Introduction

Polkadot or DOT Coin (collectively “DOT”), like other cryptocurrencies, is a token which can be traded on exchanges like Coinbase and Kraken. More importantly, it is a decentralised protocol that connects different blockchains which are previously incompatible. In this way, Polkadot is one of a number of competing blockchains aiming to grow an ecosystem of cryptocurrencies, other notable examples of which include Ethereum, Cosmos and EOSIO.

With an ever growing focus on actual “utility” of cryptos by regulators, this article will explore the potential of Polkadot and whether it can replace Bitcoin and Ethereum in the future.

What is Polkadot? | How is it unique? | Web 3.0 Solution

The DOT was developed by Gavin Wood, a co-founder of Ethereum, together with Peter Czaban and Robert Habermeier, in 2016. It is designed to allow value and data to be transmitted across blockchains (for instance, Bitcoin and Ethereum) and such value and data can flow between networks without an intermediary and in a secure manner. The DOT is also designed to be speedy and scalable, via the use of many parallel blockchains (or “parachains”) that take much of the processing demand off of the main blockchain. Polkadot can even be used to connect non-blockchain databases.

In light of such unique and innovative feature, the DOT has been hailed as a prime example of Web 3.0 advancement, representing the next iteration or phase of the evolution of the web/internet and potentially could be as disruptive and represent as big a paradigm shift as Web 2.0. Web 3.0 is built upon the core concepts of decentralization, openness, and greater user utility (e.g., the blockchain).

Polkadot is designed to operate two types of blockchains: a main network, called a relay chain, where transactions are permanent, and user-created networks, i.e. parachains. Parachains can be customised for any number of uses and feed into the main blockchain in a way that parachain transactions benefit from the same security of the main chain.

The reason Polkadot can process all this information is because its numerous parachains do a lot of the heavy lifting for its main relay chain. To achieve a greater speed, the relay chain separates the addition of new transactions from the act of validating those transactions. As a result, the Polkadot network can process more than 1,000 transactions per second, compared to about 7 for Bitcoin and 30 for Ethereum. As the network grows and more parachains are added, Polkadot should get even faster, with speeds that could hit a million transactions per second.

Further, work is underway to build bridges with blockchains like EOSIO, Cosmos, Ethereum and Bitcoin, which would allow tokens to be swapped without a central exchange.

The lack of need for centralized exchanges will mean that the DOT may very well be in a position to stay outside the ambit of the Securities and Futures Commission’s (“SFC”) recent announcement to bring centralized exchanges under its jurisdiction.

To date, Polkadot has raised roughly US$200 million from investors across two sales of its DOT cryptocurrency, making it one of the most well-funded blockchain projects in history.

Proof of stake model | The stakeholders

Polkadot uses a proof-of-stake consensus mechanism (as opposed to the proof-of-work system used by Bitcoin) to secure the network, verify transactions, and create and distribute new Polkadot tokens. This system allows anyone who stakes DOT by locking the cryptocurrency in a special contract to perform one or more of the following roles necessary to its operation:

1. Validators – validators validate data in parachain blocks and participate in consensus and vote on proposed changes to the network.

2. Nominators – nominators secure the relay chain by selecting trustworthy validators. They delegate their staked DOT tokens to validators and thus allocate votes to them.
3. Collators – collators run nodes that store a full history for each parachain and aggregate parachain transaction data into blocks for addition to the relay chain.
4. Fishermen – fishermen monitor the Polkadot network and report bad behaviour to validators.

Users who stake DOT and perform these roles are also eligible to receive DOT rewards.

Polkadot governance

Three types of Polkadot users can influence the software’s development.

1. DOT holders – anyone who purchases DOT tokens can use their DOTs to propose changes to the network and approve or reject major changes proposed by others.
2. The Council – council members are elected by DOT holders and they are responsible for proposing changes and determining which changes proposed by DOT holders are made to the software. Proposals by council members require less votes to be approved than those by ordinary DOT holders.
   
3. The Technical Committee – it is composed of teams actively building Polkadot. This group can make special proposals in the event of an emergency. Members of the technical committee are voted in by council members.
   

Key takeaways

Polkadot has unlimited potential as it leverages the power of multiple blockchains and it is able to process many more transactions than Bitcoin, Ethereum and the like. In the foreseeable future, it promises to make every single cryptocurrency unified and to allow tokens of different cryptocurrencies to be swapped without a central exchange.

As such, when the SFC does eventually bring centralized virtual asset service providers (“VASP”) under its auspices, the DOT ecosystem may have the option to stay outside of it. As such, commercial parties who is keen for decentralization may ultimately find the DOT a far more suitable asset to use for transaction than BTC or ETH.

In addition, Polkadot has a sophisticated governance system where all stakeholders have a voice. Upgrades to the network are coordinated on-chain and enacted autonomously, ensuring that Polkadot’s development reflects the values of the community and avoids stagnation.

Nevertheless, the legal landscape of Polkadot and other cryptocurrencies remains ever evolving and authorities may put in place regulations to govern transactions involving cryptocurrencies. At the moment of course, all regulatory eyes are on traditional cryptos the likes of BTC and ETH.

If companies intend to tap into the great potential of the DOT and other cryptocurrencies, they should seek legal advice on how to best draft/craft their smart contracts in order to account for possible legal ramifications of their proposed transactions and best practices to secure their rights.