Certain “layer 1” crypto platforms have been receiving plenty of attention lately. And price action, too (okay, not Cardano just yet). Polkadot, however, despite steady growth since July, has been somewhat overshadowed in recent months. That’s about to change.
There’s a lot to like about the rivals of OG smart-contract platform Ethereum (ETH). The likes of Solana (SOL), Avalanche (AVAX), Fantom (FTM), Cardano (ADA), Terra (LUNA), Elrond (EGLD), Cosmos (ATOM) and Algorand (ALGO), just to name a select bunch, are all building out growing ecosystems of innovative, decentralised projects and strong and passionate communities.
Polkadot (DOT) is also very much in that boat. In fact, it’s arguably second only to Ethereum for the breadth and quality of its network of developing projects and dApps (decentralised applications).
The current question is, with its highly anticipated parachain-slot auctions officially kicking off on November 11, are we about to see another “Polkadot season”? In other words, a period of project-pumping froth and FOMO, the likes of when Polkadot first hit the crypto scene in mid-late 2020?
— polkadot-Rick (@rickybo69909532) October 28, 2021
Well, after several months of comparatively low-key engagement since those initial heady days of DOT-ecosystem excitement, buzz is building around the project once again, and you can expect that to kick further into gear very shortly.
But before we take a closer look at the parachain auctions, what they actually are, and which of the contenders look the strongest, let’s broadly cover some general bases.
What is Polkadot?
Polkadot describes itself as a “heterogeneous multichain”. Catchy, huh?
Essentially, it’s one of crypto’s top “layer 1” projects, which, in a general sense, is a base-layer blockchain on which secondary decentralised applications (dApps) can be built on, plug into and operate on top of.
What makes Polkadot slightly different, however, is that the Polkadot’s base chain – called the Relay Chain – can connect and secure other layer-1 blockchains in its ecosystem (called parachains) with pooled security and interoperability.
This means that the Relay Chain itself is not actually smart-contract compatible – it only supports transactions related to DOT transfers, staking, governance and parachain slot auctions (more on those further below).
The parachains (the separate blockchains that plug into the Relay chain) ARE smart-contract compatible, however, and are the blockchains that will host all of Polkadot’s dApps – such as stablecoins and decentralised exchanges, for example.
Okay, think I got it… so it’s like Bitcoin?
Insofar as it’s a cryptocurrency and a blockchain, yes. But otherwise, no, not at all – it’s more like Ethereum, in that its technology (built with a bespoke framework called Substrate), uses a proof-of-stake (PoS) consensus mechanism to secure its network. And that’s unlike Bitcoin, which uses proof of work (PoW), relying on a humungous network of miners and nodes to maintain the integrity of its secure and decentralised system.
In fact, Polkadot’s PoS is actually called “nominated PoS”. In a nutshell, that means DOT holders nominate network-securing validators by delegating their DOT to them, for which the holders can earn ongoing passive staking rewards.
The current annual yield on Polkadot for staking is said to be about 10 per cent, minus the validators’ commission rate, which varies from validator to validator. But generally, we’re talking about 9-10 per cent – it’s not too shabby.
Polkadot validators secure the Relay Chain, which can apparently process over 1,000 transactions per second – pretty impressive, although still nowhere near as speedy as the likes of Solana (50,000 tps) and Avalanche (4,500 tps) purport to be capable of achieving.
Transactions per second and high throughput, while an important factor, is not the only peg for these projects to hang their multi-coloured propellor hat on. Ethereum’s first-mover advantage and network effect, for instance, keep it firmly in the lead in terms of market capitalisation value and overall usage.
The power of a large and faithful network is crucial in this game, but fast, super efficient, secure, scaleable and interoperable technology are the foundations that every one of these layer 1 projects need to develop if they want sustained success.
Who built Polkadot?
Polkadot’s founder and figurehead is a bloke called Dr Gavin Wood. Along with Vitalik Buterin, Charles Hoskinson (Cardano’s founder) and other fellow brainiacs, Wood was a co-founder of Ethereum.
He also happens to have one of the most circular, bowlish haircuts in the crypto industry, judging by this photo anyway. And that’s a green flag. You don’t want your genius computer-scientist crypto founder running around with styled, Fox Sports-presenter hair, do you?
Wood served as the Ethereum Foundation’s CTO until late 2015, then pulled up stumps, creating Polkadot in 2016 with Parity Technologies, based in the UK. The project’s development is coordinated by a separate entity, called the Web3 Foundation, which is a not-for-profit organisation based in Switzerland.
The Web3 Foundation hosted the first Polkadot ICO in 2017, which raised US$145 million in ETH. After losing more than US$90 million of that due to a smart-contract bug in the wallet, the Web3 Foundation hosted another ICO in 2019, which raised roughly US$100 million more, recouping the horrendous loss.
Polkadot’s mainnet then went live in mid 2020, with DOT available for trading in August of that year. Industry excitement ensued, largely due to the traction the blockchain was gaining with developers building projects in the Polkadot ecosystem.
In fact, rather than the DOT token itself, it was Polkadot’s early ecosystem projects that pulled in most of the price-pumping excitement and FOMO. Coins like Kusama (KSM) and Ankr (ANKR), for instance.
Originally hitting the open market around US$2.70, DOT’s price remained reasonably flat in its first four months of trading, but is now about US$52, with a market capitalisation about a 10th the size of Ethereum’s at this stage.
Polkadot’s 2021 so far
• In January, the institutional asset manager Grayscale filed for a Polkadot trust with the US Securities and Exchange Commission. A product that would potentially give DOT some high exposure to wealthy investors.
This application must be buried in the SEC’s in-tray, under various spot Bitcoin ETF filings, documentation regarding crypto lawsuits, and a stack of letters from Senator Elizabeth Warren imploring Gary Gensler to hassle more ne’er-do-well “shadowy super coders”.
Upshot: the Grayscale Polkadot trust approval is a waiting game.
• But in April, another similar institutional-grade trust product was actually approved – and this one is with the New York-based Osprey Funds. It saw immediate pick-up, although it’s only limited to accredited investors (net-worth millionaires, basically) at this stage.
• Also in April, Coinbase Ventures revealed it was investing heavily into DeFi projects building on Polkadot and largely based around the potential (actually extremely likely) parachain Acala (ACA). We’ll get to Acala further below…
• In June, the Asian-Pacific-based VC firm Master Ventures launched a US$30m Polkadot ecosystem-pumping fund, investing in projects vying for parachain slots on both Polkadot itself and its “testnet” project called Kusama (KSM).
• Also in June, a Polkadot ETP (exchange-traded product) called Valour DOT SEK began trading on the Swedish Stock Exchange. The ETP is fully backed by the underlying asset, DOT.
• Again, in June, Kusama began its first round of parachain auctions. Kusama is a clone of Polkadot that the project essentially uses as “canary network”. This means Polkadot can play faster and more loosely in Kusama as a testing ground.
That’s not to say Kusama is not valuable – quite the opposite, in fact. The Kusama chain and its parachains (particularly Moonriver) are powerful networks in their own right, and continue to build their own ecosystems and users. Both tokens, in fact, have seen impressive price gains in their respective lifespans so far. KSM is up 50,000 per cent since launch, while MVR is up about 610 per cent overall.
• But we digress… back to June (it was a big month), DOT received an overdue Coinbase-exchange listing. Did the price pump? Nope. It was a buy-the-rumour-sell-the-news kinda deal, with DOT losing more than 50 per cent in value over the following 30 days or so.
• In August, Kusama began its second round of parachain slot auctions, ending on October 13.
• In September, Polkadot (and Solana and Tron) ETNs (exchange-traded notes) operated by VanEck, began trading on the German stock market.
Which just about brings us to the Polkadot parachain auctions…
Parachain auctions – what’s this all about then?
As briefly mentioned earlier, parachains are individual, simpler layer-1 blockchains that operate in the Polkadot and Kusama multi-chain networks, attached to the Relay Chain.
Parachains can be considered the final, important piece of the core functionality of Polkadot, and a crucial element for the entire protocol to achieve scaling and become a multi-chain beast.
They’re leased out in an auction format, with a maximum of 100 slots available. Because there are hundreds of projects…