Complete Guide to Polkadot and DOT Token: How do they work?

polkadot

Overview

One of the aspects in the blockchain ecosystem that has been less addressed is interoperability between networks. So far, we have analyzed networks that, even if they included Smart Contracts or DApps, operated in isolation, meaning they had no relationship with each other. However, there are some pioneering projects whose main goal is to eliminate the independence between networks. Through interoperability between them, greater communication is enabled, as well as improved scalability and performance optimization. In this group, we find Polkadot, a project born in 2016 with the aim of becoming the “Internet of Blockchains” through communication and information exchange.

As explained in the Polkadot Lightpaper, this protocol “paves the way for new decentralized markets” because it allows bringing together “the best features of multiple blockchains.”

Polkadot seeks interoperability between networks through a subdivision of its main chain (called the “Relay Chain”). With this division, other independent chains appear, which can be public or private (called “Parachains” and “Parathreads,” respectively). These subnetworks communicate with networks outside of Polkadot through so-called “Bridges.” The structure is designed so that each of the subnetworks can leverage the full power of the main network, improving its scalability without compromising security.

polkadot

We will now explain the implications of this division in each of the basic aspects of the Polkadot protocol.

Consensus Algorithm

The consensus algorithm is one of the most characteristic features of blockchain networks. Although some algorithms are widely popularized, it’s not uncommon to see specific adaptations with unique characteristics for each project.

In the case of Polkadot, its algorithm is called “Nominated Proof of Stake” (NPoS). This algorithm differs from classic PoS in that validators are not chosen directly based on their stake in the network’s native token (called DOT in the case of Polkadot). Instead, they are voted in by the so-called “nominator nodes.” Nominator nodes share the rewards received with the validators and assume the risk of dishonest behavior.

In addition to “validators” (who validate blocks) and “nominators” (who choose validators), there are two other types of nodes. These are “collators” (who select the blocks to be validated) and “fishermen” who monitor the network to report dishonest behavior. These four types of nodes contribute to the security of the main network and expedite the transaction process.

GRANDPA and BABE

Polkadot’s algorithm is also designed in a hybrid manner because it combines what they call a “block finality mechanism” called GRANDPA with another “block production mechanism” called BABE. By separating these two mechanisms, they achieve the benefits of both without compromising the speed and efficiency of the network.

GRANDPA

GRANDPA is based on the idea that 2/3 of the validators vote for the most advanced block they consider valid. Once this block is approved, all blocks before it are automatically approved. This improves the speed of the network and avoids situations where multiple validations are required to consider a transaction final.

On the other hand, BABE allows for the continuous generation of blocks based on small time intervals. These new blocks are always added on top of the last block validated by GRANDPA. If there are multiple blocks added in the same interval, then the chain with the most “primary” blocks, i.e., the ones that arrived first within their interval, is considered.

Since GRANDPA may take longer to validate chains than BABE does to generate them, each new approval allows for the simultaneous validation of multiple blocks. These blocks become final and no further alternative chain is possible, which is different from some other networks.

Transactions

When explaining Polkadot’s transaction system, it’s essential to consider its multicentric nature. By hosting and connecting several independent sub-chains (the mentioned “Parachains” and “Parathreads”), it also allows for various types of transactions. On the one hand, there are transactions on its main chain (the “Relay Chain”), and on the other hand, there are transactions generated in the sub-chains.

Relay chain

Since Parachains have their own economic model, we will explain the functioning of transactions on the “Relay Chain” directly.

Transaction blocks in Polkadot are structured so that 75% of the space in each block is dedicated to regular transactions. The remaining 25% is for operational transactions, such as reporting malicious behavior. Transactions also involve a fee, which is calculated based on the “computational weight” of the transaction, its length, and the “tips.” The concept of “tips” is optional and is used to improve block priority.

The fees are deducted from the involved accounts before the transaction is recorded, and validators only receive 20% of them. The remaining 80% goes to a network fund dedicated to financing proposals made by participants.

To predict these fees, Polkadot introduces a novel adjustment system based on demand. The more transactions have been requested for a block, the higher the fee to be paid in transactions in the next block.

Auctions and crowdloans in Polkadot

One of the most characteristic features of Polkadot is the ability to have multiple independent and connected blockchains. These blockchains, called “Parachains,” access the Polkadot network through an auction system. Through these auctions, projects gain a connection to the network for a period of 96 weeks (approximately two years).

The connection to the network is renewable, allowing projects to bid for a slot in the network. The auctions last for a week, and the DOT tokens bid are not lost but are locked for the duration of the auction. This incentivizes competitiveness while controlling the number of integrated projects in Polkadot.

Furthermore, Polkadot enables collaboration with Parachains through a system of crowdloans. Projects wishing to participate in the auctions can open a loan to other participants. This means that if someone is highly interested in a particular project, they can lend a portion of their DOT tokens to that project under certain conditions. All of this represents an innovative system to facilitate the creation of new projects and their interoperability within the network.

Mining and Governance

Since Polkadot’s consensus algorithm is based on a proof-of-stake system, there is no traditional mining as seen in proof-of-work blockchains. The token emission is theoretically unlimited, with an expected inflation rate of 10% for the first year. This inflation rate is derived from the rewards paid to validator and nominator nodes for their contributions to the network.

Therefore, the system under which Polkadot operates is staking. Participants in the network can stake their tokens and earn rewards for doing so. Since the network penalizes both nominators and validators for dishonest behavior, it helps maintain network security.

staking in Polkadot

Furthermore, Polkadot incorporates a complex governance system. Under this system, there are two roles: on one side, there are the members of the Council, and on the other, the Technical Committee. The Council members represent all participants when proposing changes and vetoing malicious nodes. The Technical Committee, on the other hand, can propose emergency measures in collaboration with the Council for rapid implementations on the network. This system allows nodes to vote on changes to their conditions, which could include additional DOT token sales, modifications to the rewards ratio for nodes, and more.

This voting system also allows for protocol updates without the need to fork the main chain. This simplifies the management of version changes for the project.

Conclusion

In conclusion, Polkadot’s project was created with a clear intention to address scalability and governance issues in blockchain networks. It does so by providing interoperability and communication between different networks connected to its main chain.

This innovation makes Polkadot one of the most ambitious projects in the blockchain ecosystem. However, it is still in an early development phase, with many relevant features not yet implemented. Therefore, it is too early to assess the success or failure of the initiative.

In any case, it is very positive for the entire DLT network that solutions like Polkadot or Cardano emerge because they can provide solutions to the current problems facing this technology, which are barriers to its full adoption.

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