What is Polkadot? – Forbes Advisor

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Polkadot is a blockchain designed to support other blockchains. Think of this crypto platform as a network made up of other blockchain systems.

If you think of each blockchain as a single dot, then the Polkadot blockchain is like a pattern made up of those dots. Let’s take a closer look to see how it all works.

What is Polkadot?

Polkadot is envisioned as an upgraded version of Ethereum. Launched in May 2020, Polkadot is the brainchild of Ethereum (ETH) co-founder Gavin Wood. The platform is now managed by the Web3 Foundation (W3F) and developed by Parity Technologies, both co-founded by Wood.

Polkadot operates at a deeper level than a blockchain like Ethereum – think of it as a foundation that other crypto projects can build on. It calls itself a layer 0 blockchain, while Ethereum and similar blockchains like Solana (SOL) and Cardano (ADA) are called layer 1 blockchains.

When Wood first wrote the Polkadot whitepaper, he argued that crypto needed a new system that allowed interactions between different blockchain networks. Noticing issues with Ethereum’s ability to grow and scale, Wood attempted to address this issue with a new blockchain based on a proof-of-stake validation system.

Proof-of-stake validation was offered unlike earlier blockchains, such as Bitcoin (BTC) or Litecoin (LTC). In proof of work, blockchain miners solve cryptographic puzzles to add the next block to the chain for mining rewards. With Proof of Stake, validators use staked tokens as collateral to determine the next block in the chain.

The main scaling issue Wood wanted to solve with Polkadot was the amount of computing power that Ethereum required for its original proof-of-work validation system.

How does Polkadot work?

David Lawant, research director at Bitwise Asset Management, calls Polkadot a “heterogeneous multi-chain system”. This is just a fancy way of saying that there are different blockchains running on the Polkadot system.

As stated above, a Layer 0 blockchain functions as a foundational layer below Layer 1 blockchains. Polkadot provides an integrated framework on which programmers can build their own blockchains with cross-chain interoperability.

Layer 1 blockchains, like the Ethereum Wood project built with co-founder Vitaly Dmitriyevich “Vitalik” Buterin and others, allow programmers to create decentralized applications (DApps), smart contracts, non-fungible tokens (NFTs) ) and more.

But it’s difficult for programmers to build a Layer 1 blockchain. They have to build the base layer before they can even get hundreds of people to run their Layer 1 program on one computer, says Bill Birmingham, chief investment officer at Osprey Funds.

Experts say Polkadot has already built the base layer. So all the Layer 1 programmer has to do is focus on optimizing their own project.

Thibault Perréard, head of finance at cross-chain staking hub Bifrost, says most of these Layer 1 systems are siled. They don’t have much interaction with each other. Polkadot intends to allow any public or private blockchain to communicate with each other – it’s supposed to be “the internet of blockchains”.

Polkadot Native Token: DOT

The key to bringing all of these factors together—proof-of-stake validation, cross-chain interactions, and base-layer programming—is DOT, Polkadot’s native token.

DOT is the token staked or pledged by validators to approve the next block on the Polkadot blockchain. In this way, DOT functions as Polkadot’s proof-of-stake mechanism.

Each separate blockchain built on Polkadot is referred to as a parallel chain or parachain within the system.

When moving data through these parachains, security is paramount. Polkadot provides this security with a single underlying chain called relay chain.

This relay channel is Polkadot’s main channel, and according to Lawant, it’s what sets Polkadot apart from its closest competitor, Cosmos (ATOM).

Perréard even specifies that “the chain of relays ensures security”. He says parachains can “take advantage of Polkadot’s architecture and foundation.” In other words, they don’t have to worry about security.

DOT is the token used to validate blocks on Polkadot’s relay chain. But staking isn’t the only use of DOT in the Polkadot system. The token is also used for governance and liaison. All DOT holders have the right to vote on network governance, such as network upgrades and fees.

DOT as Guarantee

The other factor that Polkadot operators need to consider is which projects get a parachain in the Polkadot system. These parachains are offered by separate projects using DOT as collateral.

According to Birmingham, a project can “go out and buy DOT to commit to” Polkadot for the parachain auction. Then, if the project has enough DOT, “They’ll win the spot.”

Once a project is approved for a parachain, the auctioned DOT is locked in for two years. Users will receive lockout rewards in exchange for the projects.

Polkadot’s first parachain auction concluded in December 2021.

Polkadot versus Ethereum

Ethereum, the number 2 blockchain in the world, and Polkadot have a few things in common. However, the two blockchains have many more things that differ.

Here are some similarities and differences between Polkadot and Ethereum:

Investing in Polkadot

Polkadot is an easily accessible crypto asset. For developers bidding on a Polkadot parachain or investors interested in acquiring tokens for speculative purposes, DOT can be purchased on most major crypto exchanges around the world.

Accredited investors who comply with certain regulations determined by the Securities and Exchange Commission (SEC) may also gain exposure to Polkadot through Osprey Polkadot Trust (ODOT).

Once DOT tokens are purchased, they can be kept in a crypto wallet. Crypto wallets are available online (hot wallet) or offline (cold wallet). Online wallets carry greater security risks. You will also need to verify that the crypto wallet supports Polkadot tokens.

Investors should remember that Polkadot, like all cryptocurrencies, is an extremely speculative and risky investment.

If you are considering owning DOT tokens, you may want to consult a financial advisor first. You should never invest more than you can afford to lose, given the volatile nature of cryptocurrencies.

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