What is cryptocurrency Polkadot (DOT) and how does it work?

What Is Polkadot (DOT)?

Polkadot is a scalable, secure, and decentralized multi-chain network for the next web, built using Substrate – a framework enabling the creation of compatible and purpose-built blockchains composed of custom or pre-built components.

Polkadot seeks to enable a fully decentralized web where users are in control, delivering an interoperability protocol that uses segments, or shards, to scale the network. It can connect private chains, public networks, and oracles – facilitating a new form of the web where independent blockchains can exchange data and transactions in a trustless way.

DOT is the native token currency of the Polkadot network, the smallest unit of which is called a Planck. It facilitates payments, network governance, staking, reward incentives, transaction fees, and other bonding processes – where tokens are locked up as part of connecting new chains to the Polkadot network or taking on another role in the ecosystem.

Unlike most other cryptocurrencies, DOT isn’t limited in supply. This is designed to incentivize the network and dynamically adjust according to staking participation rates of users, inflating up to 10% per annum.

How Does Polkadot Work?

Polkadot allows funds to be sent from one digital wallet to another, using a system of public and private key cryptography. The hash of the public key is the address you give out to receive funds and the private key acts like a password, authorizing and broadcasting transactions to the network. Approximately every six seconds, these pending transactions are confirmed in a block of transactions, and together the blocks form the Polkadot blockchain.

Polkadot offers a lot more than the sending and receiving of funds, of course. Polkadot is a sharded multi-chain network, coordinated by a central Relay Chain which allows it to process data and transactions on several chains in parallel, known as Parachains. Its sharded architecture breaks up the network into individual segments, or shards. This increases the throughput of transactions by allowing them to be processed in parallel on each shard rather than sequentially across the whole network like older generation blockchains.

Multiple Parachains can therefore plug into Polkadot, gaining security from that of the entire network, significantly improving scalability, interoperability, and cross-chain functionality, eliminating the congestion, high fees, and incompatibility of legacy blockchains. Polkadot manages upgrades automatically without hard forks, utilizing a governance system managed by DOT native token holders.

To coordinate the network, Polkadot uses a Nominated Proof-of-Stake (NPoS) consensus mechanism, rewarding users for locking up DOT tokens in a process known as staking, rather than the mining reward incentives offered in Proof-of-Work blockchains like Bitcoin.

Stakers interested in maintaining the entire network can run a Validator node, Collators on Polkadot maintain Parachain nodes, Fishermen nodes police the network, and DOT holders can stake tokens to participate as Nominators, choosing to back up to 16 Validators as trusted candidates with their stake. Validators then produce new blocks, validate Parachain blocks, and guarantee finality. We’ll discuss these roles in further detail later on.

Who Are the Founders of Polkadot?

A flagship project of the Web3 Foundation, Polkadot was co-founded by Gavin Wood, one of the original co-founders of Ethereum and former CTO of the Ethereum Foundation, where he helped develop Ethereum’s Solidity programming language. Wood is also CEO of Parity Technologies,the blockchain infrastructure firm responsible for developing Parity Ethereum is one of the most widely used Ethereum clients on the network. At the same time, Wood is actively working on both Polkadot and Substrate development.

Wood was joined in co-founding Polkadot by Thiel Fellow Robert Habermeier and Peter Czaban, also Technology Director of the Web3 Foundation.

The original whitepaper was released in 2016 and following a successful $145 million fundraise a year later, Polkadot finally went live with its initial mainnet in May 2020. During this first Proof-of-Authority (PoA) phase, governance of the network was managed by the Web3 Foundation while Validators began joining the network to participate in consensus. The second Nominated Proof of Stake (NPoS) phase was then launched in June once Polkadot had a large decentralized set of Validators on the network.

By this time, governance had transitioned to DOT token holders and was no longer under the control of a centralized entity, the first act of which allowed DOT exchange listings and wallet support. A redenomination of the DOT token then took place at a 1:100 ratio, coinciding with an impressive rise that saw DOT reach the top ten cryptocurrencies by market cap for the first time.

The mainnet launch built on the success of the alpha release of its sister network, called Kusama, in 2019, described as a canary network and live proving ground for Polkadot’s technology and functionality, including its native token KSM. Polkadot’s Parachain testnet, Rococo, was then introduced in 2020 in a significant step towards implementing Parachain functionality.

Polkadot is now moving into the next stage of core infrastructure development including the Parachains auction rollout, Parathreads, and cross-chain message passing. It will then become a fully functional Relay Chain that provides security through NPoS and coordinates the system as a whole, including Parachains. More on this later.

What Makes Polkadot Unique?

Polkadot is unique among leading blockchain solutions in providing scalability through sharding, the pooled security of a central relay chain and adaptable consensus, and the interoperability of a multi-chain network. The parallel processing achieved by executing transactions in separate shards dramatically increases throughput, and cross-chain functionality enables transfers of any type of data or asset between shards.

Polkadot also removes friction for projects, providing compatibility with existing platforms like Ethereum, without having to choose one isolated blockchain network over another, with clearly defined community governance and automatic upgrades.

As Polkadot is built with the Substrate blockchain framework, other projects using Substrate can deploy custom chains quickly and easily that run natively on Polkadot. This means that you can start working on a blockchain using the framework before you are ready to deploy on the network.

Rather than being the “Ethereum killer” it is sometimes labeled, the potential of Polkadot actually lies in complementing existing blockchains, rather than competing against them. This is something already recognized by over 350 projects in its ecosystem, building out smart contracts, decentralized finance (defi), oracles, digital collectibles (NFTs), gaming, and other solutions, notably including Chainlink and 0x Protocol.

Polkadot is not itself a smart contract platform. Instead, it provides the infrastructure for decentralized app (dApp) developers to integrate smart contracts across an interoperable network of wide-ranging functionality, witnessing the largest increase in active developers of major protocols as a result.

What Gives Polkadot Value?

Polkadot is currently one of the leading staking platforms, offering estimated rewards of over 13% per annum with over $20 billion in staked value. It has a market cap of over $30 billion, and over 50% of eligible tokens staked.

By staking DOT, users can offset the inflation rate compared to just holding and yield an annual return on their investment, in addition to any capital appreciation. DOT also provides participants with the ability to vote on network upgrades and future feature sets, proportional to the amount of DOT they are staking.

Polkadot’s scalability, interoperability, and cross-chain functionality have already attracted many projects including Acala’s cross-chain defi hub and stablecoin platform; Moonbeam’s smart contract Parachain allowing developers to use existing Ethereum dApps on Polkadot; Chainlink’s oracle technology, and Polkastarter’s decentralized exchange platform, in an expanding number of use cases being brought to the Polkadot ecosystem. This contributes to the value and utility of the network and the DOT tokens required to establish, secure or interact with Polkadot Parachains over time.

How Many Polkadot (DOT) Coins Are in Circulation?

DOT has a current supply of approximately 1 billion tokens following the community governance vote in 2020 to redenominate at a 1:100 ratio from the 10 million tokens at genesis, avoiding small decimals and making calculations easier.

Due to Polkadot’s inflationary monetary policy, the number of tokens is expected to increase 10% per annum, with Validator rewards depending on the staking rate and the remainder going to the network treasury alongside transaction fees to dynamically adjust the incentive to participate in staking.

Polkadot Blockchain

Polkadot’s architecture is coordinated by a central Relay Chain, connecting Parachains, Parathreads, and Bridges.

The Relay Chain is “layer 0” of Polkadot, handling consensus, security, and cross-chain interoperability. It manages a relatively small number of transaction types including governance mechanisms, Parachain slot auctions and leases, and the staking process. The Relay Chain has deliberately minimal functionality, coordinating the system as a whole as a central or base layer while delegating more specific features to the Parachains with different implementations.

Parachains are the specialized shards in Polkadot’s architecture that connect to the central Relay Chain hub. These shards allow transactions to be processed in parallel, solving scalability issues and handling most of the computation on the network. Parachains are usually blockchains optimized for specific use cases. They lease dedicated connection slots to the Relay Chain, which then validates the Parachains to maintain consensus across the ecosystem, sharing in the security of the whole network, and communicating with other Parachains using Cross-chain Message Parsing (XCMP).

Parathreads provide an alternative to Parachains, temporarily participating in the network on a block-by-block basis. This allows protocols to access Polkadot’s security without the time and cost commitment of leasing a dedicated slot. It helps further scale the network, allowing the scarce resource of a Parachain slot to be shared among competing Parathreads as required.

Bridges extend scalability and interoperability further still, enabling compatibility with the Polkadot ecosystem and allowing Parachains to trustlessly communicate with external blockchains.

Other Technical Data

The development of Polkadot is also decentralized, governed by a distributed community of DOT token holders, a Council, and a Technical Committee. To make changes to the network, the idea is to combine DOT token holders and the Council to administer network upgrade decisions.

Active DOT token holders can propose a referendum on changes to the network by bonding their tokens (depositing a minimum amount to a proposal) for a certain period and vote on the proposals of others. Proposals that gather the highest amount of bonding support will be selected first in the next voting cycle. Tokens are then unbonded once proposals have been brought to a vote.

The Council is an on-chain entity, elected by DOT token holders and responsible for both proposing changes and determining which changes are made. It also manages the development treasury from the network fees collected and provides representation for passive DOT holders in the ecosystem. Council member proposals require fewer votes for approval than those by ordinary DOT holders.

The Technical Committee is then composed of the development teams that are building the Polkadot network. Along with the Council, it can make special proposals in an emergency with fast-tracked enactment times and is elected by Council members.

Whether a proposal is made by the public DOT holders or the Council, it will have to go through a referendum to let all DOT holders, weighted by stake, make the final decision.

How Is the Polkadot Network Secured?

Polkadot uses NPoS (Nominated Proof-of-Stake) as its consensus mechanism, designed with the roles of Validators, Collators, Fishermen, and Nominators to maximize chain security.

Validators secure the network by staking DOT to run validating nodes and perform full verification of the Relay Chain. They also validate Parachains and participate in consensus with other Validators to come to agreement on the true shared state of the network, rejecting any invalid transactions. They add new blocks to the Relay Chain and, by extension, all Parachains sharing in its security, receiving incentive rewards in return.

The Polkadot network provides validation rewards equally to all Validators, regardless of their stake. Staking rewards are then distributed pro-rata to all stakers after the Validator payment is deducted, incentivizing a more equally-staked set of Validators.

Collators maintain full node history for the Relay Chain and a full node for their particular Parachain. Collators aggregate Parachain transactions to produce new Parachain block candidates for Validators to validate in the shared state of the Polkadot network. A Collator cannot continue building blocks on a Parachain until the block candidate they proposed to the Relay Chain Validators has been validated.

Collators are also key to the XCMP cross-chain messaging. By being full nodes of the Relay Chain, they are all aware of each other as peers. This makes it possible for them to send messages from Parachain A to Parachain B.

Fishermen are full nodes of Parachains, same as Collators, but perform a different policing role, monitoring the Collator process for invalid transactions and reporting them to Validators. If they are proven correct about a report, they are rewarded but risk losing their required role stake on the Relay Chain if they are wrong.

Finally, Nominators are active DOT token holders who don’t want to take on the cost and responsibility of other roles in the network but still help to secure the Relay Chain by staking DOT and selecting good Validators in return for a share of the staking rewards. This incentivizes increased participation in network security and careful Validator selection as if Validators misbehave (go offline, attack the network, or run modified software), both Validators and Nominators will get slashed, losing a percentage of their staked DOT.

How To Use Polkadot?

Polkadot offers various utility for different entities and individuals. It enables an alternative, decentralized payment method outside of the interference of intermediaries, providing more control over your money.

DOT can also be used for speculation and investment, or as an alternative to expensive and slow international transfers. It can also contribute to an alternative financial system for the hundreds of millions of people that have access to smartphones but not a bank account, we also introducing a new opportunity for income generation or supplementation through DOT staking.

Polkadot provides an interoperable, scalable, secure, and decentralized platform that eliminates the bottlenecks of legacy blockchains and their high transaction fees, opening up use cases for projects working on defi, oracles, digital collectibles, gaming, IoT, privacy, gaming, cross-chain solutions, and more.

How To Choose a Polkadot Wallet?

The type of DOT wallet you choose will likely depend on what you want to use it for and how much you need to store.

Hardware wallets or cold wallets provide the most secure option with offline storage and backup. Ledger is currently the only hardware wallet option for DOT, used in conjunction with the official Polkadot-JS web wallet. Hardware wallets can involve a bit more of a learning curve and are a more expensive option, however. As such, they may be better suited to storing larger amounts of DOT for more experienced users.

Software wallets provide another option and are free and easy to use. They are available to download as smartphone or desktop apps and can be custodial or non-custodial. With custodial wallets, the private keys are managed and backed up on your behalf by the service provider. Non-custodial wallets make use of secure elements on your device to store the private keys. While convenient, they are seen as less secure than hardware wallets and may be better suited to smaller amounts of DOT or more novice users.

Online wallets or web wallets are also free and easy to use, accessible from multiple devices using a web browser. They are considered hot wallets and can be less secure than hardware or software alternatives, however. As you are likely trusting the platform to manage your DOT, you should select a reputable service with a track record in security and custody. As such, they are most suited for holding smaller amounts or for more experienced frequent traders.

Polkadot-JS is the official Polkadot web wallet, which works from within your internet browser and allows you to send, receive, and store DOT and Polkadot ecosystem tokens, as well as participate in staking and voting. It is probably better suited to more advanced users, however.

Polkadot Staking

You may have a DOT account and want to earn DOT rewards by staking. You could do so as Validator, though that requires a node running 24/7, meaning it is only suitable for more advanced users with the technical knowledge and hardware requirements to maintain one. Otherwise, you can still earn DOT by nominating one or more Validators.

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By doing so, you become a Nominator for the Validator(s) of your choice. You must pick Validators carefully as if they do not behave properly, they will get slashed and you will lose some staked DOT as well. However, if they do follow the rules of the network, then you can share pro-rata in the staking rewards that they generate.

For the duration that your DOTs are staked by nominating a Validator, they are bonded (locked up). You can receive new DOTs in your account but you cannot stake as a Validator or transfer DOT away from your account. You can un-nominate at any time to stop staking your funds. However, there is an unbonding period of 28 days on Polkadot before bonded funds can be transferred after issuing an unbonding transaction.

Stakers can bond DOT tokens and nominate a Validator using the Polkadot-JS user interface, or the Command-Line Interface, both of which may be better suited to more advanced users. Alternatively, stakers may find it more convenient to use an exchange platform that will manage the staking process for you, though the rewards may be lower than nominating directly.

Polkadot ATMs

Crypto ATMs provide a convenient and familiar fiat kiosk for users to buy and sell crypto using cash or debit cards and an additional service offering for merchants hosting them at their locations. Some machines are unidirectional and only offer purchases. Others operate bidirectionally, enabling the selling of crypto too. As Polkadot is part of a new generation of digital assets, not all crypto ATMs will offer DOT services at present, though will likely add it as a priority.

Customers can use existing wallets or set one up using the ATM. Whether you are buying or selling DOT, just make sure you get a receipt from the machine in case of any issues.

While they can be an expensive option in terms of fees compared to online counterparts, with approximately 14,000 crypto ATMs worldwide and counting, competition and continued adoption should bring fees down over time.

The Bottom Line

Polkadot’s revolutionary design introduces a multi-chain network, solving the scalability issues and high fees that have hampered earlier generations of blockchain technology without sacrificing security or decentralization.

Its next-generation blockchain is capable of delivering a fully decentralized web, controlled by its user base of incentivized stakeholders, NPoS consensus, and on-chain governance. It connects private chains, public networks, oracles, and applications, igniting new use cases using parallel processing, pooled security, compatible frameworks, cross-chain messaging, and bridged connectivity.

Far from being the “next Ethereum,” an “Ethereum killer,” or competitor to other networks, Polkadot dismisses the idea that there should only be one blockchain. It delivers a new era of cross-chain interoperability, complementing the wider crypto ecosystem using a hub and spoke style architecture that increases the utility of web3, rather than the series of independent protocols that came before, well demonstrated by the growing number of projects and developers building out the Polkadot ecosystem.

Get started on your Polkadot journey today.

Polkadot FAQ

How To Buy Polkadot (DOT)?

There are three main methods you can use to buy DOT:

Crypto exchanges like Kriptomat provide a platform where you can register and create an account, add your payment method, and buy Polkadot.

Crypto ATMs offer another option where you simply select an ATM at a convenient location, add your wallet information or set one up, verify your identity, and buy DOT.

Alternatively, you can take advantage of local crypto sellers or online peer-to-peer services to exchange cash or bank transfers for DOT.

How To Sell Polkadot (DOT)?

Just as there are three main methods to buy DOT, the same options are available to sell DOT as well: using an online exchange platform like Kriptomat, crypto ATMs, or via local crypto buyers or online peer-to-peer services.

Polkadot (DOT) Price

Several factors influence the Polkadot price, including exchange inflows and outflows, sentiment, technical and fundamental developments, the news cycle, and the general economic environment.

Ultimately, the price is decided at any given moment by the cumulative buying and selling of millions of participants worldwide. You can keep up to date on the latest price action using crypto exchanges like Kriptomat or one of the many different cryptocurrency tracking services.

The current Polkadot price is EUR.
The 24-hour trading volume of Polkadot is EUR. Polkadot is currently ranked of all cryptocurrencies by total market capitalization, with a market cap of EUR. It has a circulating supply of Polkadot.

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