What is Polkadot (DOT)?How It Works? Complete Guides 2024

Polkadot is a protocol that connects blockchains — allowing value and data to be sent across previously incompatible networks (Bitcoin and Ethereum, for example). It’s also designed to be fast and scalable. The DOT token is used for staking and governance; it can be bought or sold on Coinbase and other exchanges. 

Polkadot, like many post-Bitcoin cryptocurrencies, is both a token that can be bought or sold via exchanges like Coinbase and a decentralized protocol.

The Polkadot protocol is designed to allow unrelated blockchains to securely talk to each other, so that value or data can flow between, say, the Ethereum and Bitcoin blockchains without any intermediary. It’s also designed to be speedy and scalable, via the use of many parallel blockchains (or “parachains”) that take much of the processing demand off of the main blockchain.   

The Polkadot token (DOT) serves two main functions within the Polkadot network: it’s a governance token, which allows holders to have a say in the future of the protocol, and it’s used  for staking, which is the way the Polkadot network verifies transactions and issues new DOT. DOT can be bought and sold on exchanges like Coinbase as part of your investment strategy. 

How Does Polkadot work?

Polkadot, with its DOT token, aims to address scalability and interoperability issues faced by many blockchains. Here’s a breakdown of how it works:

Central Chain: Relay Chain

• Unlike traditional blockchains handling everything, Polkadot has a central chain called the Relay Chain. This focuses on security and coordination between different blockchains.
• The Relay Chain validates transactions related to the network’s overall security and governance, including those for adding new parachains (explained below).

Parachains: Independent Blockchains

• Polkadot’s core innovation lies in parachains. These are independent blockchains specializing in specific tasks, like DeFi, smart contracts, or supply chain management.
• Parachains leverage Polkadot’s security by connecting to the Relay Chain. This allows them to focus on their own functionality without needing robust security measures themselves.
• Parachains compete for a limited number of slots on the Relay Chain through a bonding mechanism using DOT tokens. This ensures valuable parachains secure a slot.

DOT Token:

• DOT serves several purposes in the Polkadot ecosystem:
  • Staking: DOT holders can stake their tokens to secure the Relay Chain and earn rewards. Validators who validate transactions on the Relay Chain also need to stake DOT.
  • Governance: DOT holders can participate in voting on proposals for the network’s future development and upgrades.
  • Bonding: Parachains need to lock up DOT tokens to secure a slot on the Relay Chain.

Benefits of Polkadot:

• Scalability: By offloading processing to parachains, Polkadot can handle many more transactions per second compared to traditional blockchains.
• Interoperability: Parachains can communicate with each other and the Relay Chain, enabling seamless transfer of data and assets between different blockchains.
• Security: Parachains inherit security from the shared security model of the Relay Chain, validated by staked DOT tokens.
• Flexibility: Polkadot allows for innovation by enabling developers to create custom parachains for specific purposes.

How much is Polkadot worth?

As of today, June 23, 2024, the live price of Polkadot (DOT) is around $5.74 USD [CoinMarketCap, Binance, Coinbase]. Here’s how you can find the current price yourself and stay updated:

• Cryptocurrency Websites: Several websites track and display cryptocurrency prices in real-time. Here are a few popular options:
  • CoinMarketCap
  • CoinGecko
  • Binance
  • Coinbase
  • Coin Data Cap
• Cryptocurrency Apps: Many mobile apps allow you to track cryptocurrency prices and manage your portfolio.
• Cryptocurrency Exchanges: If you have an account with a cryptocurrency exchange, you can usually view live prices directly on their platform.

How is Polkadot structured?

The Polkadot network includes a main blockchain called the “relay chain” and many user-created parallel chains (or “parachains”). It also has a connecting layer, or “bridge,” that allows value and data to be transferred between most blockchains — and can even be used to connect to non-blockchain databases.

Polkadot’s structure is designed to address scalability and interoperability issues in traditional blockchains. Here’s a breakdown of its key components:

• Relay Chain: This central chain acts as the backbone of the Polkadot network. It’s responsible for:
  • Security: Validating transactions related to the network’s overall security and governance.
  • Coordination: Facilitating communication and data transfer between parachains.
  • Consensus: Reaching agreement on the state of the network through a Byzantine Fault Tolerance (BFT) consensus mechanism.
• Parachains: These are independent blockchains connected to the Relay Chain. They handle specific tasks or cater to specialized use cases, such as DeFi applications, smart contract platforms, or supply chain management systems. Benefits of parachains include:
  • Scalability: By distributing processing power across parachains, Polkadot can handle many more transactions per second compared to single-chain blockchains.
  • Flexibility: Developers can create custom parachains optimized for their specific needs, fostering innovation in the blockchain space.
  • Security: Parachains inherit security from the shared security model of the Relay Chain, reducing the need for each parachain to have its own robust security measures.
• Bridges: While parachains can communicate with each other and the Relay Chain, bridges can connect Polkadot to external blockchains like Bitcoin or Ethereum. This enables interoperability between Polkadot and other blockchain ecosystems, allowing for seamless transfer of data and assets.
• Validators: These are special nodes responsible for verifying transactions on the Relay Chain. To become a validator, users need to stake a certain amount of DOT tokens. This staking mechanism incentivizes validators to act honestly and securely.
• DOT Token: The native token of the Polkadot network, DOT, plays a vital role in several ways:
  • Staking: DOT holders can stake their tokens to become validators on the Relay Chain and earn rewards.
  • Governance: DOT holders have voting rights on proposals for the network’s future development and upgrades.
  • Parachain Bonding: Parachains need to lock up DOT tokens to secure a slot on the Relay Chain. This ensures valuable parachains with strong communities have a higher chance of obtaining a slot.

How does Polkadot work?

The reason Polkadot can process all of this information is because the many parachains do a lot of the heavy lifting for the main relay chain. As a result, the Polkadot network can process more than 1,000 transactions per second, compared to about 7 for Bitcoin and 30 for Ethereum. As the network grows and more parachains are added, Polkadot should get even faster, with speeds that could hit a million transactions per second.

Or as the infrastructure experts at Bison Trails describe it:

The relay chain is responsible for achieving consensus and transaction delivery … among parachains. Parachains … are application-specific blockchains within the Polkadot network. Each parachain is an entire blockchain in and of itself, with its own logic and features.

How does staking work on Polkadot?

Polkadot uses a proof-of-stake consensus mechanism (as opposed to the proof-of-work system Bitcoin uses) to secure the network, verify transactions, and create and distribute new DOT. There are several ways DOT holders can interact with staking system — depending on how much time, technical knowledge, and money they want to devote. 

• Validators do the most work — it’s a major commitment, and requires technical knowhow. To become a validator, you need to run a node (one of the computers that makes up the network) with little to no downtime and stake a substantial amount of your own DOT. In exchange, you get the right to verify legitimate transactions, add new “blocks” of transactions to the relay chain, and potentially earn newly created DOT, a cut of transaction fees, and tips. (On the flip side, you can also forfeit some or all of your staked DOT for acting maliciously, making a mistake, or even having technical difficulties). 
• Nominators allow regular investors to participate in staking indirectly. You can delegate some of your DOT to a validator you trust to behave according to the rules. In exchange, you get a cut of DOT earned by your chosen validators. Be careful with who you choose: you also can forfeit some of your stake if your validator breaks the rules.
• There are also two specialized roles that typically require less of a commitment than becoming a full validator but more technical skill than is required to be a nominator: Collators keep track of valid parachain transactions and submit them to the relay chain validators. Fishermen help find and report bad behavior across the network. 

By staking and participating in the network via any of the above roles, you may be able to receive DOT rewards. DOT holders also have a say in the governance of the network and are able to vote on proposed software upgrades.

Who created Polkadot?

Polkadot’s developers include Ethereum co creator Gavin Wood. It launched on May 26, 2020. The nonprofit Web3 Foundation is the primary research organization that maintains Polkadot’s open-source code. 

Want more information? For a lot more detail about how Polkadot works — as well as tips for participating in Polkadot staking — check out this explainer from Bison Trails. 

Polkadot was founded in 2*016 by a team with several key players:

• Gavin Wood: A prominent figure in the blockchain space, Gavin Wood is best known as a co-founder of Ethereum. He also invented the Solidity programming language used for creating smart contracts on Ethereum. Polkadot’s core concept and architecture are largely attributed to his vision.
• Robert Habermeier: A Thiel Fellow with a background in blockchain technology, distributed systems, and cryptography. Habermeier is a key contributor to Polkadot’s development, particularly focusing on the Relay Chain’s consensus mechanism.
• Peter Czaban: With experience in software development and entrepreneurship, Peter Czaban co-founded Web3 Foundation alongside Gavin Wood. The Web3 Foundation plays a crucial role in supporting the research and development of Polkadot and the wider Web3 vision.

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