Polkadot

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Project overview

Polkadot is proof-of-stake Layer 1 blockchain with smart contract execution capabilities. It is known for being an interoperability network that connects different blockchains together. Users can build their own custom chains known as “parachains” or create their own decentralised applications and solutions that operate under a broader network.

Polkadot first emerged with the release of its whitepaper in 2016. Parity Technologies, the developer company behind Polkadot, launched the project in various stages, starting with a V1 launch in May 2020 and officially completing its full release in December 2021.

Technology

Polkadot’s interoperability framework includes a primary chain, known as the “relay chain”, and parachains which are essentially separate chains that run in parallel to the main network. Each parachain is highly customisable and serves a specific use case within the Polkadot ecosystem, while the relay chain handles the consensus, communication, and shared security.

Polkadot uses a nominated Proof-of-Stake (NPOS) consensus mechanism where tokenholders nominate validators to secure the relay chain.

Token supply model

Polkadot has an inflationary token supply model with a 10 percent fixed annual inflation rate and no capped supply. However, adjustments to the inflation rate can be made through governance referendums. Eight percent of the newly issued DOT tokens are distributed to validators and tokenholders as rewards for securing the network, while the remaining 2 percent are sent to the treasury.

Serving as a financial reserve for the network, the Polkadot treasury funds are used on activities to generate value for the ecosystem. Polkadot has implemented a burning mechanism within the treasury, where if token funds are not spent after a 24-day spend period, 1 percent are burned.

Key value drivers

The growing demand for blockchain interoperability may complement ecosystems like Polkadot, especially given that its infrastructure allows users to transfer assets between blockchains without any additional fees – this makes it unique to Ethereum and Ethereum-based Layer 2 transactions. The challenge for Polkadot will be how well it is able to connect with blockchains outside of its own parachain ecosystem.

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