Why Is Polkadot the Ultimate DeFi Hub?

Polkadot (DOT) is a cross-chain ecosystem founded by Web 3 Foundation, that reflects Web 3’s vision of a multi-сhain and the user-friendly future of DeFi. 

Officially launched in may 2020, the project has made its way to the top of DeFi within just a year. Today their native token (DOT) shines among the heavyweight cryptocurrencies (currently ranking number seven on Coingecko) and the blockchain is supported by such giants as Coinbase Venture and Compound, who have granted Polkadot for development of Acala, the network’s DeFi hub. Let’s take a closer look at this unique pink creature.

What Constitutes Polkadot?

Polkadot unites many blockchains, all of which are heterogeneous – each of them can have its individual structure and area of specialization. All the blockchains are secured and connected through the Polkadot Relay Chain.

The Relay chain provides cross-chain transfers not just of token, but also of data. For instance, for trading synthetic assets a blockchain could request data about the stock price and get it from an oracle of some foreign parachain. Herewith, parachains can interact regardless of their types, which allows, among others, to share some permissioned information from a private chain with a public one.

Polkadot can provide a perfect protection for smaller projects that lack good security mechanisms, and here is why: the functions of Relay Chain include the responsibility for security of any parachain, no matter how important it is. Thus, it is working as a universal “umbrella” for all the projects it unites.

Although anybody can contribute to the Polkadot codebase as the code is open-source, the network still can run forkless as it was built with the expectation of frequent updates, and therefore, changes in code.

Polkadot’s innovative nature and its flexible structure make this network a viable competitor of existing blockchain giants such as Ethereum. Let’s take a closer look.

Parachains and Parathreads

Polkadot provides instruments to anyone wishing to build their own blockchain as an individual network or as Polkadot parachain.

There are two tool sets or Parachain Development Kits (PDKs) Substrate and Cumulus. With the help of the Substrate framework anyone can build their own blockchain, and Cumulus is the extension to Substrate allowing to implement the new blockchain on Polkadot as its parachain, when its mainnet has been launched.

As has already been stated, the implementation of a blockchain built with Substrate into Polkadot is only optional, which means, this blockchain can actually exist as an independent entity too.

To be able to become a Polkadot parachain the project needs to participate in parachain slots auction first, as the number of parachains that Polkadot can support is currently limited to 100. Acala Network, now Polkadot’s DeFi hub, was the first project to have won the parachain auction slot on Rococo, a testnet for protocols that provide cross-shard communication. 

However, the auction isn’t the onliest way to join the Polkadot ecosystem. Aside from parachains Polkadot also has parathreads. Technically they are the same as parachians, but connected with Polkadot without leasing the auction slot. In fact, they can be joined for a lower price (as it’s cheaper to register the parachain than to lease the parachain slot) in case they don’t intend to stay with the Polkadot network for long. 
Finally, auction slot lease is not a cheap deal: the parachain-candidate Equilibrium has recently raised $2.5M in funding round ahead of the near PLO (the parachain lease offering), while the price for reserving the slot estimates at 1 million DOT (~$40M). However, Polkadot expects to simplify the process of parachains creation by the upcoming launch of Frontier, Parity Technologies-baked aggregation layer.

And Bridges?

Although all the Polkadot parachains are united with one basic blockchain called Relay Chain, the system is still not a loop, as the external (autonomous) blockchains (including Substrate-powered) can also be connected with some parachains and/or with each other via bridges. Bridges can also be built between the entire Polkadot ecosystem and other blockchains. For example, you might have heard of Web 3 Foundation-financed developments of the bridges between Polkadot and Bitcoin / Polkadot and Ethereum.

Bridges make Polkadot a continuously growing ecosystem: it can steadily expand, attracting a limitless amount of new projects. Striving to achieve the most seamless interaction between blockchain networks, with time it will unite more and more various blockchains, thus moving towards the multichain future. Polkadot also plans to be bridged with Kusama, its experimental platform and “structural clone”, in the future.

What is Kusama?

Built as Polkadot’s experimental platform, Kusama has the same code and structure as Polkadot, consisting from the Relay Chain and parachains. It was created to be the perfect space for technologies to be tested and prepared for the further deployment on Polkadot. Developers can play around with the code and new features and even intentionally create faults to expose problems. This lets Polkadot improve itself without taking risks.

It’s hard to believe, but despite all this “Polkadot’s wild cousin” is an actually operating network, not just a testnet. It has its own DAO-based governance, native KSM token and gains popularity thanks to its high speeds and innovations, which you need to pay for by taking risks.

Kusama is also known for being an NFT-friendly platform. Many of its parachains have open-source components for NFTs, and the parachain Unique Network already has its native NFT- Substrapanks game, a spin-off of CryptoPanks but based on Substrate. What is more important, on March 26 Kusama has organized the world’s first crypto art exhibition. It’s likely that NFTs will appear on Polkadot because of Kusama’s NFT-oriented vision.

The canary at Kusama’s logo symbolizes the canaries that miners used to take in coal mines in order to be warned of toxic or explosive gases which the birds reacted to with singing. As the experimental platform to explore new features and prevent the potential danger for the system, Kusama is often called  “Polkadot’s canary network”.

The Next Level of DeFi

The network is also well-known with its active community, as it is fully runned by its users and is open to their initiatives. Stakeholders can join the Council, the on-chain entity assembled from their accounts. Basically, the Council allows its participants to put forward their proposals that, if voted on, can be implemented first on Kusama and then on Polkadot. The number of Polkadot Council seats is limited and currently accounts for 13, while Kusama has 19. Besides, the system is fully automated in a way that it is programmed to reward active users with DOT or apply fines against the participants commiting malicious acts.

On April 6, Tether announced the launch of its USDT token, the world’s largest stablecoin with more than $40B of market cap, first on Kusama and then on Polkadot. Thus, USDT will be Polkadot’s first stablecoin, driving the network further towards being the ultimate DeFi hub.

Polkadot Vs. Ethereum

When comparing the two networks people often see Polkadot and Ethereum.02 as competitors. Some people even consider Polkadot as “Ethereum’s Killer” in a sense that it might replace ETH 2.0 as its more popular alternative. Though this statement is rather controversial, let’s look at the facts that could speak for themselves.

Both networks have a lot in common. First, Polkadot creator Gavin Wood is also a  co-founder of Ethereum, not to mention that one of the reasons behind the creation of Polkadot was namely a desire to find the solution for scalability problems of classic Ethereum version (upcoming ETH 2.0 will try to fix these problems too). In fact, Polkadot managed to find a better scalability solution by turning its parachains into shards, which allows each node to avoid working on the whole block and process transactions portionally instead. It’s interesting that the system is flexible enough to modify the distribution of load depending on the network’s current state. For example, if a shard requires too much gas, it can be split in half, and vice versa, if two shards become too small and often communicate with each other they can simply be combined. The first project to implement this system to its platform was Zilliqa. Now it is used by Cardano and will be used in Ethereum 2.0.

The dapps from Ethereum 2.0 can join the Polkadot ecosystem, while even ETH 2.0 cannot add the dapps developed out of its network, which makes it way less attractive for developers.

However, there is also an opinion that Polkadot won’t present any potential threat to Ethereum 2.0. First, the protocols plan to cooperate, second, they have different goals and therefore can’t be called competitors: Ethereum specializes in smart contract execution, whereas Polkadot focuses on providing people the possibility to create their own blockchains and integrate them with each other.

DOT Use Cases

DOT is Polkadot’s native token and one of the largest cryptocurrencies by market capitalization. It is used for:

a. network governance;

b. staking;
c. ensuring the securance of the parachains slots in the network by being held during the slot lease.

Thus, DOT holders can:

  • Act as validators, nominators or fishermen.
  • Take part in the network governance.
  • Take part in the decision-making process: by staking DOT users can vote for a network upgrade proposal. Each vote is proportional to the amount of staked crypto.
  • Become collators for a parathread by making bids for block inclusion that are denominated in DOT.

Polkadot Ecosystem

In total, there are 347 Polkadot-based projects, 111 of which are built with Substrate.

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