Polkadot (DOT): Definition, History, and How It Works

What Is Polkadot (DOT)?

Polkadot is a blockchain project that focuses on creating a platform that other blockchain-based projects and applications can build on. It has arguably become one of the most successful projects working to improve the fundamental technology that powers decentralized applications (dApps).

Learn what Polkadot is, how it works, and why it’s important to blockchain and cryptocurrency advancements.

History of Polkadot (DOT)

Polkadot was started by Peter Czaban and Ethereum co-founder Gavin Wood, who, incidentally, coined the now-ubiquitous term Web3 in 2014. Wood published the white paper for Polkadot in 2016 and, with Czaban, launched the Web3 Foundation in 2017. The foundation then raised more than $200 million to develop the protocol by selling DOT tokens.

Polkadot consistently remains in the top 20 cryptocurrencies by market cap. As of this writing, it was ranked 16 (by market cap), had a market cap of $6.319 billion, and had a 24-hour trading volume of $163.62 million. There were 1.49 billion tokens circulating and 880.81 million staked.

How Polkadot Works

Industry experts and developers list three significant obstacles hindering the growth of blockchain technology: decentralization, scalability, and security. Although most first-generation blockchains—a somewhat loose term—have made incremental improvements over time, they remain inhibited by these technical limitations.

The Polkadot blockchain attempts to break down the barriers between various blockchain ecosystems, allowing intermediary-free communication among these networks to address these issues. The project's vision is to enable tokens and data to be transferred across all blockchains, creating the foundation for Web3 and removing bottlenecks.

According to Wood, many developers, and fans of blockchain, Web3 is the next iteration of the web where the infrastructure behind the scenes is changed. In this vision, people's data will not be gathered and used against their wishes by corporations or centralized entities. It is hoped that under Web3, information will not be controlled or censored, but the entire system will be decentralized.

Polkadot allows vastly different blockchain architectures to interact with each other to facilitate the goals behind Web3. It does this through parachains, or specialized blockchains with their own functionality and tokens. The network uses the nominated proof-of-stake (PoS) consensus algorithm and was inspired by the Ouroboros protocol.

Parachains and the Relay Chain

Parachains are blockchains that can run independently and be completely customized by the owner. They can host any application and have features and programming logic that are limited only to the developer's imagination.

But what binds these parachains is the relay chain, which is responsible for shared network security, consensus, and interoperability. The relay chain validates data and ensures that it is understandable; i.e., it is responsible for achieving consensus and ensuring that transactions are executed.

Bridges and on-Demand Parachains

Polkadot also uses bridges, which connect blockchains and allow data to be transferred among them. Bridges establish interoperability and can be used to connect with external networks like Bitcoin (BTC) and Ethereum. Another part of the network is on-demand parachains, a smaller-scale version of the parachains that works on demand. On-demand slots are useful for blockchains that don’t require continuous connectivity to the Polkadot network.

Substrate

The benefits are not limited to only addressing the previously mentioned technical pain points. Substrate, a blockchain development framework designed by Parity (the company behind Polkadot), is vital to the project's offerings because developers can create their blockchains using it. Its design allows teams, companies, and individuals to focus on building a parachain—as the framework takes care of much of the initial legwork of designing a blockchain.

Consensus

Three stakeholders exist within the nominated proof-of-stake consensus model on Polkadot. They are nominators, validators, and collators:

• Nominators: Participants who stake their DOT and appoint their stake to validators they believe are trustworthy.
• Validators: Participants who stake their DOT, validate proofs from collators, and participate in consensus.
• Collators: Require less involvement than validators. They are responsible for keeping a record of valid parachain transactions and sending them to validators on the relay chain.

The DOT Token

The DOT token has three uses:

• Staking: Like other proof-of-stake blockchains, staking DOT incentivizes network participants to act honestly by holding DOT as collateral for good behavior. Rewards are issued to those who stake their DOT.
• Governance: DOT holders are given rights and abilities to participate in voting through referenda—a voting scheme weighted by stake.
• Bonding: Because there are only a limited number of parachain slots available, they are leased in bulk coretime reservations. DOT is used to reserve coretime in one-month increments.

Polkadot's Future

Many see Polkadot as one of the most promising networks of the future, as it is attempting to lay a foundation for a multitude of purposes. While the project is still in its early years, many developments indicate that the path it has laid out could become the standard for building Web3.

Polkadot may or may not become the go-to platform for developing blockchain-based applications, especially with Ethereum releasing its own improvements that address many of the same issues. However, what is particularly favorable is the combination of the Substrate development tool along with the fundamental technical benefits, which could attract a lot of development.

Polkadot can process an estimated 1,000 transactions per second. The theoretical upper limit for Polkadot’s transaction throughput is 1 million transactions per second.

Polkadot says the parachain model is more decentralized and trustless than layer-2 scaling solutions alone. Many teams have already built parachains, so the future bodes well for this budding ecosystem. As of 2024, millions of transactions have been processed on parachains.

How to Get DOT

The actual DOT token is not available on centralized exchanges, but you can swap it on decentralized exchanges built on a parachain. The tokens seen on other exchanges are tokens created on a different blockchain and are wrapped or pegged versions of DOT. You can purchase the wrapped DOT on exchanges such as Binance, Coinbase, Kraken, and Gemini. However, it is not available on popular decentralized exchanges like SushiSwap or UniSwap.

If you own DOT, you can store it in several wallets. Some examples are Ledger, Fearless, Polkawallet, and Polkadot-JS Plus. Polkadot Vault is a wallet you can install on an old smartphone. You keep it in airplane mode and use it as cold storage.

The Bottom Line

Polkdot is a blockchain and ecosystem designed for decentralized and other applications to be built on. It is designed so that developers purchase time slots for their applications to use the Polkadot Relay chain. Like many blockchain projects, it is still under development. Its future, similar to all other blockchain projects, is uncertain.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own DOT.