What is Polkadot?

Polkadot is a multi-blockchain network, consisting of a base layer which secures many other sovereign chains. This scalable and customizable architecture aims to provide a shared foundation for the most transformative apps of web3.

The base layer, or the "heart" of the ecosystem, is known as the Relay chain, and is responsible for the network’s shared security, consensus and cross-chain interoperability. DOT is the native cryptocurrency of the Relay chain.

Polkadot sits at a market capitalization (market cap) of $8.1 billion making it the 17th largest token by market cap per CoinGecko, as of August, 2024.

The sovereign blockchains secured by the Relay chain are called Parachains and are like "mini-blockchains." They can optimize their design and functionality according to specific use cases.

Brief History

The network was created by Ethereum Co-Founder Gavin Wood and Peter Czaban. The Polkadot and its whitepaper was published in 2016. The Polkadot ICO took place in 2017, raising $145 million, however its token DOT did not begin trading until August 2020.

In 2017, Wood and Czaban established the Web3 Foundation, a non-profit entity tasked with supporting Polkadot ecosystem and development.

Polkadot's Kusama testnet launched in 2019, and continues running today. Its mainnet launched in 2020, and parachains went live one year later.

In the next two years, the Polkadot team released a messaging format to standardize communication between parachains, called XCM, and OpenGov, an on-chain governance system. With that, by 2023, Polkadot had officially completed the release of all the features outlined in its whitepaper.

Relay Chain Deep Dive

Polkadot’s ecosystem consists of its Relay chain, and the surrounding parachains. The Relay chain is the central hub of the Polkadot ecosystem. It functions as a “layer zero” network, and is responsible for providing security and interoperability to the parachains.

In its current form, the Relay chain’s main responsibility is to anchor the ecosystem. It does not have smart contract capabilities, and runs on a Nominated Proof-of-Stake consensus mechanism (NPoS) to confirm transactions and secure the network.

Nominated Proof of Stake (NPoS) is a blockchain consensus mechanism that has two key roles: validators and nominators. Validators are responsible for producing and verifying blocks, while nominators select and stake their tokens on trusted validators, effectively voting for them.

The system selects validators based on the amount of stake they receive from nominators, aiming to distribute power evenly and prevent centralization. Both validators and nominators receive rewards, incentivizing them to participate honestly.

Polkadot's Relay chain is built with Substrate, a framework for building blockchains which is also used to build parachains. Polkadot’s state machine is compiled to WebAssembly (Wasm), and its runtime environment is being coded in Rust, C++, and Golang.

Parachains Deep Dive

Parachains are customizable L1s that exist on top of Polkadot’s Relay chain. They have their own tokens, fee structures, governance and economic ecosystems. Some can have smart contracts, they can be public or private, they can enable NFTs, DeFi, or serve as bridges to other networks, like Ethereum and Bitcoin.

Parachains can act autonomously based on the will of their communities. "This opens the door to new decentralized funding models, from project funding to decentralized sovereign wealth funds and even cross-chain mergers and acquisitions," according to the Polkadot website.

Each chain is fully interoperable with the other parachains. This architecture is designed so that the independent networks can work together and collaborate with each other based on their specific niches, structures, and dApps in a decentralized manner.

Interactions on parachains are processed in parallel, "enabling highly scalable systems," according to the Polkadot website.

Each parachain gets to share the security of the entire Polkadot ecosystem thanks to the Relay chain.

Polkadot Ecosystem

The ecosystem can support a maximum of 100 parachains at once. Some of the more notable parachains include Hydration, Moonbeam, Astar and Centrifuge.

Many of these parachains are designed for their own specific niche. Mantra for example is focused on privacy, whereas Centrifuge is focused on real world assets while Acala is acts as a DeFi hub on Polkadot.

The Polkadot ecosystem activity increased in Q2 2024, with the most notable gain made on "extrinsics," which are akin to on-chain transactions.

Extrinsics rose by almost 47% QoQ, as parachain addresses declines, which suggests users were more active in Q2 2024, according to a Messari report. The Frequency parachain, which focuses on SocialFi, had the biggest increase in extrinsics among parachains.

The number of referenda reached an all-time high on OpenGov and the Polkadot Treasury seeing record usage in Q2 2024, with nearly 11 million DOT used for proposals, according to Messari.

Agile Coretime Replaces Parachain Auctions

In 2023, Wood proposed overhauling the previous method the Polkadot community had for distributing parachains among projects, which was based on an auction. Project with winning bids were able to then lease a chain.

The new model introduces Agile Coretime, which is a marketplace for distributing time on parachains. Chunks of Coretime are represented by NFTs in the XCM messaging language. Like any pother NFTs, they can be traded within the Polkadot ecosystem. The result should be a more flexible system, which doesn't require projects to lock up DOT tokens in auctions.

The JAM Gray Paper

The Agile Coretime model is part of a larger change, called the Join-Accumlate Machine (JAM), which is at the core of Polkadot 2.0. The Gray Paper is Gavin Wood’s iteration of a whitepaper for JAM, which is an upgrade that will allow for the permissionless deployment of dApps as rollups on its JAM chain in lieu of the Relay chain.

The JAM chain will be introduced in a singular upgrade, and once implemented it will operate without any traditional transactions. After JAM replaces the Relay chain, the layer will become transactionless, meaning that all actions on the layer are to be run permissionlessly and without interference from a centralized party.

There is no current timeline on the release of JAM, and the upgrade is still in the research and development phase.