DOT Tokenomics Explained

Blockchain economies rely on native tokens to incentivize ecosystem participants and fuel growth. The economics behind the token, often referred to as tokenomics, can determine an ecosystem’s success or failure.

Polkadot’s native token, DOT, is the driving force behind transactions, DeFi, parachain launches, and governance of its ecosystem.

DOT currently boasts a $6.5 billion valuation, making it the 20th largest cryptocurrency by market capitalization. The DOT token reached an all-time high of $53 per token in November 2021, but has since retraced alongside the rest of the altcoin market. As of Oct 24, DOT is changing hands for $4.23, up 4% over the last two weeks.

Users can acquire DOT via both centralized and decentralized exchanges, and it can be staked natively through supported wallets such as Talisman, Nova, or Subwallet.

DOT Use Cases

The DOT token is the lifeblood of the Polkadot ecosystem, and is needed for all the primary functions of the network.

With Polkadot’s new agile coretime, which is part of the Polkadot 2.0 upgrade, developers can now simply purchase coretime however best suits their needs. This can be done through bulk purchases and monthly coretime renewals, or “on-demand” for lesser needs.

There is also the implementation of a secondary marketplace for coretime, where developers can sell their excess coretime to others, and the marketplace is powered entirely by DOT. The ability to purchase coretime creates a direct link between the demand for DOT, and the demand for development on the network.

The agile coretime method is a more efficient alternative to the parachain auction method from Polkadot 1.0, and theoretically it drives more value accrual to DOT.

DOT also acts as the native token for transaction fees on Polkadot and all of its parachains. This means that transactions on the parachains often cost the users DOT token, perpetuating the flywheel of demand for the token through transaction heavy tasks like DeFi, buying or selling NFTs, or simply sending DOT or stablecoins to another wallet.

Despite the importance of transaction fees in DOT’s demand curve, the fees are small and approachable to users when compared to other layer-1’s such as Ethereum or Bitcoin. On the Asset Hub parachain, where a majority of Polkadot activity will be moving in the future, transaction costs are below $0.01.

Inflation and Staking

To maintain equilibrium, the current inflation model is designed to incentivize network participants to stake DOT when the staking rate is less than the “ideal staking rate” and disincentivize staking when it is greater than the “ideal staking rate.”

DOT Inflation Model

This balance between staking rewards, treasury rewards, and an ideal staking rate is what creates the current DOT inflation model.

This model is set to change in the near term after the passing of Polkadot Referendum 1139, which will see the inflation rate pivot to an 8% inflation rate with 15% of that being sent to the Treasury in order to provide a fixed flow-rate.