Like most cryptocurrencies Polkadot has been taking a beating during the bear market. Behind the scenes however, its ecosystem has only continued to expand as new parachains plug in. So, today I’m going to give you a bit of background on Polkadot’s bring you up to speed with some of the projects, most important update, and tell you how DOT is going to handle the bear market. And if you want to be up to date with a crypto market, consider the big opportunity that the vast majority of crypto traders take advantage of: the Jet-Bot crypto trading bot. Taking advantage of this can be quite beneficial to you. It allows you to copy best traders, earn crypto passive profit, and feel confident. Jet-Bot is an official broker of the Binance crypto exchange. Jet Bot got 100% rating at CoinPayments website according to 7000+ users feedbacks. You can connect your Binance account to Jet Bot platform via secure Binance API connection for binance copy trading.
Polkadot Explained
If you’re unfamiliar with Polkadot, here’s what you need to know. Polkadot was founded in 2016 by Ethereum co founder Gavin Wood it was built by Parity Technologies, a software company based here in London, England.
Polkadot’s development is coordinated by the Web3 Foundation, a nonprofit based in Switzerland, Polkadot raised around $145 million in 2017 and raised an additional $100 million in 2019 and 2020. The second round of sales was to compensate for the $100 million that were lost when the project’s Ethereum wallets were compromised shortly after the first round of sales. This left Polkadot with around $130 million of initial funding and though many Polkadot projects have since raised 10s of millions of dollars. Polkadot itself has not received any post ICO funding.
Polkadot’s mainnet went live in the summer of 2020 and though it is fully functional, the project is still technically in development. Under the hood, Polkadot uses a proof of stake blockchain called the relay chain, which leverages a novel consensus mechanism called nominated proof of stake which is like delegated proof of stake, but better. Polkadot’s relay chain can process around 1000 transactions per second. This is currently secured by around 300 validators and over 27,000 nominators, which are analogous to delegators.
Note that Polkadot’s relay chain can support a maximum of 1000 validators in its current form. Now, while the hardware requirements associated with running a Polkadot validator our low validators must currently stake a minimum of 1.8 million DOT to become part of the validator set according to the Polkadot apps website. That’s over $14 million at the time of shooting.
Meanwhile, the minimum stake for nominators currently sits at 128 DOT according to the Polkadot apps website, which is a much more modest 1000 or so dollars at the time of shooting. Note that the minimum stake required to become a validator or nominated can and often does change. Validators and nominators must also lock their DOT coins for 28 days and any misbehaving validators are slashed.
In return for their security services, validators and nominators can expect to earn around 15% and 14% per year respectively, according to staking rewards.
Although Polkadot is a smart contract cryptocurrency its relay chain has limited smart contract functionality as it only handles transactions related to staking governance and standard DOT transfers. Most of Polkadot smart contract functionality comes from proprietary blockchains called parachains that plug into Polkadot’s relay chain for security.
Note that parachains do not have to use DOT for transaction fees and do not even necessarily need a coin or token to operate. Now there are three types of parachain:
- common good parachains,
- para threads
- standard parachains.
Because the relay chain can only support 100 parachains. Each type of parachain has its own unique purpose and selection process. Common Good parachains are intended for things like bridges to other cryptocurrencies, and they’re selected via community governance.
Para threads are pay as you go parachains which are arguably intended for institutions whoever pays the highest price gets the Para thread and multiple institutions can share the same para thread.
Standard parachains are intended for crypto projects. And they’re selected using parachain slot auctions which involve taking a snapshot of the dock provided by the project at a random time before the auction ends. This is to prevent the insane last minute bidding you see on websites like eBay.
To help them win a parachain slot. Most crypto projects will hold something called a Parachain Loan Offering or PLO, which makes it possible for their community to delegate to the crypto projects parachain slot auction.
In exchange PLO participants typically get that crypto projects coin or token. This makes PLOS like initial coin offerings or ICOs. But what makes PLOs better is that the DOT’s you use to participate in them never actually goes to the crypto project, nor is your DOT ever sold DOT, your DOT is just locked up on their power chain for its lease period, which is usually a maximum of two years. According to parachains DOT info, there have been around 24 parachain slot auctions so far, and they’re scheduled to continue until the end of August.
Updates Part 1
Anyways, it’s only been about four months since I last covered Polkadot but a lot has happened since then. In early March, Gavin would donated almost $6 million worth of DOT to The Ukrainian government in a move that was seen as controversial by some seeing as Gavin implied that the donation had to be made in DOT for what it’s worth. The Ukrainians on the other end weren’t upset, and that’s what matters.
In mid March, popular NFT crypto project Enjin launched its parachain on Polkadot bringing its massive community of more than half a million people into Polkadot’s ecosystem. Parity technologies also announced that it had completed a major upgrade for its custom programming language for smart contracts called INK, making it easier for developers to build on Polkadot. Former Andreessen Horowitz partner Katie Hound also poured $10 million into a DeFi protocol on Moonbeam, popular Polkadot parachain that uses the Ethereum Virtual Machine for smart contracts. This is more significant than you think because Katie’s new VC firm secured $1.5 billion in funding earlier this year. The fact that Katie seems to be interested in Polkadot’s ecosystem means more of that massive money pile could find its way to other Polkadot projects in the future.
At the end of March, another popular Polkadot parachain called Acala announced a $250 million developer fund that focuses on the adoption of aUSD Acala’s crypto back stablecoin that it hopes will become the standard in Polkadot’s ecosystem. This is again more significant than you think because the primary asset used to collateralize aUSD is different types of DOT meaning the adoption of aUSD would logically translate to an increase in demand for DOT.
WisdomTree also launched exchange traded products for Polkadot, Solana, and Cardano on European stock exchanges, revealing just how much institutional demand there is for DOT and other altcoins.
In early April, the institutional interest in DOT and other altcoins was underscored. When the Chicago Mercantile Exchange or CME announced that it had added reference rates for a dozen altcoins including Polkadot. For context the CME is a futures exchange that’s popular with institutional investors. So the fact that the CME is adding reference rates for altcoins suggests that the exchange could be looking to offer futures for those cryptos in the near future, no pun intended.
In mid April Tether’s USDT stablecoin expanded to Kusama Polkadot’s testnet cryptocurrency, if I’m not mistaken this makes it the first centralized stablecoin to set up shop in Polkadot’s ecosystem and it’s expected that USDT will find its way to Polkadot in due course.
Terra Classics now infamous Anchor Protocol also announced that it would be expanding to a collar and if I’m not mistaken, it didn’t manage to do so before Terra Classic collapsed. This is actually really good news because the crypto projects with the most exposure to Terra Classic were hit the hardest when it collapsed. And it sounds like Acala and Polkadot came uncomfortably close to getting caught up in that mess.
Updates Part 2
In early May Parity technologies announced it had completed an important upgrade for its Parity Signer mobile wallet which only seems to have around 10,000 downloads on Android devices. This is a far cry from the 500,000 downloads of the Polkadot.js browser extension, which is used to interact with Polkadot’s relay chain its parachains and the decentralized applications that live on them.
Note that the Polkadot blockchain itself has over 1.1 million unique wallets. Polkadot also announced that it had shipped its cross chain messaging protocol called FCM, following a code audit that had been completed in April. This means it is now possible for Polkadot’s parachains to interoperate including the decentralized applications that live on them.
At the end of May, Gavin announced that he had partnered with an American real estate billionaire named Frank McCourt to create a decentralized social media protocol on Polkadot called Project Liberty. Additional details about Project Liberty are expected to be released later this year. But Coindesk speculates that the project will likely receive its own common good parachain slot once it’s up and running, assuming the community agrees, of course. I’ll quickly point out that project Liberty was announced at one of the crypto conferences that was taking place in Davos, Switzerland, down the street from the World Economic Forum’s own annual meeting.
Now, that wasn’t crazy enough. Parity technologies also announced that it had partnered with Klayton, a South Korean crypto project created by one of the country’s largest tech companies KAKAO, the partnership will see Klayton build a new Metaverse focused blockchain using substrate which is used to build Polkadot and its parachains. Though the announcement doesn’t say that Klayton’s new chain will become a Polkadot parachain, it’s quite possible that it will become a part of Polkadot’s ecosystem.
As a cherry on top, Moonbeam partnered with liquid staking protocol Lido Finance to bring liquid staking to Polkadot. This means it’s now possible to stake your DOT without locking it up more about Lido Finance in the description.
Anyhow, earlier in June, a research report by cryptocurrency exchange Coinbase found that most investors view Polkadot as an Ethereum competitor, which the authors argue isn’t entirely accurate due to Polkadot’s unique capabilities.
The authors also highlighted the completion of Polkadot’s aforementioned cross chain communication protocol as laying the groundwork for DOT’s value accrual going forward. Arrington Capital also announced a $100 million ecosystem fund for Moonbeam in what is likely to be the biggest bet on any Polkadot project to date. As another cherry on top Chainlink integrated with Moonbeam to provide reliable data feeds to Polkadot developers.
DOT Price Analysis
As amazing as Polkadot’s, updates, upgrades, partnerships and announcements have been DOT has been getting absolutely decimated on the charts and I’m not exaggerating. Its price is basically what it was before the last bull market even began.
DOT’s of normally poor price action is due to a few factors, and the first is the fact that the rest of the crypto trading market has been getting wrecked, notably BTC whose price is strongly correlated with DOTs. Not only that, but Coin Gecko’s historical data reveals the DOT’s circulating supply has increased by around 55 million over the last four months alone. Now I’ll note that Coinmarketcap status suggest DOT’s circulating supply hasn’t increased at all. But Coin Gecko appears to be consistent with Polkadot’s explorers, whereas Coin Market Cap isn’t.
In any case, assuming an average price of $15 per DOT during that period. This means that DOT could have experienced more than $800 million dollars of sell pressure. But it’s possible if not likely that some of this newly issued DOT was staked rather than sold. Even so, it’s clear that there has been a substantial amount of sell pressure for DOT. And that’s simply because the Web3 Foundation has issued no less than 60 grants to Polkadot projects since the start of the year as per the Polkadot GitHub. This sell pressure wouldn’t be a problem if there was enough demand for DOT’s to offset it. But the problem there is that the demand for DOT has been on the decline as the crypto bear market sets in and not just from retail investors.
If you read the article about Messari’s crypto report, you might recall that DOT is the most held cryptocurrency by crypto funds after BTC and ETH. Well, the amount of DOT held by Exchange Traded products for Polkadot has fallen by more than 70% since February, according to just ETF specifically from $100 million to less than $30 million. This gives us some idea of how much the demand for DOT has dropped among crypto funds.
To make things worse DOT isn’t required to pay for transaction fees on Polkadot’s parachains, which means that it lacks the key demand driver that many other smart contract cryptocurrencies have. To be fair, the demand for DOT will probably increase as new use cases for it are introduced on these parachains.
For now, the only real demand driver for DOT is coming from individuals and institutions who want to participate in Polkadot’s parachain sloth auctions which are ongoing. The thing is that the amount of DOT being used in these auctions has likewise been on the decline. Case in point, the 7 parachain slot auctions that took place from mid March to the end of May only saw $5.2 million deposited worth just $41 million.
Even if we assume DOT at $15 during this time, it still works out to 82 million or so dollars of demand, which isn’t much. The silver lining is that more than 15% of DOT’s circulating supply has been committed to parachains, which means they will be out of circulation for two years. Unfortunately, the economic benefits of this will decline over time due to DOT’s annual inflation rate of around 7.5%. I’ll reiterate that Polkadot’s parachains are likely to create more demand drivers for DOT but whether Doc can eventually reclaim its new all time highs ultimately depends on the project’s own upcoming milestones.
Roadmap
Polkadot’s official roadmap ends with future upgrades which include its already released cross chain communication protocol, as well as the rollout of para threads, which will obviously create more demand for DOT.
The plan for now is to gradually plug in all 100 of Polkadot’s parachains, something that will first be done on Polkadot’s Canary Network Kusama to ensure there are no issues. Additional Polkadot milestones can be found in interviews with members of Polkadot’s ecosystem most notably Polkadot founder Gavin Wood.
In January this year, Gavin revealed that Parity technologies and the Web3 Foundation were hiring lots of people in preparation for Polkadot 2.0, which has yet to be detailed. I take this as more evidence that there has been a lot of DOT selling especially since neither of these entities has received post ICO funding.
In February, Gavin revealed that he was working on a new governance structure though I must admit he didn’t specify whether it will be implemented on Polkadot. I imagine this is because it’s ultimately up to the Polkadot community.
In another February interview, Gavin said Polkadot’s core developers are focused on improving the project’s scalability with the ambitious goal of achieving millions of transactions per second in the coming years.
In April, a member of Acala’s team mentioned in a presentation that the project had entered a partnership with the Wormhole Bridge, foreshadowing collaboration between Solana and Polkadot in DOT.
Another presentation from April, a member of Parity Technologies seemingly confirmed that there will be collaboration with other crypto projects, stressing that the developers are focused on creating bridges to other crypto ecosystems.
In an April interview, Gavin slammed other smart contract cryptocurrencies for being too centralized and said the Polkadot’s developers are working to make sure the project is truly decentralized from top to bottom.
Concerns
This brings me to my concerns about Polkadot and I’ll start by saying that DOT’s poor price action is really just part and parcel of the crypto bear market. That said, DOT’s supply and demand dynamics just aren’t on a par with every other smart contract cryptocurrency and that’s my first concern about Polkadot. Besides actually being used to pay for transaction fees on their native blockchains, almost every other smart contract cryptocurrency has a very important demand driver, and that’s stablecoins.
As far as I can tell, stablecoins are going to be one of the few organic demand drivers for smart contract cryptocurrencies during the bear market. And this is something that Polkadot currently lacks. Not only is it something that Polkadot lacks, but it’s something that wouldn’t even result in an increase in demand for DOT. Because well it’s not used to pay for transaction fees on its parachains, which is where the stablecoins will probably end up.
I will once again reiterate the Polkadot’s parachains will likely create new demand drivers for DOT but so far, the biggest one has been Acala’s aUSD stablecoin, which given Terra’s UST recent collapse may not be all that appealing to individuals nor institutions.
Case in point there’s only around 3 million a year on Kusama has Karura parachain and only around 5 million aUSD on Polkadot’s Acala parachain. Compare that to the billions of dye that are currently in circulation. This ties into my second concern, and that’s the relentless sell pressure that has seen.
The fact of the matter is that DOT’s existing demand drivers would probably be enough to support its price if there wasn’t so much sell pressure. As I mentioned earlier, the entities behind Polkadot never complete post ICO funding rounds. That means that one of the only remaining ways they have to be able to continue funding ecosystem development is through the sale of DOT.
The good news is that this is likely to change as Polkadot projects continue to see 10s of millions of dollars of investment from crypto VCs. This capital will almost certainly attract developers and new projects, which is what the Web3 Foundation and Parity Technologies have been spending their money on.
This relates to my third concern, and that’s competition. If you’ve been keeping up with my crypto updates, you’ll know that Polkadot, Solana and Near Protocol are all coded in Rust. This means that they’re fighting for the same pool of developers a pool that’s shrinking, as the bare market sets in Solana and Near Protocol have much more capital than Polkadot developers with but the former seems to be having some serious issues of its own. The latter appears to be lacking the brand and mission that inspires so many crypto depths. A brand and a mission might be Polkadot’s biggest edge over its competitors. So much so that it still continues to attract developers, crypto projects, and even institutional partners, despite its suboptimal tokenomics which will hopefully improve as time goes on.
That’s why I will continue to hold DOT and if its current downtrend continues, I may just accumulate even more.
[This article is a transcription of a video made by Coin Bureau]
[Original video: https://youtu.be/gO7U3ibtCPA]
