 30 transactions every second.	Cardano can handle around 250 transactions each second.
It uses NPoS technology.	Ethereum utilizes a PoW or Proof-of-Work protocol.	It uses a PoS or Proof-of-Stake protocol.

Frequently Asked Questions (FAQs)

1. Is Polkadot a good investment?

Polkadot could be a decent investment considering its loyal community network, roadmap, and global business applications. That said, individuals must remember that cryptocurrencies are associated with very high risk. Hence, they must assess their risk appetite and identify their financial goals before allocating their savings to DOT tokens.

2. Is Polkadot EVM compatible?

No, it is not EVM or Ethereum Virtual Machine compatible. However, it has the ability to connect with the Ethereum users via the Ethereum bridge. This bridge refers to several smart contracts, enabling the transfer of assets to Ethereum from Polkadot and vice versa.

3. When was the Polkadot launched?

It was launched on May 26, 2020.

4. Why Polkadot is falling?

The price of DOT tokens is falling owing to the falling because of the following reasons:
- Cryptocurrencies’ overall weakness
- High-interest rates
Lastly, the fall of some key players in the cryptocurrency industry has caused the price of DOT to drop. Also, the U.S. Securities and Exchange Commission sued Coinbase and Binance recently for the sale of unregistered tokens. This further impacted DOT’s price.