What is Polkadot (DOT) and how does it work? (2024)

A blockchain is simply explained as a database containing data, which is secured through a distributed network of participants. A database is a collection of information. This data is stored in blocks, and each block of data is linked together and forms a chain - i.e. a blockchain. The most common data in a blockchain is transactions.

Instead of a central actor being responsible for storing the data, the majority of blockchains are secured using cryptography and through a decentralized network of people around the world. An important factor that distinguishes blockchains from ordinary databases is that the information in a blockchain cannot be manipulated or changed.

Today there are over 13,000 different cryptocurrencies. The biggest problem is that the blockchains are not able to communicate and exchange data across each other. This is where Polkadot wants to come up with the solution as one of the first so-called Layer-0 protocols, which allows blockchains to operate seamlessly and efficiently with each other.

Before we look further at how Polkadot works, we will explain Layer-1 and Layer-2 in more detail.

In a decentralized ecosystem, we can look at Layer-1 protocols as the basic architecture. Examples of Layer-1 protocols are Ethereum and Cardano, they have their own blockchain architecture and their own ecosystem. Layer-2 protocols build on Layer-1. Among Layer-2 we find, for example, Polygon, which has its own ecosystem built on the Ethereum network. Another example of Layer-1 and Layer-2 is Bitcoin and Lightning Network.

Layer-1 and Layer-2 protocols work well together, as the Layer-2 protocol uses the architecture of the Layer-1 protocol. Two individual Layer-1 protocols, on the other hand, do not work optimally, as they have two very different architectures. So this is what Polkadot will solve; they will be a Layer-0 protocol that allows all these blockchains to coexist and communicate with each other.

Polkadot wants to revolutionize the way we can use blockchain technology. This can be a whole new world for software developers, start-ups and large companies. Polkadot thus has a completely unique infrastructure, and the blockchain that controls this ecosystem is called Relay Chain. Polkadot calls the Relay Chain "the heart of Polkadot". All blockchains in Polkadot are linked together here. These blockchains that are linked together are called parachains, and each of these blockchains can be optimized for their specific use. Relay Chain is thus the main blockchain and parachains are the blockchains that spring from this main blockchain. All these parachains are linked together to achieve consensus. Relay Chain thus uses proof-of-stake to validate blocks.

How do parachains work?

Blockchains can rent one of Polkadot's parachain spaces, and this can bring many benefits to the blockchains. First of all, they can easily communicate with Polkadot and all other parachains. Blockchains also benefit from scalability, security and a smaller workload than normal. Polkadot makes it super easy for blockchain teams building their own blockchain to simply plug right into the existing security system that Polkadot has set up. Therefore, the teams can focus on what they do best, namely coding and building their blockchain. Polkadot's ability to scale is an important element here. With over 150,000 transactions per second, bottlenecks will not occur, as we experienced, for example, when DeFi on the Ethereum network was at its peak.

The number of parachain slots will gradually increase over time and according to Polkadot, Relay Chain can support up to 100-250 parachains. As of today, there are 11 different parachains that are already live. To get one of these parachain places, a project must win a so-called "candle auction".

A candle auction is used to randomize the exact moment the winner of an auction is determined. There will still be an official end to the auction, but at a random time a snapshot of all current bids will be taken. The project with the highest bid when the snapshot is taken wins the auction. To bid on a parachain space, the project must bid DOT tokens.

The more DOT tokens a project has, the more chance it has to win one of the parachain spots. Therefore, projects also want to accumulate DOT. However, this can be done in several different ways. During an auction, DOT holders can lock their tokens to support a project that they believe should receive a parachain slot.

To encourage DOT holders to support the project, they can, for example, provide an airdrop with the project's upcoming token, or provide other types of rewards to investors who support the project. This process is called a crowdloan. If the project wins, the pegged DOT tokens are locked by the network for the duration of the parachain lease and are returned when it expires. That means you can't buy a parachain space forever, you can only rent it for a certain period of time.

You can read more about how Polkadot's exciting ecosystem works further down in this article. First, we want to talk a little about scaling and how you can buy Polkadot.

Polkadot's Scaling: Crushing Bitcoin and Ethereum

One of Polkadot's specialties is scaling, which is also very necessary when many blockchains are to be connected. To compare with other blockchains and players, Bitcoin has a maximum capacity of 7 transactions per second, Ethereum has a max around 15-20 per second and Visa can process up to 65,000 transactions per second. Polkadot takes this to a whole new level as their research team has found that their theoretical transactions per second capacity is around 166,666. Founder Gavin Wood has said this could increase to 1 million per second.

There are primarily two ways you can buy DOT. You can either buy DOT via a crypto exchange, or you can buy DOT from a private individual.

Regardless of which method one uses, one must store one's DOT in a cryptocurrency digital wallet.

You can choose between creating an account at a crypto exchange and letting the crypto exchange take care of your cryptocurrencies for you, or creating a decentralized wallet that supports DOT, where you yourself are responsible for the storage and security of your DOT.

Buy and store DOT with a crypto exchange like Firi

An easy and cheap way to buy and store DOT is through a crypto exchange like Firi. Firi makes it easy to both buy, sell and store your DOT and other cryptocurrencies.

When you create an account through Firi, a Polkadot wallet is automatically generated for you. In practice, this means that Firi safely stores your DOTs for you and you don't have to worry about the security of your Polkadot wallet.

You get access to your Polkadot wallet by logging in to your user account with e-mail or Vipps, and by verifying yourself with BankID. You can easily send and receive DOT to your wallet in Firi from other exchanges or other Polkadot wallets.

Cryptocurrency can be bought 24/7, and Firi makes it easy to exchange between DOT and NOK. In less than one working day, you can also sell your DOTs for NOK and transfer to your bank account if you wish.

Store DOT in a decentralized wallet

Because Polkadot is a decentralized network, it is possible to create a separate, private wallet where you can store your DOTs.

When creating a Polkadot wallet, a public key is generated that acts as an account number and a private key that acts as a password for your wallet. If someone gets hold of your private key, they will have access to all your cryptocurrency.

No central actor can help you get your money back.

A public key can be compared to an account number for your Polkadot wallet. For example, if someone is going to send you DOT, they need access to your public key which is associated with your Polkadot wallet.

You can safely send your public key to others. A public key is a combination of letters and numbers unique to your Polkadot wallet.

A private key can be compared to the password for your digital wallet. A private key is a combination of letters and numbers unique to your Polkadot wallet.

A private key can also be generated in the form of a seed phrase, which in practice is 12 words that act as a backup copy of your private key. If someone has access to your private key or your seed phrase, they will also have access to all your cryptocurrency. It is therefore important not to share your private key with anyone.

It is important to note that a Polkadot wallet like Parity Signer for example only supports Polkadot, Kusama, parachains and Ethereum. For example, if you send DOT from a Polkadot wallet to a Bitcoin wallet, the DOT sent will be lost forever without being accessed.

It is very important that you are aware of which public key you send and receive cryptocurrency on.

After you have bought cryptocurrency from Firi, you can choose whether you want Firi to store your cryptocurrency for you, or whether you want to send it to a separate decentralized wallet.

Polkadot has an interesting, but complicated, ecosystem. Here we will go in depth on this.

We have already mentioned that Polkadot wants to enable different blockchains, which are designed for different tasks, to seamlessly operate together. Polkadot uses a so-called hub-and-spoke system where the hub is called Relay Chain and the spokes are called Parachains. Relay Chain uses proof-of-stake and is the main blockchain in the architecture where all the different parachains are connected to achieve consensus. The Relay Chain is secured by several different key roles that contribute to maintaining security. These spokes in the Polkadot architecture, i.e. parachains, are basically various projects that have won an auction and rent the parachain space.

These blockchains are specially adapted and optimized for different areas of use. Polkadot has built its own framework for the blockchain called Substrate, which works as a drop-and-drag system where developers can choose which aspects or features they want in their blockchain.

The consensus mechanism and securing the network

Polkadot uses what they call a hybrid consensus, which separates finality from the block production mechanism. The two mechanisms that drive Polkadot's consensus include:

While the core technology of Polkadot is the Relay Chain, the network achieves consensus through a modified and proprietary proof-of-stake mechanism consisting of four key roles: Collators, Validators, Nominators and Fishermen.

Collator:

Each parachain has a collator that performs the same task as a miner in a proof-of-work system. A collator must maintain the state of both the Relay Chain and the Parachain. The collator then manages the queue of transactions entering and exiting the Parachain from the Relay Chain. Collators aggregate parachain transactions, produce proof of state change in the blockchain, create new block candidates and then forward them to validators in exchange for a fee for their work. In a competitive market with many collators, the collators can encourage the validators to choose their block by sharing a portion of the fee with the validator.

Validators:

Validators are randomly selected to approve block candidates from the parachain collators, verify the information in the block and republish the block candidate to the Relay Chain.

As a validator approves a block, they also validate and change the state of the Relay Chain block by moving the transaction data from the originating parachain's input queue to the destination parachain's output queue.

Validators are incentivized through a staking mechanism that requires them to stake DOT tokens to be selected as an active validator. Validators who violate the consensus algorithm are penalized by losing a portion of their staked tokens, while those who correctly secure the network and approve the blocks are rewarded with new tokens.

Nominators:

Nominators are those who themselves are unable to participate in the transaction validation process directly, for example in the absence of enough DOT tokens, so they instead contribute tokens to a validator of their choice.

Nominators receive a share of the validator reward based on their share of the validator's staked amount, so nominators are encouraged to choose a validator where their share will be the largest in order to receive the highest possible reward. The Polkadot team believes that the nomination process will create a competitive marketplace for high-quality validators and nominators.

Fishermen:

Fishermen do not participate in the transaction validation process with validators and nominators, but instead act as watchdogs that monitor activity across the Polkadot network and identify validators that violate the consensus rules. Fishermen stake a smaller number of tokens than a validator, but receive a proportionally larger reward than validators for their role in securing the network.

By owning DOT, it also gives you the right to help control how the network is managed. Namely, Polkadot allows the contributors and the actual token holders the opportunity to vote on, and propose, changes. This includes, for example, voting on network fees, the addition or removal of parachains and any network upgrades.

When it comes to distribution of DOT tokens, or tokenomics as it is called, DOT is inflationary, something that counterweights the large amount of tokens that will be staked on the platform. A little inflation is necessary to keep things in balance, because if all tokens are locked up in staking, the supply on the open market would dry up and the price of DOT would get too high, which again would prevent future developers from building on the network. At the time of writing, there are 1,099,327,980 tokens in circulation.

Kusama really deserves a separate article, as there is a lot to cover if you go in depth. Simply explained, you can say that Kusama is Polkadot's experimental network. Many of the updates that come to Polkadot come to Kusama first to test the functionality. Kusama has an identical code base to Polkdot, but has its own ecosystem of projects that build on Kusama instead of Polkadot. Kusama is particularly useful for two things: