Polkadot
Market Recap
Uniswap Leads The Rally
Polkadot
Last week we wrote about interoperability. Interoperability is the idea that two or more systems can communicate with one another and share data in an understandable format. In blockchain, this is exceedingly important as it will enable a multi-chain world where people can choose to use the chains that best serve their needs while being able to leverage the unique advantages of others.
While this seems simple is an incredibly complicated issue to address in practice. For a long time, the world of blockchain has been fragmented and existed in silos; nevertheless, many attempts have been made to solve these issues, and we are getting closer to creating a genuinely trustless interoperability solution. Polkadot is one of the projects actively working on solving this problem.
What is Polkadot?
Last week we covered Polkadot from a high level. This week we will investigate it in more depth and explore its inner workings.
Polkadot is a project creating a network of independent interoperable blockchains. It was built to connect and secure a variety of specialised blockchains, whether they are public, permissionless networks, private consortium chains, or other Web3 technologies. Through this, they can create an internet where independent blockchains can communicate and share information under similar security guarantees.
Its creator, Dr Gavin Wood, was an early contributor to the Ethereum project. He was introduced to Vitalik Buterin in late 2014 and very quickly became intimately involved in the project; he was instrumental in creating what Ethereum is today. He coded the first functional implementation of Ethereum (PoC 1 or Alpha version), created the Solidity smart contract programming language and wrote the Yellow Paper, which was the first official specification of the blockchain state machine. It was in 2016 that Gavin left the Ethereum project, no one knows exactly why, but it is speculated that Vitalik and himself had fundamental disagreements on the future development of Ethereum.
After he left, his company Parity Technologies pivoted from assisting Ethereum, and in October 2016, Polkadot released its whitepaper titled "POLKADOT: VISION FOR A HETEROGENEOUS MULTI-CHAINMULTI-CHAIN FRAMEWORK". In the paper, Gavin described a "heterogeneous multi-chainmulti-chain" architecture that could address some of the problems he perceived to exist in the blockchain industry: scalability in performance, flexibility in architecture design, and upgradability in governance.
The first Proof of Concept was released in May 2018; this included the basic state transition engine that would power its Relay Chain and on-chain governance. This was followed by several other PoCs and testnets that ensured the network operated as designed. It wasn't until May 2020 that the mainnet was rolled out, yet this also was a slow process and consisted of many phases in a self-described "multi-stage launch". After a year of further research and development and with the first blockchains connected to Polkadot becoming interoperable in December 2021, the Polkadot launch was finally considered complete.
How Does Polkadot Work?
Polkadot uses a sharded architecture model. This is similar to what Ethereum plans on implementing in the future, something we have written about before.
In Polkadots model, each shard is known as a "parachain". Each of these parachains maintains a record of its current state (i.e. who owns what and how much of it they own) and connects to the Relay Chain, which is the chain that coordinates them. Through this design, transactions will be processed in parallel as opposed to sequentially, which is how something like Bitcoin currently works.
Polkadot has been designed in such a way that if a blockchain's logic can compile to WASM and it adheres to the Relay Chain's API, it can connect seamlessly as a parachain (many existing blockchains, such as Bitcoin and Ethereum, don't have this logic built in; therefore they require an additional "bridge" that can provide this service).
The Relay Chain's primary responsibility is providing security guarantees in the Polkadot ecosystem. Parachains are responsible for constructing and proposing blocks and submitting them to the Relay Chain. Once a valid block has been proposed on one parachain, that message is sent through the Relay Chain, and an action takes place on the destination chain.
The above diagram provides a comprehensive overview of the Polkadot ecosystem components. There are two core elements that allow it to function as it does. The first is how it connects the different chains to one another, and the second is how it maintains consensus. Within the former, there are four core pieces of network architecture:
The Relay Chain
The Relay Chain operates as the central chain of the Polkadot network. When the developers designed the Relay Chain, they purposefully created it with minimal functionality; it is so basic that the Relay Chain doesn't even support smart contracts. The idea behind this was that fewer problems could arise if it only performed essential functions. On the Relay Chain, you can participate in governance, parachain auctions (which we will get to) and stake on different parachains to contribute towards reaching consensus. The Relay Chain's primary responsibility is coordinating the system as a whole. All the other work is delegated to the parachains.
Parachains
Parachains are much more expressive and support smart contracts; these are customisable and can support most applications and business logic. They can act as parachains as long as they are able to generate a proof that the validators of their respective parachain can validate. This proof is vital as it verifies the state transition of the parachain.
The Polkadot developers wanted to ensure that the parachains were able to cater to any developer's applications. This means that they can be a specific application, focus on specific features such as smart contracts, privacy or scalability or even be a new architecture that isn't a traditional blockchain. This flexibility may attract a wide variety of developers to Polkadot, creating their own applications while leveraging some of the benefits of other chains connected to the Polkadot network.
Parathreads
Parathreads are similar to parachains; however, they operate on a pay-as-you-go model. Where parachains have their own specific slot that connects to the Relay Chain, parathreads will share a slot among a group. They will have to participate in block space auctions to process their transactions. The primary consideration for a developer choosing between the two will be the economic tradeoff. To create a parachain, you are required to reserve and hold a certain amount of DOT the whole time you are connected to the Relay Chain, where a parathread will only pay per block. It is possible for a parathread to become a parachain and vice-versa.
Bridges
Bridges will play an integral role in the Polkadot ecosystem if a chain does not conform to the prerequisites to operate as a parachain. These are generally established chains like Bitcoin, Ethereum or Solana. These chains cannot innately connect to the Relay Chain as they have different consensus mechanisms and designs. If there were no way for these chains to connect, it would significantly limit what Polkadot could achieve. Therefore, they introduced bridges to address this issue.
These bridges act as a "middleman" and convert the messages/ transaction instructions from a chain such as Bitcoin to something that the Relay Chain can understand and execute.
There are several approaches to designing bridges, each with its own tradeoffs and design considerations that are beyond the scope of this article but provide a fascinating read.
The four components mentioned above provide connectivity within the Polkadot ecosystem. However, how does the Relay Chain maintain consensus between all the different parachains?
Polkadot Consensus
Last week we described the Interoperability Trilemma and how many of these solutions need to make a tradeoff between three properties:
Trustless - this means having the same level, if not more security, than the base chain.
Extensible - the ability to support any blockchain.
Data Agnostic - the ability to transfer and handle any type of arbitrary data supported by the chains.
Polkadot is no exception, and they have had to make inevitable tradeoffs. Nevertheless, they have put certain actors in place to get as close to solving the above as possible. The following are the core actors who help maintain consensus in the Polkadot ecosystem:
Validators
Validators are responsible for maintaining consensus on the Relay Chain. Anyone can become a validator as long as they are willing to stake DOT and run a node.
They are the ones who receive the proofs from the parachains and vote on their validity along with other validators. Once a valid proof has been submitted and accepted, they add the new block to the chain and are, therefore, the party responsible for completing cross-chain transactions.
Validators perform two functions:
1) Verifying that the information contained in an assigned set of parachain blocks is valid
2) Participating in the consensus mechanism to produce the Relay Chain blocks based on validity statements from other validators. As with most proof of stake networks, they will be punished by having their stake taken away if they are found to be manipulating transactions. As a validator, you are rewarded with new DOT if you do your job correctly.
Nominators
Nominator's core responsibility is securing the Relay Chain by selecting trustworthy validators and staking DOT. You would opt to be a nominator if you wanted to participate in validating the Relay Chain but don't want the responsibility of running a node 24/7. You will receive a portion of the validator's rewards minus the fee they charge for letting you use their services.
You need to be exceptionally careful when choosing a validator to nominate as if they are caught trying to manipulate transactions, you will also have your DOT stake slashed.
Collators
Collators are responsible for maintaining consensus on the parachains and providing the proof of state transition to the validators on the Relay Chain. Collators are required to keep a full node for the Relay Chain and their respective parachain. This enables them to author new blocks and ensure that all transactions that happen on their chain can be executed. Something to bear in mind is that collators are not responsible for securing the network; they are only responsible for forwarding transactions to the validators of the Relay Chain, who decide if they are valid or not.
One of the core tenants of interoperability is that systems can understand each other and act on the information in a meaningful way. Collators also play a core role in ensuring that messages between parachains are delivered in an understandable format. In the Polkadot ecosystem, this is the XCM (Cross-Consensus Message Passing Format).
Together these systems work to create an interoperable ecosystem that maintains consensus between all chains involved. At the system's heart lies the DOT token, which is the financial inventive that coordinates the ecosystem.
DOT Token
DOT is the native token of the Polkadot systems, similar to how Ether is for Ethereum and BTC is for Bitcoin.
The smallest denomination of a DOT is called a Planck and is equal to 0.0000000001 of a DOT token. This will also be applicable to other Substrate based Polkadot networks such as Kusuma.
DOT serves three critical functions in the Polkadot ecosystem:
to be used for governance of the network,
to be staked for the operation of the network,
to be bonded to connect a chain to Polkadot as a parachain.
We mentioned the concept of a parachain auction earlier, this ties in with the DOT required to keep a parachain open (vs a parathread). You must lock up or bond DOT to have a slot connected to the Relay Chain. These parachain slots are scarce resources as there will be a limited number available (around 100). If you want your project to be interoperable with other chains and have guaranteed inclusion for every block on the Relay Chain, you require one.
These parachain slots are never guaranteed, and you essentially lease them for a specified period according to an unpermissioned candle auction. As Polkadot gains traction and it becomes more attractive to have a parachain, more and more DOT will be locked up to bid on the slots available.
The DOT token serves as a crucial component in the Polkadot ecosystem, similar to Ether and Bitcoin, and as demand for Polkadot and its interoperability solution increases, so too should the demand for the DOT token.
Conclusion
Polkadot is an exciting project in the blockchain space. Interoperability is a concept that has allowed humans to flourish throughout history, and in the context of blockchain, it will be no different. There will most likely exist a multi-chain world where people will choose to use the blockchain that makes the most sense to them while being able to leverage the benefits of others.
While several projects in the industry are trying to solve this problem, Polkadot is currently one of the clear leaders. Its founder, Dr Gavin Wood, is one of the brightest minds in blockchain, and so the project is in good hands.
We look forward to watching the project grow, add additional parachains to its network, and see what is possible in an interoperable blockchain world.
Notable Articles and News Stories This Week:
Binance Charts Regulated Course to New Zealand
Binance has expanded its operations to New Zealand following a successful registration with the country's business ministry earlier this month.
Binance New Zealand will join existing entities operating under the company's name, including in Australia, Italy and, more recently, France. General manager Ben Rose, formerly of local software development firm CodeHQ will lead operations within the island nation.
The exchange and crypto infrastructure provider said the move to become a registered financial service provider with the Ministry of Business, Innovation and Employment made sense despite the country's lower population and small domestic markets.
"A lot of major tech firms are slow to open a New Zealand office," Binance founder and CEO Changpeng Zhao said in a statement. "I guess for some, it's easy to overlook … but we see significant value in having a serious New Zealand presence."
Read more about the move here
California Governor Newsom Vetoes Crypto Bill
California’s governor has vetoed a bill — born out of an executive order he issued in May — that sought to establish a licensing and regulatory framework for digital assets.
The bill would have tasked crypto companies with seeking a license to offer their services or digital assets to the state’s residents.
It would have also formally adopted new rules governing stablecoins, including requirements that licensed companies only engage with bank-issued stablecoins, which must remain 100% backed by reserves.
Governor Gavin Newsom said his reasoning was due to the bill’s “premature” nature to lock in a licensing regime under Assembly Bill 2269 without first considering prior research and forthcoming federal actions.
“A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving technology and use cases and is tailored with the proper tools to address trends and mitigate consumer harm,” the governor said in a statement addressed to members of the California State Assembly.
Read more of his comments here
Sam Bankman-Fried, Elon Musk Weighed ‘Joint Effort’ to Acquire Twitter
When Elon Musk offered to buy Twitter for $44 billion, a line of tech personalities pitched efforts to take forward the deal. One of them was FTX CEO Sam Bankman-Fried, newly-released text messages revealed this week.
A series of private texts, first reported by Business Insider, showed Bankman-Fried’s associate Will MacAskill told Musk that the FTX CEO was “potentially interested” in acquiring Twitter and proposed a “joint effort” with the Tesla chief.
MacAskill, an advisor at the FTX Future Fund, said on March 30 that Bankman-Fried could contribute between $3 to $8 billion towards the deal, according to their message history found online.
Morgan Stanley banker Michael Grimes, also trying to propose a deal between the two, separately told Musk that Bankman-Fried could finalize $5 billion and facilitate the engineering for social-media blockchain integration.
Read more about the potential deal here
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge, we aim to lower the barriers to understanding this fast-growing digital economy.
If you are interested in staying up to date, please subscribe to our newsletter at etherbridge.co
This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.
