Polkadot Brief Overview by P2P Validator

Polkadot is a decentralized ecosystem of parallelized blockchains called parachains. They can be used for various cases and are able to communicate seamlessly while parallel transaction processing drastically increases scalability. Polkadot implemented shared security meaning that all parachains share their state and are verified by a single validator's set of a Relay Chain. Separate blockchains can also be linked to the Polkadot ecosystem via bridges.

Developers can utilize Substrate, a framework for building parachains, to minimize the effort of constructing their own blockchain and seamlessly join to the Polkadot ecosystem. The network is permissionless and governed by the DOT token holders on-chain in a truly decentralized manner.

Current state and market potential

Polkadot mainnet is expected to launch by the end of May as a Proof-of-Authority chain with gradual transition to Nominated-Proof-of-Stake.

Interoperability is an important component for the evolution of blockchains. The benefit of a single network is limited by its capabilities and design solutions. The ability to interoperate seamlessly and utilize some unique features of each other will bring new use cases across interconnected projects and increase the synergy of cumulative value flow.

The closest analogy to Polkadot Relay Chain is Cosmos Hub secured by the ATOM token, which has a market capitalization of more than $500 000 000 on the date of writing. The Polkadot’s concept of shared security can drive additional demand for DOT token resulting in a higher initial token price and market capitalization at launch.

Token allocation and purpose

Web3 Foundation raised ~$144 million. The overall DOT token allocation looks as follows:

50% of DOT tokens sold via ICO in 2017
50% remain with the foundation where 20% are reserved for future sales or other ways of distribution to the public and 30% to support the Polkadot ecosystem growth

DOT is the native token of the Polkadot Relay Chain the main purpose of which is to host multiple parachains and form the robust validator set to provide shared security making interchain transactions trust-free. DOT holders will be able to influence the future development of Polkadot ecosystem by participating in governance. Another purpose is to select validators who will be the active set by bonding their DOT and nominating. In order to join Polkadot ecosystem, parachains will need to lock a certain amount of DOT and get approval from the community.

There is no information available regarding the additional sale before mainnet launch. To acquire tokens you should participate in Kusama as one percent of DOT tokens at genesis are reserved as a reward for Kusama stakeholders and active community. The distribution scheme has not been finalized yet.

Otherwise, you should wait for official announcements from Web3 Foundation and listing on exchanges.

Staking economics

Polkadot currently uses hybrid consensus algorithm GRANDPA/BABE. Validator nodes verify blocks of Relay Chain and hosted parachains and earn DOT rewards. Polkadot Relay Chain will launch as a Proof-of-Authority chain with smooth transition to NPoS. Staking rewards depend on annual network emission which is a function of staked tokens. The maximum value of 10% annual emission is achieved at 50% of tokens at stake resulting in ~20% APR. If the staked percentage surpasses 50% then network emission will decrease drastically. Holders can nominate validators they believe and trust increasing overall security of the network and earn a share of rewards in proportion to their stake in the validator pool.

In Polkadot, due to the fact that validators perform the same job for the network, they have equal chances to produce a block regardless of their stake. Era rewards are distributed among the active validators meaning that with a rising number of active nodes the reward per validator pool will be lower.

There is no minimum required to become a nominator but balance must have at least 0.01 DOT and should be sufficient to pay transaction fees. Staking since the beginning of the mainnet will result in higher returns for nominators.

*If 50% tokens are nominated and validators have equal stake.

Slashing risks

If a validator misbehaves there are 4 levels of punishment depending on the severity of misconduct.

In the case of an isolated downtime, the nominated stake won't be slashed but the validator will be removed from the active set and next election without receiving a reward. If it happens repeatedly or more than 10% of validators go offline simultaneously then the nominations of the offending validator will be lost and a portion of a stake will be slashed.

Isolated GRANDPA equivocation occurs if a validator signs two or more votes on different chains in the same round. Isolated BABE equivocation occurs if the validator produces two blocks on the Relay Chain in the same time slot. In both cases the punishment will be more severe.

In the case of a validator’s hacks or low level of coordination like simultaneous BABE/GRANDPA equivocation by multiple operators, up to 10% of a stake can be slashed.

If validators form large cartels and pose a serious security risk then punishment can be even bigger - up to 100% slashing.

About P2P Validator

P2P Validator is a world-leading non-custodial staking provider securing more than $3 billion by over 10,000 delegators/nominators across 25+ high-class networks. We have been present in all Polkadot testnets and have been actively participating on Kusama network since the beginning. P2P Validator invested its own funds in Polkadot in 2017 and intends to support the network in the long term.