Polkadot (DOT) is an interoperable blockchain network connecting different chains, called parachains, so they can seamlessly transfer data and assets. As more parachains join the network, Polkadot becomes increasingly secure. Polkadot’s robust security and scaling characteristics make the platform perfect for high-value financial apps and the emerging Web3.
First thing’s first — is an interoperable blockchain network important? The answer is a resounding yes. Blockchains in their current form have limited capacity for exchanging data with one another, much less digital assets. For instance, a developer can’t build a decentralized finance app that interacts with Ethereum and Solana blockchains assets.
That’s a massive problem for blockchains generally because it keeps data and value fragmented across different chains. You might be thinking, but what about the cross-chain bridges? Sure, Ren Protocol bridges exist, but they provide synthetic representational assets while introducing unnecessary friction and security risks.
What if all networks — or at least many of them — shared a governance chain in common? Then you’re looking at the future of the decentralized web, and that’s what Polkadot is building.
Let’s dig in and discover what the Polkadot blockchain is, how Polkadot works, and everything to know about DOT tokens.
What is Polkadot?
As a multi-chain network, Polkadot envisions itself as the common ground between blockchains, (called parachains) operating according to their own rules and purposes. You can think of each parachain as a state within the Polkadot nation.
Why would a blockchain become a Polkadot parachain? A state has better security guarantees, economic ties, and privileges with other states as part of a nation. So it goes with parachains.
By joining up with Polkadot, parachains enjoy the network’s robust security, developer framework, and seamless connection to other blockchains. The freedom gained from receiving these qualities by default upon connecting to Polkadot enables parachains to squarely focus on developing specialized products, services, and applications.
The point of it all is to bring in the era of the decentralized web — something Polkadot likes to call Web3.
In Web3, gone are the days of monopolized internet infrastructure like Amazon Web Services, Google Cloud, and Cloudflare. Facebook, Google, and iCloud don’t own your data, and third parties can’t sell it without your permission.
Instead, your identity immutably persists on the blockchain — and you’re its keeper. Applications, services, and products are decentralized, uncensorable, and community governed. Decentralized finance, including banking, lending, and payment apps abound, as do decentralized games and social media.
That all sounds great, but getting Web3 off the ground is no small feat. At the core of building it out is the interplay between the Polkadot Relay Chain and parachains, so let’s start there.
Polkadot Relay Chain
The Polkadot Relay Chain is the network’s main chain where global blockchain features reside. By global, we mean features shared by every parachain connected to Polkadot. These features are security, network consensus,and interoperability for data and assets.
In other words, the Relay Chain organizes the entire network of parachains (or dots, if you will) but not much else. However, that isn’t to say the Relay Chain isn’t capable of much. Polkadot developers intentionally kept the Relay Chain minimal and flexible to delegate specific tasks and characteristics to parachains.
All Polkadot validators stake their DOT tokens to the Relay Chain. As more validator stake comes online, Polkadot’s security paradigm increases. And since security on the Polkadot network is considered a shared state between the Relay Chain and parachains, everyone benefits from higher stakes and increased security.
Data and crypto asset interoperability is another of the Relay Chain’s significant features. Think of the entire Polkadot assemblage as a computer. The Relay Chain is like the processor, whereas each parachain is a core.
Because of the shared state between the Relay Chain and parachains, specific computations are delegated amongst parachains capable of them. That allows developers to utilize Polkadot’s extensible architecture to produce powerful products and deploy them at scale.
You can quickly visualize parachains by drawing dots on a page then linking them with a few straight lines. The dots are parachains, and the lines are Polkadot’s shared state with the Relay Chain linking the entire network.
Remember, Polkadot is a blockchain of blockchains. In other words, the Relay Chain is the network’s main blockchain, but each dot, or parachain, is its own blockchain too. Some call Polkadot an internet of blockchains or a multi-chain platform, but in the end, they all refer to the network’s interoperability.
Each parachain sets out the rules for its governance, meaning the Relay Chain does not dictate how each parachain should govern itself. The only rule here is that each parachain must be validate-able by Relay Chain validators.
So, a parachain governs itself (for instance, via a governance token) while passing its data to collators who produce blocks validated by Relay Chain validators. As long as parachains work within these minimal requirements, they can implement their own token economics, specializations, and independent communities.
Parachains run in parallel to the relay chain and can therefore process transactions in parallel too. That’s an essential feature because it allows Polkadot to run virtually countless transactions per second to scale to the needs of (potentially) billions of people.
As we specified in the previous section about the Relay Chain, the advantages of building a blockchain on Polkadot or porting an existing one over are many. But just to refresh, the two main advantages are security and interoperability.
For example, perhaps your parachain hosts a decentralized version of Twitter. Another parachain runs a decentralized identity application you can seamlessly integrate for user login. You can roll in another parachain’s file storage capabilities to host your app’s data to go a step further.
The ability to pluck capabilities from other parachains (a feature called composability) is a massive appeal for developers considering Polkadot. OK, but how do you build a parachain? It sounds complicated but isn’t thanks to Polkadot’s Substrate framework.
Substrate is a Polkadot-native toolset that allows anyone to build a Polkadot-ready blockchain, in about 15 minutes. If you don’t believe that, check out this video of Polkadot Founder Gavin Wood booting up a laptop, building a blockchain in Substrate, and launching it in a testnet environment, all within 15 minutes.
Quickly building and launching a blockchain on Polkadot is made possible by Substrate’s WebAssembly standard. WebAssembly is developed and maintained by Microsoft, Google, Mozilla, and Apple, so the virtual environment it enables is world-class. Moreover, Polkadot plays nicely with Rust, Golang, and C++, helping to tap into a vast pool of developers already using these common languages.
To summarize, Substrate makes it easy for anyone to build a Polkadot-ready parachain using common coding languages. That accessibility is vital in bridging the divide between developer talent and blockchain specialization.
Alright, you’re up to speed on what a parachain is, along with how to build a parachain. But how do you connect a parachain to Polkadot? There are three ways, but the most straightforward is to win a parachain slot auction.
Parachain Slot Auctions
The deal is, nobody owns space on Polkadot. Polkadot considers network space a scarce resource and estimates there’s room enough for only 100 parachains. So, parachains lease a position on the network by securing and bonding a certain amount of DOT tokens.
How many DOT tokens? That’s a big unknown decided during a parachain slot auction. The way parachain slot auctions work is pretty simple in principle. Projects vying for a slot on the network place bids until a winner is decided.
The winning bid for a parachain slot is selected using a modified candle auction. A random point during the closing phase is selected as the end after the auction closes. The point of doing it this way is it encourages projects to bid early since, technically, the later you bid, the greater the odds that the auction’s endpoint is retroactively placed before your bid.
Once a project wins a parachain slot, it can remain there for a maximum two-year lease (bundled in 3 month periods). At the end of two years, the parachain slot auction process is repeated to remain on the network. That ensures only well-supported, high-quality parachains with community support remain on Polkadot.
Parachain Slots at Genesis
To raise the DOT tokens necessary to bid on a parachain slot, bidders can bid with privately raised funds or use Polkadot’s crowdloan function. Parachain crowdloans are available to any project registered for a parachain slot auction, and allow them to raise DOT tokens directly through the Polkadot community.
Unlike Ethereum ICOs, crowdloans are not about selling DOT tokens for another. Instead, during a crowdloan, you pledge an amount of DOT tokens which are then locked for the duration of the project’s parachain lease (if it wins the parachain slot). In return for bonding your DOT tokens, parachain applicants will likely distribute a token back to supporters.
If the project you support during a parachain slot auction wins, your bonded DOT tokens are locked in your wallet for the duration of the lease, so you can’t use them for staking. However, Polkadot DeFi projects like Acala are building tools for accessing the liquidity of your locked tokens, such as Liquid DOT (L-DOT) tokens.
Moreover, when the parachain’s lease ends, all DOT tokens bonded for the lease are released, meaning they unlock back to your wallet. So, DOT token bonding is more about signaling your support of a project by letting the network lock your tokens for a while, but you get them back in the end.
The most significant advantage of winning a parachain slot auction is every Relay Chain block includes transactions from your parachain. That means your parachain has constant access to the network. But not every project needs continuous access — for some, only sporadic or on-demand access is needed. For those projects, there are parathreads.
Parathreads vs. Parachains
A parathread is a scaled-down version of a parachain that doesn’t require its own slot to run. In other words, a parathread doesn’t need perpetual 24/7 throughput to Polkadot’s Relay Chain for sending cross-chain messages and assets.
Even though parathreads don’t get the same throughput to the Relay Chain as parachains do, they still share the same security and connectivity paradigm as parachains. That’s because parathreads exist on a shared parachain with other parathreads.
Polkadot likes to call parathreads pay as you go parachains. Instead of having automatic inclusion in every Relay Chain block, parathreads can pay a fee per block to be included, enabling them to only pay for what they use.
Starting Polkadot life as a parathread is a cheaper way for Substrate-built blockchains to merge with the ecosystem rather than splurging on an expensive parachain slot. Doing so also gives a project time to build a user base and become economically viable so that, in time, the project can upgrade from parathread —> parachain.
An oracle for a weather app, for instance, would do well as a parathread since it’s more like an application that’s occasionally woken up by request for data. On the other hand, an oracle for decentralized exchange markets will run without pause and is, therefore, better suited to a parachain slot.
To summarize, parathreads are for less volume-intensive apps that don’t require perpetual inclusion in every Relay Chain block, whereas parachains do.
We’ve explained Polkadot parachains and parathreads, which, taken together, represent only two out of three paths for connecting to Polkadot. The third is a Polkadot bridge.
Polkadot bridges enable the Polkadot Relay Chain to treat an external blockchain as though it were just another parachain or parathread. For instance, if a Polkadot < — > Ethereum bridge is established, the two blockchains, along with any parachain in the Polkadot ecosystem, can talk to Ethereum.
Bridge pallet: Any blockchain built using Substrate can bridge to Polkadot using this method. For example, Polkadot < — > Kusama.
Smart contracts: Blockchains that are not built using Substrate must write smart contracts on their side to initiate a bridge with Polkadot.
Non-smart contract: Blockchains without smart contracts (such as Bitcoin) can use XClaim-based bridges, such as PolkaBTC.
Therefore, even if a Substrate-built blockchain doesn’t choose to go the parachain/parathread route, it can still operate an independent yet connected blockchain via a bridge (option 1 above).
Polkadot (DOT) Token Explained
Polkadot (DOT) token is a utility token with many uses, putting it amongst crypto’s most well-designed assets. DOT tokens are at the center of the Polkadot ecosystem and figure into almost every process instead of being an afterthought.
Stake DOT Tokens
DOT staking is arguably the token’s most crucial function. Polkadot uses a nominated Proof of Stake consensus algorithm that requires validators to stake DOT tokens. So, for the Polkadot network to operate securely, DOT token staking is essential.
When a validator stakes their DOT tokens, they post them as collateral to guarantee their honesty while verifying transactions. If a validator is found to be dishonest, their DOT stake is slashed, meaning they permanently lose it all.
Anyone can stake DOT tokens using a Polkadot.js wallet or via Kraken exchange. Staking DOT tokens on Kraken is the easiest choice for beginners. But, if you’ve staked crypto before, the Polkadot.js wallet is straightforward enough.
Currently, DOT staking rewards average between 10% and 12% interest.
Using DOT for Polkadot Governance
Polkadot is a decentralized network governed by DOT token holders. If you own DOT tokens, you can participate in network-wide decision-making processes about the ecosystem’s future.
One problem with decentralized governance based on one token = one vote models is they favor wealthy players with large holdings. Polkadot has developed a novel solution for giving smaller stakeholders a larger say in voting through token locking. The longer you lock your tokens in correspondence with a vote, the more weight your vote is given.
If you decide to lock your tokens for the maximum 896-day duration, your vote has an extra 600% voting power (put another way, you vote with 600% of your token holdings). At the end of the lock-up period, your tokens are unlocked in your wallet.
DOT Token Bonding for Parachains
DOT tokens are the essential ingredient required for parachains to connect to Polkadot. As we detailed earlier in this Polkadot guide, parachain hopefuls need to win a parachain slot auction first, then lock DOT tokens to lease the slot.
Unlike an apartment lease where you pay money to a landlord, and it's gone, parachain bonding holds the DOT tokens for the duration of the lease then unlocks them when it’s over. If you participate in a parachain crowdloan (the Polkadot equivalent of an ICO), you’ll get your bonded DOT tokens back when the parachain’s lease expires.
DOT Token Metrics
Market cap = $28,551,909,614
Fully diluted = $30,779,134,406
Max supply = 1,104,403,772 DOT
Circulating supply = 1,023,463,166 DOT
Distribution type = ICO
About The Author:
The Shrimpy Team
The Shrimpy Team is comprised of highly experienced content writers who analyze and research the latest market trends, delivering content suitable for both beginner and veteran crypto investors.