What is Polkadot Anyway?
Updated: Jun 2, 2021
The information below is to be used for informational and educational purposes. This is not financial advice.
One of the most exciting and fastest growing projects of 2020 and 2021 is Polkadot. Over the last few years hundreds of projects have started to build on Polkadot, which makes it one of the most popular blockchains for developers. After reading this blog post, you'll understand why the blockchain community considers Polkadot the most innovative blockchain since Ethereum.
Polkadot has many unique features that set it apart from all other blockchains. It is interoperable, highly scalable, future proof, and has a unique system architecture.
Kusama is Polkadot's sister network and has almost identical architecture. Parachains launching on Polkadot will first launch on Kusama and these auctions represent a unique opportunity to grow your portfolio. Kusama is extremely undervalued compared to Polkadot
Polkadot and Kusama are likely the most secure and potentially best performing assets to add to your portfolio in 2021. I'm expecting DOT to reach $300-$600 in the next 1-2 years.
What Is Polkadot?
Polkadot is an open-source "metaprotocol" developed by Ethereum co-founder, Dr. Gavin Wood. One of its core features is that it enables interoperability between other blockchains, i.e., the cross-blockchain transfer of any type of data, asset, or tokens. Popular blockchains like Ethereum or Bitcoin are closed networks, which is why the interoperability feature of Polkadot makes it truly unique. This value of this feature cannot be overstated as it not only allows blockchains built on Polkadot to communicate with each other seamlessly and trustlessly, but it also allows for Polkadot to communicate with other Layer 1 protocols outside of its network. This transformative technology will allow for the creation of smart contracts and protocols that have been out of reach of developers for the last decade.
Secure and Developer Friendly
Projects built on Polkadot utilize the Substrate framework, which enables the rapid development of parachains that run natively on Polkadot's Ecosystem. This framework allows blockchains built on Polkadot to inherit a common consensus mechanism, peer-to-peer networking functionality, database structure, and more. This allows developers to focus on the unique use-case for their specific project. Substrate projects will get interoperability and security from day one. Validators for the Polkadot network are able to secure the entire network instead of each blockchain having to secure validators on their own.
Scalable Polkadot is a "sharded multichain network", which means it can process many transactions on several chains in parallel. Sharded chains connected to Polkadot are called parachains and, due to Polkadot's unique system architecture, they do not compete over resources the way that contracts on Ethereum do. Parachain economies are self-contained, which means that high traffic on one parachain won't impact the throughput of another chain.
Polkadot can upgrade without hard forks in order to integrate new features or fix bugs. Thus, as new technologies become available, the Polkadot network can easily adapt and improve. This is one of the most valuable features of the Polkadot network. Ethereum, on the other hand, has been working on upgrades for years and it will be years more before those first round of upgrades are complete.
Part of what make's Polkadot so unique is its three-part composition.
The main relay chain (Polkadot blockchain) - This is the consensus layer which validates the transactions between parachains and creates shared security through a common set of validators. This chain exists primarily to serve the member parachains.
Parachains - Parachains are independent blockchains in the Polkadot network. Each parachain is defined by its own governance mechanism, economics, and unique use case.
Bridges - A bridge chain allows an independent blockchain such as Ethereum, with its own particular consensus mechanism, to connect to the Polkadot network. As opposed to parachains, where security is pooled, a network like the Ethereum mainnet will stay independent.
Kusama is a scalable network of specialized blockchains built using substrate and has nearly the same codebase as Polkadot. Kusama is a network built as a risk-taking, fast moving, "canary in the coal mine" for Polkadot. The idea behind Kusama is that core system and parachain upgrades can be tested on Kusama before making their way to Polkadot. Thus Kusama functions as a live testnet and any risks that arise from new bugs get resolved on Kusama before any code is pushed to Polkadot. This grants Polkadot more stability and increased security as all upgrades will already have been tested before being released.
I suspect that Kusama is very undervalued compared to Polkadot because, at the time of this writing (2/16/21), it has approximately 1/16th the marketcap of Polkadot despite having almost identical technology. In time, as upgrades are released for the core codebase and parachains, Kusama will eventually be more advanced than Polkadot.
How could a more advanced version of Polkadot be worth 1/16th the value of Polkadot?
Polkadot and Kusama only have a limited number of parachains. The current goal is for Polkadot to support up to 100 parachains and potential parachains will secure one of these limited slots through auctions. To win an auction projects will likely create a Parachain Loan Offering (PLO) using the substrate crowdfunding module to accept DOT loans from any DOT holder, likely in exchange for their native token. If a project is able to secure enough contributions to win the auction, the DOT loans will be returned to the contributor at the end of the parachain lease period (could be months or years). If the auction is lost, then the DOT will be returned to contributors immediately. Parachain auctions on Kusama will require KSM to be lent out instead of DOT. Crowdfunding contributors are essentially making a secured debt investment into a parachain.
You can read more about this here.
Parachains that want to launch on Polkadot will likely launch on Kusama first and thus Kusama will be "live" a full quarter, or sooner, before Polkadot. In the next 30 days I expect to see the Kusama price skyrocket as people realize they need KSM to participate in the Kusama parachain auctions.
What projects are most likely to secure a parachain?
That's an excellent question! While we don't know for certain which projects will win the auctions for the initial slots, we do have some clues. On the Polkadot Wiki I've discovered that projects interested in securing a parachain are testing on the Polkadot Rococo V1 Test Network.
Polkadot developers are letting teams set up deploy on Rococo in batches as shown below.
According to this tweet, it looks like batches 1 and 2 are complete.
Acala: A Case Study
One of the most anticipated projects for the Polkadot Ecosystem is Acala. This is a stablecoin platform that will enable lending and borrowing on Polkadot. I may make a blog post about this later, but for now I just want to talk about the upcoming parachain auction on Kusama (and later Polkadot).
Acala on Kusama is called Karura. From their crownloan video, I've learned a little bit about their tokenomics and have begun to understand the potential value of participating in the auction.
Total KAR: 100,000,00 KAR
KAR Paradrop: 11% or 11,000,000 KAR
30% Paradrop available at Launch: 3,300,000
Let's also assume that other tokens are also unlocked at genesis (such as tokens for liquidity programs or for the team) and assume that 5 million tokens are available on day 1.
In order for the value of your KAR tokens to match the value of your locked up KSM in this scenario, KAR would have to reach a marketcap of $83 million / $16.66 per token (which is the current KSM price of $200 divided by 12, the ratio of KSM to KAR).
I think Acala/Karura could be compared to Maker (MKR) which has a marketcap of $2.1 billion today.
In crypto we have seen projects reach $50 million+ marketcap within 24 hours or days of launch. So the question is, do we think that Karura/Acala, likely the hottest and most anticipated Polkadot project, will reach a marketcap of at least $83 million to justify the risk of locking up your KSM/DOT?
I think that the answer is a resounding yes!
It's Time For the Hopium. Let's See Some Price Predictions!
I believe that Polkadot is following the hype and price trajectory of Ethereum in 2016/2017. During that cycle we saw Ethereum hit a marketcap of $150 billion.
In 2021 there is significantly more interest, hype, and available liquidity than there was four years ago. Therefore, I believe we will see Polkadot surpass Ethereum's previous $150 billion marketcap and approach $300-$600 billion in valuation / $300-$600 price per DOT.
How is this possible you may wonder? Well, consider that according to stakingrewards.com 60% of all Polkadot is staked and there will be tens of millions of DOT soon locked up in parachain crowdloans. This will create a liquidity crisis similar to Bitcoin as only a fraction of DOT's available supply will be available in the open market.
In addition, if BTC is expected to reach a marketcap of $2-$5 billion, then its possible the altcoin marketcap could reach a valuation of $3-$8 billion depending on how low btc / altcoin dominance falls (for reference a BTC price of $250k / market cap of $4.7 trillion and a 40% btc/altcoin dominance ratio will put the value of the altcoin market cap at $7 trillion).
In such a world, why would a $300-$600 DOT be out of the realm of possibility?
I don't know where Polkadot is heading, but I think we should all be very excited to find out. Cheers.
Big thanks to Brian Girvan for editing.