What is Polkadot (DOT)?

What is Polkadot?

Polkadot is a technology designed to improve interoperability among different blockchains, such as Bitcoin and Ethereum, by uniting them in a single multichain network.

The Polkadot network aims to solve key problems holding blockchain technology back from mass adoption, namely:

• Scalability. First-generation blockchains cannot process the vast number of transactions envisaged in a decentralised future. For now, network nodes handle transactions one at a time, limiting the network’s growth;
• Isolation. Blockchains remain discrete and independent, lacking two-way connectivity and operational interoperability.

The network has a native token — DOT. It not only underpins Polkadot’s base consensus mechanism but also serves three functions:

• Governance. Token holders fully control the protocol, with privileges that on other platforms are reserved for miners — setting transaction-fee structures, deciding protocol changes, and adding or removing parachains;
• Rewards. Network users are rewarded with the native token.
• Parachains. DOT is used by projects to lease slots to host their parachains.

Who created Polkadot, and when?

Polkadot was created by Gavin Wood, a pivotal figure in the early history of Ethereum: he was a co-founder, the first chief technology officer, and the project’s lead engineer. Wood wrote the code for the first implementation of the platform, authored its formal specification and created the Solidity programming language.

On January 11, 2016, Wood left the team to pursue a project that could meet expectations that, in his view, Ethereum had failed to fulfil.

According to Wood, the idea for Polkadot came to him in the summer of 2016 as he awaited technical documentation on sharding in Ethereum 2.0 to begin implementing it. In collaboration with Marek Kotewicz, Wood began work on a “maximally simple” version of Ethereum and by October 2016 had prepared the first draft of the Polkadot white paper.

While still at Ethereum, Wood and several colleagues founded EthCore, a commercial blockchain-development company. EthCore later became Parity Technologies. Its team created the Parity Ethereum Client, the Substrate framework, the Polkadot network and the Parity multisig wallet.

In the summer of 2017 Wood and developer Peter Chaban founded the non-profit Web3 Foundation to foster protocols for a decentralised internet.

Although the first token sale in 2017 raised $145m, the funds were insufficient for development. In June 2019 Web3 Foundation conducted an additional sale of 500,000 DOT, lifting the project’s projected capitalisation to $1.2bn. At the end of July 2020 Web3 Foundation raised another $43.6m in a private round.

How does Polkadot work?

To achieve scalability and improve cross-chain interaction, Polkadot comprises the following components:

• Relay Chain (“linking chain”) — the primary Polkadot chain that connects all individual blockchains (parachains) in the network;
• Parachain (short for “parallelised chain”) — individual parallel blockchains that execute transactions and pass them to the base chain. Parachains are maintained by so-called collators: they collect users’ transactions and confirm blocks based on a Proof-of-Validity algorithm. Collators are rewarded for their work, with compensation depending on the specific parachain. Their role is analogous to miners in blockchains using Proof-of-Work and Proof-of-Stake;
• Bridge Chain (“chain bridge”) — designed to connect blockchains that do not use Polkadot’s governance protocols (for example, Bitcoin, Ethereum and Tezos).

The Relay Chain enforces consensus, routes messages between participating chains and facilitates transaction finality. This “linking chain” is a blockchain with a pool of validators randomly assigned to add and validate blocks across different parachains. For each transaction they must post a deposit. If a transaction complies with the consensus rules, the deposit is returned and the validator receives a reward. If rules are violated, the stake is forfeited.

Consensus on the relay chain is achieved via two accountability-based mechanisms: one for block production and another for finalisation. Separating block production from finality overcomes scalability constraints in instant-finality protocols (such as Tendermint), enabling fast block production and allowing more validators to participate in consensus. 

The two mechanisms are known by acronyms: BABE (Blind Assignment for Blockchain Extension) handles new block production; GRANDPA (GHOST-based Recursive Ancestor Deriving Prefix Agreement) finalises older blocks.

Although parachains share the same finality mechanism, each can implement different block-production methods with characteristics and parameters optimised for particular classes of applications. Depending on those choices, each network’s throughput may vary; overall network throughput can therefore be estimated only approximately.

The first version of Polkadot (active as of April 2024) supports 100 parachains. Assuming each can handle at least ten transactions per second, the lower bound for throughput is roughly 1,000 transactions per second. A future version of Polkadot plans to raise the parachain limit, scaling the network severalfold.