TLDR

• Polkadot seeks to enable arbitrarily different parachains to interoperate in a trustless way through shared security. Parachains do not need to bootstrap their own validator set.
• To become a parachain, a project must win a parachain auction which acts as a gatekeeper of quality. It can then avail of the shared security and interoperability of the Polkadot network. The current limit is 100 parachains, which could have greater capacity than the entire industry today if they were at full capacity and demand.
• The Substrate SDK enables high customization and upgradeability. This is important for optimizing and future-proofing designs for high-performance app-specific blockchains.
• At present, Polkadot lags far behind Cosmos in terms of user experience. Parachains only launched in Q4 of 2021, and interoperability has not yet been enabled. Many of Polkadot’s promises remain hypothetical and are yet to be seen and tested in practice.
• However, in an industry plagued with hacks and short-termism, Polkadot’s slow approach to deployment and use of Kusama as a test network could be a key strength. It will be worthwhile paying attention to the ecosystem as it develops. The successful deployment of XCMP (i.e. interoperability between parachains) should be a key catalyst for the ecosystem.

Key Terms

Introduction

Polkadot is a platform that allows highly customizable application-specific blockchains to build on and interconnect with one another on a unified and secure network. Blockchains built on Polkadot are called ‘parachains’, which will be interconnected by the Polkadot Relay Chain. Polkadot’s key value proposition is that it will enable safe and secure interoperability between its parachains. Bridging between blockchains is inherently problematic, and Polkadot is creating a network on which all parachains leverage the same security. This means that no multi-sig/external validator bridges are being used for a parachain to be interoperable with another due to their shared validator set and cross-consensus messaging format (XCM). The importance of this use case has been highlighted recently with the Ronin and Wormhole hacks.

Blockchains built on Polkadot using Substrate will have a very high degree of customization, enabling developers to optimize their parachain for the specific use case. This is a powerful vision and is worth exploring further as the narrative around application-specific chains and a multi-chain future gathers steam.

Note that Polkadot remains in its infancy and has yet to enable interoperability between parachains. Polkadot remains behind Cosmos in terms of well-adopted applications and user experience. However, Polkadot has a very impressive technology roadmap, the second-largest developer community of any crypto ecosystem, and if implemented as intended, offers a very strong value proposition.

In order to understand Polkadot and its potential, it is necessary to assess Substrate.

Substrate

Polkadot and its parachains use a framework called Substrate. This is the SDK developers can use to build any type of blockchain on Polkadot.

• Note that although Polkadot parachains can be built without Substrate, alternative software options are currently limited.
• Substrate can be used to build any blockchain - including those not connected to the Polkadot ecosystem and exist as ‘solo chains’ e.g. Chainflip.

The idea of Substrate is to enable greater flexibility and optimization for developers than what they would experience building on a general-purpose smart contract blockchain like the EVM. Substrate-based blockchains connect with Polkadot to leverage its underlying security and interoperability with other parachains.

Developer friendly

Electric Capital published a crypto developer report for 2021 which showed Polkadot as having the second-highest number of total developers and total full-time developers, behind Ethereum.

Source: Electric Capital

It is a strong signal that Polkadot has a highly active developer community and it makes sense given Polkadot’s impressive tech roadmap and developer focus. Having a thriving ecosystem of full-time developers is crucial for Polkadot to fulfill its potential and is a good indicator of the future success of the protocol.

Customizable

Polkadot aims to create an ecosystem of blockchains that are optimized and customized for their specific use-cases. The rationale is that building on top of a standard blockchain like Ethereum is suboptimal for specific applications due to their generalized design decisions.

With Ethereum, developers must use EVM languages and place their business logic in terms of the EVM, as well as being exposed to Ethereum’s slow and challenging upgradability. This is limiting and places constraints on developers building specific applications.

Substrate is intended to enable a better developer experience by enabling them to have optionality in terms of the tooling they use and choose from a growing list of pallets rather than building from scratch.

Off-Chain Features

Customizable Transaction Fees

Substrate’s modularity means that blockchains can be customized to the extent that transaction fees are optional and can be paid in any token(s) of the parachain’s choosing. Zero transaction fees can be enabled due to off-chain features that greatly reduce storage costs and computation so that block production isn’t affected by heavy off-chain tasks.

Data

As well as having gas benefits, off-chain features enable private data to be stored (and retrieved) off-chain to support features impossible on some current blockchains like record deletion and other requirements to comply with GDPR, for example.

Speed

Substrate is configurable in terms of transaction throughput. Possible configurations include horizontal scaling, custom block times, and flexible transaction queues.

Architecture

Substrate Core enables full customization and can be leveraged to implement a project from scratch in all languages that are compatible with WebAssembly. Alternatively, Substrate uses libp2p and jsonRBC which many developers are familiar with, meanwhile enabling the developer to determine how their architecture will be customized to suit their needs.

Substrate claims that by using Substrate Node a developer can configure and supply a JSON file which will allow her to deploy a blockchain in minutes. However, this is yet to be seen in practice.

Another approach would be to use Substrate FRAME which allows for freedom and configuration without extensive customization (which is more burdensome for the developer). This is essentially a middle-ground between Core and Node. Using FRAME, developers have the option to custom-build their own or select from an increasing library of pallets.

Composability

Composability enables the development of blockchains with various different components configured to their specific needs. This gives blockchains a level of customization specific to their use case which has performance and security advantages over those that do not.

Pallets

Pallets are basically blockchain building blocks on Substrate. There are currently 40+ pallets, which include a governance pallet, a recovery pallet, and an oracle pallet that can be incorporated into chains built using Substrate.

They can be integrated into a parachain during initial development, or at later stages by forkless upgrades. Substrate claim that pallets can be added as developers wish ranging from key recovery to drastic changes ranging from the advent such as in the event of the proliferation of large-scale quantum computing developers could add a quantum-resistant pallet. This ease of upgradeability is crucial to future-proofing Polkadot going forward.

For example, a team may want to build a blockchain that enables users to gain access to their accounts even if they lose their private keys.

• This is a problem with existing blockchains whereby it is impossible to recover accounts without your private key, resulting in enormous financial losses. In this case, the developer can include the ‘recovery pallet’ which enables the recovery of a private key using trusted actors. Developers do not need to build this functionality, it is already available - and there is a growing list of pallets that they can use.

Compatibility - XCMP

XCMP (cross-chain message passing) enables parachains to communicate with each other (e.g. transfer tokens) without additional trust assumptions. This is arguably Polkadot’s most fundamental value proposition. Bridges are controversial, as many prominent figures such as Vitalik Buterin have pointed out their security flaws. In addition, as a bridge gains more liquidity (making it more useful), it becomes increasingly targeted by hackers. Recent examples include the Ronin and Wormhole hacks. A large-scale hack of an enormous bridge could have serious consequences for the industry. Polkadot’s key value proposition is a safe and trustless transfer among parachains that avoids the additional risk that bridges present today.

Meanwhile, other blockchains such as Ethereum will be accessible to the Polkadot ecosystem through parachain bridges. Polkadot claims that parachains will be able to gain interoperability with other major blockchains while maintaining Polkadot’s pooled security. However, this will likely not be seen in the near future, if at all.

It is important to note that XCMP has not been deployed yet. The sooner this is deployed, the better, as until then parachains will not be able to communicate with each other - which is the primary value proposition of Polkadot. At present, a similar version called HRMP is being tested on Kusama.

On April 12th 2022, Robert Habermeier, co-founder of Polkadot tweeted that XCMP will be implemented in the next Polkadot upgrade. It is not yet clear when this will be.

XCM

XCMP is part of Polkadot’s XCM (cross-consensus messaging format). XCM is essentially a common vocabulary of messages for the Polkadot ecosystem. It is consensus agnostic, meaning it can communicate between blockchains with different consensus systems. In the future, this could include communication with different ecosystems e.g. Polkadot and Ethereum. Polkadot tweeted on 8th April 2022 that XCMv2 has been audited twice, and v3 is in its final stages of development. XCMv2 is live on Kusama, but not Polkadot. The v3 release will include bridge infrastructure and support for NFTs.

Upgradeability

Ethereum has demonstrated that blockchains can be extremely difficult to upgrade. For example, EIP-1559 was proposed first in April 2019, and finally implemented in August 2021. Polkadot’s relay chain was built so that it can never change. Instead, changes occur at the parachain level which allows developers to update their blockchain as they see fit, removing legacy design decisions that are outdated. Importantly, these upgrades can be implemented automatically and without the need for forking the protocol. This makes it far easier to upgrade and therefore more future-proof than other blockchain designs.

Usability

Substrate was built with well-adopted technologies such as libp2p and WebAssembly and light client technology. The aim is to enable the creation of both desktop and mobile applications with a level of usability on the same level as centralized applications. This is a prerequisite for web3 applications to achieve true mass adoption. However, Polkadot has become notorious for its poor user experience. This needs to drastically improve for Polkadot to ever meaningfully compete with and exceed the incumbents. However, as illustrated, Polkadot has been built with technology that should enable developers to build user-friendly applications that are suitable for the mass market. It will be interesting to see how the user experience improves as (or if) the technology is deployed successfully.

Parachain Example: Acala

Acala aims to become Polkadot’s DeFi and liquidity hub. It uses Substrate and the EVM pallet to build an EVM-compatible platform customized for DeFi developers and users - most of which are most familiar with EVM tooling and libraries. Substrate’s upgradability will enable Acala to upgrade the platform to continually improve the user and developer experience - effectively future-proofing the chain. This means that it can add new features that are not available on other EVM platforms. This means that developers will be able to build Solidity smart contract platforms while also leveraging additional features as Acala optimizes the chain in the future.

Acala has been designed so that any accepted token can be used to settle transaction fees on the network. In the background, these are settled in Acala’s native token ACA. Fee tokens must have liquidity with the Acala stablecoin aUSD. This is useful as it means that users do not require ACA in their wallet at all times in order to make transactions, meanwhile, ACA always being used in the background means that the token maintains fundamental utility while providing a better UX.

Note that, like everything else in Polkadot, Acala is in its early stages of development This means that it remains to be seen if it can execute on its vision of becoming a major DeFi hub of sufficient quality to bring in new users and users from other DeFi ecosystems en masse.

Security

Parachains on Polkadot inherit security from the Relay Chain which is secured by the staked DOT. All economic incentives lie at the Relay Chain, where validators confirm transactions. This is beneficial to parachains as sovereign chains must bootstrap their own validator set and deal with the challenge of accruing sufficient value to their coin to ensure it is sufficiently secure. This is extremely difficult to achieve.

• On Polkadot, the greater the number of validators, the greater the security of the network as more validators should mean greater decentralization. There are currently 297 validators. Polkadot aims to support 1000 validators in the near-term, and scale up from this in the longer term.
• Another important component regarding network security is the amount of DOT staked by validators and nominators. The greater the amount bonded and staked, the higher the requirement for an attacker to acquire a validator slot.

Do Parachains Ever Need Their Own Security?

Most parachains will not require their own security as they tap into Polkadot’s shared security. However, in some cases, parachains will be required to have their own security. For example, zero-knowledge blockchains will be responsible for their own data availability.

Parachain Auctions Explained

• Parachain auctions are a unique feature of Polkadot/Kusama. Projects participate in these auctions to get a parachain slot that inherits all the benefits of being a part of the Polkadot parachain ecosystem.
• Projects crowdsource support for their parachain slot auction bid. This is often referred to as a “crowd loan”. The community locks up their DOT to Polkadot to signal support for a project. If this project prevails, the DOT is locked for the duration of the parachain slot. At the end of the slot, DOT is returned, as are token rewards by the parachain project.
• These auctions are ‘candle auctions’.
  • A candle auction runs for a predetermined amount of time. However, unlike traditional auctions, in which the highest bidder at the end of the auction wins, in candle auctions, the time when the winner is determined is randomly decided on and retroactively applied to the projects with the most KSM or DOT support at that time.
  • Simply, at a random point in time over the course of the auction, a snapshot is taken and the project with the most DOT committed at that point in time wins the auction.
  • While unusual, the rationale for this is that it avoids gaming the auctions by piling in at the last minute to manipulate the result in favor of your project.
  • Interestingly, parachain slots can be purchased on the secondary market if a slot winner wishes to sell.
• Parachain auctions are essentially crowd-sourced loans, in which the community locks up DOT for the duration of the parachain slot in exchange for token rewards. At the end of the parachain slot, the user’s DOT is returned to them. If the project loses the auction, funds will be returned.

Cost of Being a Polkadot Parachain

As described, parachains must win a parachain auction to gain a parachain slot.

• The cost of this is the opportunity cost of bonding DOT for the period of the parachain slot (typically 2 years).
  • For example, if DOT moons to extremely irrational levels during this period, you will not be able to take some profits before it normalizes. However, liquid staking options will be offered by protocols such as Acala that reduce this opportunity cost. In addition, these blockchains will often need to incentivize the community in the form of their native token to contribute DOT to the auction.
• Further, collator nodes will need to be incentivized.
  • It is up to the parachain to decide how to incentivize the collator. This may be through token emissions, transaction fees, or another mechanism determined by the parachain.

However, once connected the parachain gains shared security and interoperability with other parachains and can access the computing power it requires without the need for additional fees or gas. In addition, DOT is not required for transactions. It should be more economical overall for a blockchain with a large number of users and traffic to be a parachain rather than building on an existing platform or bootstrapping its own validator set.

• Participating in a parachain auction is a considerable investment decision as DOT will be locked up for up to 96 weeks. This is a relatively significant opportunity cost. Therefore, it makes sense only to those with strong conviction in the project to support it. This is a way to ensure that high-quality projects with a community willing to undertake this opportunity cost will attain a parachain slot.

Winners of the first 14 Parachains

Acala

• DeFi hub with EVM compatibility, currently with liquid staking, AMM, and aUSD stablecoin issuer (similar to MakerDAO).

Moonbeam

• EVM compatible smart contract platform for a developer-friendly environment to launch projects, Metamask wallet compatible.

Astar

• Multi-chain smart contract hub supporting EVM and WASM. Astar is developing a cross-chain virtual machine that will enable communication across different VMs and languages.

Parallel

• DeFi platform featuring a parachain auction loan platform and a money market.

Clover

• EVM-compatible cross-chain infrastructure platform.

Efinity

• By Enjin. Purpose-built NFT and metaverse chain. Creating a new standard for interoperable cross-chain NFTs.

Composable

• DeFi infrastructure platform for cross-chain interoperability. Building a cross-chain virtual machine.

Centrifuge

• Financing real-world assets with DeFi liquidity. RWAs are tokenised as NFTs which are used as collateral.

HydraDX

• Cross-chain liquidity hub with innovative omnipool liquidity model.

Interlay

• Interlay is designed to bring Bitcoin to the Polkadot ecosystem.

Nodle

• Nodle is a decentralized wireless network. It aims to enable secure low-cost connectivity and data liquidity to IoT devices.

Equilibrium

• Equilibrium is an interoperable DeFi money market with pooled lending, synthetic asset generation, and decentralized trading.

Phala Network

• Phala Network tackles the issue of trust in the computation cloud.

Unique Network

• Unique Network is a blockchain built using Substrate for programmable NFTs with advanced features.

There will be 100 parachain auctions over the next 2 years. It is notable that competition for parachain spots has reduced significantly since the first 2 auctions. This can be attributed to the fact that these auctions were conducted during a strong bull market, parachains were a novel and exciting concept at the time, and there is a lack of supply of very high-quality projects. This is to be expected, given that Polkadot is still in its infancy.

Parachain Auction Analysis

While the first cohort of parachains may involve some low-quality projects, taking the view that in 10 or 15 years Polkadot will still be here and implemented its current tech roadmap, it is likely that there will be a thriving ecosystem of high-quality application-specific blockchains interacting with each other in a secure environment.

Having 100 parachain slots initially has been a big source of criticism. However, this is arguably misguided. 100 high-functioning parachains would be capable of supporting an enormous ecosystem - potentially even greater than the entire industry as it stands today. Gavin Wood claims that Polkadot could process hundreds of millions of transactions per second in the next 3-5 years and up to 400 parachains. Naturally, this can be taken with a pinch of salt given crypto founder’s propensity to underestimate the challenge and timeline to delivery of technology.

Polkadot.js Wallet

One of the biggest criticisms of Polkadot is the wallet user experience. Even experienced crypto users find the wallet highly complex and difficult to use. This is frustrating to many users and a barrier to adoption. Polkadot needs to urgently address this wallet usability issue in order to achieve higher adoption. EVM compatible chains have flourished due to the familiar Metamask experience. Solana wallets like Phantom have a strong user experience that has facilitated adoption. Even Cosmos’ Keplr wallet has a far better user experience. Polkadot lacks this critical feature at present.

DOT

The Polkadot network token DOT is used for:

• Governance
• Staking
• Bonding

Bonding is a crucial feature of Polkadot and is designed to ensure that high-quality projects receive parachain slots. Note that initially there will likely be poor quality parachains (as there are 100 slots), but over time as the network grows bonding will play a role in ensuring that only very high-quality parachains can secure a slot on Polkadot.

As long as there is demand for parachain slots, there will be demand for DOT. Therefore, if the Polkadot ecosystem grows and thrives, so will the token. DOT inflation is ~10% annually so those holding DOT in the mid to long terms have a strong incentive to stake. You can buy DOT on PancakeSwap. However, it is very difficult to bridge over to the Polkadot network. This is problematic in terms of staking. The easiest way to buy DOT is on Binance, Kraken, and Coinbase.

Relationship with Kusama: Dotsama

The Polkadot ecosystem comprises both Polkadot and Kusama. Kusama is referred to as Polkadot’s ‘canary network’. This refers to the practice of miners bringing a canary bird down into mines to check if there were poisonous gasses. If there were poisonous gasses, the canary would die first.

Therefore, Kusama is an experimental chain, in which planned upgrades and innovations for Polkadot occur on Kusama first to ensure that they are reliable and secure. It is described as a ‘fast-moving’ and risk-taking blockchain’ - a test network for Polkadot.

• Kusama is inherently more fast-moving than Polkadot enabling faster innovation.
• For example, governance voting periods are 7 days for Kusama and 28 days for Polkadot.
• Several projects, such as Moonbeam and Centrifuge deployed parachains on Kusama before Polkadot. This is done in order to familiarize with the process and potentially fine-tune their Polkadot parachain after learning from Kusama.
  • Examples include:
    • Moonbeam (Polkadot) → Moonriver (Kusama)
    • Centrifuge (Polkadot) → Altair (Kusama)
    • Acala (Polkadot) → Karura (Kusama)
• Many projects will likely maintain parachains on both networks as they experiment on Kusama before deploying on Polkadot.
• Essentially a chain for proof-of-concept for Polkadot.
• Polkadot and Kusama will remain as independent standalone chains with their own communities and governance. In the future, there will be a bridge between Kusama and Polkadot.
• The Web3 Foundation supports both networks.

Kusama is already developing into its own ecosystem, and some projects may prefer to deploy there rather than Polkadot. The question arises as to whether or not Kusama cannibalizes the core value proposition of Polkadot and DOT. However, it is necessary to understand their inherent differences.

Benefits

Polkadot

• High stability
• High security
• Conservative approach to governance and upgrades
• High validator rewards

Kusama

• Lower barriers to entry for parachain deployment
• Lower bond requirements for validators & parachains
• Lower slashing penalties
• Fast iteration
• Latest technology

Use cases

Polkadot

• Enterprise, B2B applications
• High value applications requiring very high security and stability
• Upgrade path for more developed Kusama applications

Kusama

• Early stage startups
• Experimentation
• Applications that do not require very high security and stability
• Pre-production environment for Polkadot

It is clear that they both have different use cases - with Polkadot for more enterprise applications and Kusama for more experimental, innovative applications. It will be interesting to see how this plays out over time, as both projects have their own separate communities that can determine their future direction. Ultimately it will be a case of product-market fit.

It is arguable that Kusama cannibalizes Polkadot and DOT in that it offers a very similar ecosystem that some high-quality parachains will likely choose to focus on. On the other hand, Polkadot should benefit greatly from having Kusama as a canary network testing out upgrades before Polkadot deployment. Therefore, Kusama is a double-edged sword for Polkadot and DOT.

Polkadot and Cosmos Comparison

Cosmos has been dominating the interoperable application-specific ecosystem narrative lately. This is due to the real progress the ecosystem has made over the last year. Therefore, it is a useful point of reference to understand Polkadot.

Note that Cosmos is further ahead on its roadmap

Security

Polkadot

• Parachains all share the same security.

Cosmos

• Each zone (a chain on Cosmos) is responsible for their own security. Interoperability is handled over IBC using a light client trust assumption on origin/destination chain. Therefore, the destination chain needs to trust in the security of the source chain.

Upgradeability

Polkadot

• Upgrades will occur without the need for a hard fork.

Cosmos

• Upgrades occur through a traditional forking mechanism.

Model

Polkadot

• Sharded model - shards are called ‘parachains’. Relay Chain validators independently verify parachain blocks.

• Parachains share state with the entire system - a re-organization of a single parachain requires a re-organization of the Relay Chain and all parachains.

Cosmos

• Bridge-hub model connecting Tendermint chains. Each hub connects to a group of zones. Zones are responsible for securing themselves.

• Communication between zones is through IBC.

• Zones do not share state. A reorganization of one zone does not affect other zones so messages between zones require the recipient's trust in the sender’s security.

Architecture

Polkadot

• The Relay Chain acts as the main chain. All validators are on the Relay Chain.

• Parachain collators propose parachain blocks to validators. Collators do not have security responsibilities. Once a block is submitted, it is confirmed/rejected by Validators.

• Winning an auction is required to gain a parachain slot. Parachains last for up to 2 years, after which the project can decide whether to try to apply for another parachain slot.

• If a project fails to gain a parachain, they can avail of a parathread which operates as a ‘pay-as-you-go’ model where you pay for block execution as they arise.

• Communication with external chains can be conducted via bridge parachains.

Cosmos

• Zones maintain their own state and require their own validator set.

• Zones communicate with each other via IBC.

• Zones use Tendermint to implement the IBC interface in order to send messages to other chains.

• Cosmos ‘peg zones’ enable it to interact with external chains. Ex: Gravity bridge forks for Umee, Injective, Secret Network, Sommelier Finance.

Consensus

Polkadot

• Hybrid consensus model with 2 sub-protocols called GRANDPA and BABE.

• At a high level:

  • BABE can propose blocks to extend the finalized chain, and

  • GRANDPA finalizes them in batches

  • The rationale for separating these tasks is to reduce complexity for block production and finalization.

  • In addition, the ability to extend the chain with unfinalized blocks leaves these blocks open to further scrutiny by validators.

Cosmos

• Cosmos uses tendermint consensus which enables instant finality.

• Block production and finalization occurs one block at a time.

Staking Mechanics

Polkadot

• Polkadot uses nominated PoS. The validator maximum size is currently set at 1,000. Stakers can delegate to up to 16 different validators.

• An algorithm is used to select validators based on having the most evenly staked set. This algorithm is called Phragmen.

• Nominating a validator does not give the validator governance voting rights.

Cosmos

• Cosmos uses bonded PoS (a form of delegated PoS).

• Plans to support up to 500 validators, currently it optimally supports up to 150 validators.

• Rewards and voting are stake-based in Cosmos. More than 2/3 of the stake must commit, rather than 2/3 of the validators. E.g. a validator with 20% of the total stake will receive 20% of the total rewards.

• If a staker does not vote on a proposal, the validator will assume their voting power.

Interchain Communication

Polkadot

• Polkadot will use XCMP for messaging between parachains.

• When there is a parachain reorganization, messages can be rolled back to the point of reorganization - relying on proofs posted on the relay chain.

• An additional protocol called SPREE also facilitates inter-parachain messaging and provides additional guarantees of provenance and interpretation by the receiving chain.

Cosmos

• IBC is Cosmos’ cross-chain protocol.

• At present, it allows token transfers between zones.

• Given that zones do not share state, receiving chains must rely on the security of the sending chain. This means that chains that want to be interoperable must make a decision on whether or not the other chain is safe and can secure themselves.

• Other forms of shared security launching: shared security via the Cosmos Hub, Celestia, Saga and Interfluid staking.

Governance

Polkadot

• There are multiple avenues to pass proposals. All pass through a public referendum which operates through majority voting.

• Council - a set of accounts elected by the community. Council represents minority interests and unanimous council decisions will often have a lower passing threshold in public referendum.

• Technical committee to make technical/emergency recommendations.

• Decisions are binding and carried out on-chain autonomously.

Cosmos

• Coin voting to pass proposals.

• Enactment of decisions carried out by protocol hard fork.

• All token holders vote, and if a delegator does not vote his vote is passed to the validator he delegated to.

Incentives

Polkadot

• To get an airdrop you need to lock DOT in parachain auction for up to 96 weeks to receive tokens

Cosmos

• Cosmos has attracted many users due to the ease of getting airdrops. Those who stake ATOM or other popular coins in the ecosystem have qualified for numerous airdrops, as well as those that use the native protocols.

• This demonstrates Polkadot’s compelling value proposition from a technological standpoint.

• Despite its impressive tech, from a user standpoint Cosmos exceeds the Polkadot ecosystem at present. Cosmos also has a developer-friendly environment with low barriers to entry, and has a number of dApps that have achieved strong adoption such as Osmosis and Juno. The success of several of its app chains has created hype and interest in the ecosystem. For Polkadot to receive this kind of hype and attention, its applications must become more usable and widely adopted. However, it is still a relatively new network with a long-term outlook so many are betting that these issues will be ironed out in the near future.

Ecosystem Fund

• In October 2021, an 18.9m DOT ecosystem fund was announced. The distribution of these funds will be determined by community governance, and will be put towards ‘building, improving, educating’.

• Funds will be spent if proposals put forward to the 13 person council are approved. However, stakeholders who put forward proposals must deposit at least 5% of the proposed spend. This is slashed if rejected or returned if accepted. This is arguably problematic as it discourages putting forward proposals in 2 ways. Firstly, some proposers may lack the capital to deposit 5% of the proposed spend. In addition, the risk of losing funds for simply proposing something is likely to deter proposals, which impedes governance participation in Polkadot.

Governance

• Polkadot has a sophisticated governance process that distinguishes it from other blockchain ecosystems. While some may praise this, others have taken the view that it is overly complicated and unfamiliar.

• Firstly, Polkadot’s governance is conducted on-chain. Most use off-chain governance mechanisms.

• There are 3 components to Polkadot’s on-chain governance.

Council

• Council - group of 12 elected members. Primary purpose is to put forward proposals, veto referenda if required, and elect the technical committee.
  • Every 2 weeks an election is held for council members.

Note that, like validators, council members are selected by the number of tokens staked. Obviously, the problem of whales dominating the council/governance is apparent. However, Polkadot uses an algorithm they call Phragen to reduce this risk.

This selects council members (and validators) by optimizing for:

• Maximize the total amount staked
• Minimize the difference in token weights between members
• Maximize the stake behind the least staked candidate

Technical Committee

• Tasked with ensuring the proper functioning of the network. Composed of teams that have successfully implemented a Polkadot runtime or Host. Primary purpose is to make proposals to the committee, as well as veto referenda if they pose a security risk.

Community

• Every DOT holder. They can:
  • Create proposals
  • Vote on referenda
  • Nominate council membeers Source: Polkadot

• Every 28 day voting cycle the proposal with the most DOT staked to it is put forward for a referendum. There is only 1 referendum per month, except in the case when the technical committee fast tracks an emergency proposal (in which there can be 2 per month).
• If a proposal passes, a 28 day implementation delay begins. This is in case the proposal could be harmful. At the end of this period, the proposal will be automatically implemented on-chain.

Conviction Multiplier

Voting power is based on

• Number of tokens bonded
• Time bonded

This avoids a situation where whales completely dominate governance. Smaller players who stake their tokens for a long time frame are given a stronger voice. This mechanism in general encourages longer staking of tokens.

Positive turnout bias (for community proposals)

The smaller the number of voters (DOT holders and weight of token staked) on a proposal, the greater the majority required to pass the proposal.

Negative turnout bias (for unanimous council proposals)

The smaller the number of voters, the more difficult it is to reject a proposal. This is to ensure the efficient functioning of the network - ultimately, the elected council will be far better equipped to make decisions for the network than the general community.

Risks and Considerations

Too Slow?

Polkadot has been slow to develop. Much of what is discussed above is still in development. A glaring example is that there is not yet interoperability between parachains. It is difficult to assess many of the merits of Polkadot as they do not exist yet.

However, it is clear that Polkadot is taking a very long-term approach to development. There is extreme pressure to develop products quickly in this space. This is likely a contributing factor to the various hacks that occur - which are getting increasingly worse. Polkadot’s clear focus on security and apparent discipline in not rushing products could therefore be a strong sign for the future of the ecosystem. Their commitment to security is demonstrated by the existence of Kusama as something of a test chain for Polkadot.

However, the counterargument to this is that even Kusama has been slow to develop so far. However, the Web3 Foundation has a strong team and its commitment to sustainable development is especially pertinent given the increase in incidence and severity of hacks in the space.

Given that many of Polkadot’s core features are yet to be deployed, it is difficult to assess what does not yet exist. XCMP would ideally be implemented as soon as possible, so Robert Habermeier’s tweet on 12th April stating that XCMP channels will be included in the next network update is welcome. Following XCMP’s implementation, the most important thing will be the quality of the projects built on Polkadot and whether the crowd loan parachain auction system is effective.

Key Takeaways

• Polkadot has a compelling technology roadmap and ambitions to create an ecosystem of application-specific blockchains that interoperate with each other in a trustless and secure environment.
• Its key value lies in shared security and interoperability between parachains. If this can be realized, the Polkadot ecosystem could be extremely competitive. However, the concept is not tested as the network is in its infancy (parachains only went live on 18 December 2021 and interoperability is not yet enabled).
• If Polkadot lives up to its billing as an interoperable and secure ecosystem of highly customizable blockchains it will be very difficult to beat in the long-term. It is likely that Polkadot will go through some more hype cycles if progress is made at the protocol level and if widely adopted applications are built.
• The criticism of only having 100 parachains is arguably not strong - as each of these can be enormous ecosystems in themselves, and the competition for slots ensures that only high-quality projects can tap into Polkadot.
  • Gavin Wood has stated that the project could scale to 250-400 parachains and 9-figure TPS. However, this is purely hypothetical.
• Polkadot’s user experience leaves a lot to be desired so far. However, this will only improve over time. In addition, the network’s slow development is likely attributed to the team’s long-term focus on ensuring the delivery of a highly secure network for the next generation of interoperable application-specific blockchains.