In 2015, Ethereum became the first programmable blockchain, a decentralized platform on which developers could build self-executing computer programs known as smart contracts. That technology has since evolved into an ecosystem of decentralized applications (dApps) comprising video games, social platforms, and decentralized finance (DeFi) services.
Not surprisingly, Ethereum has parlayed its first-mover status into a substantial competitive advantage. According to DappRadar, there are over 9,300 total dApps deployed across all blockchains, and over 3,000 of them are accessible from Ethereum. Unfortunately, as products on the platform have become more popular, network congestion has caused Ethereum's fees to rise and speeds to slow.
The developer community plans to address Ethereum's lack of scalability with upgrades in the coming years, but in the meantime, several other blockchains are gaining ground. For instance, Polkadot (DOT 1.28%) is an ambitious project that recently entered a crucial phase of development. And with its DOT token's price 60% below its all-time high, this cryptocurrency could be ready to rebound in a big way.
Here's what you should know.
An ambitious mission
Gavin Wood, a co-founder and former chief technology officer of Ethereum, published the Polkadot white paper in 2016. One year later, he co-founded the Web3 Foundation, a nonprofit group dedicated to building a decentralized internet (Web 3.0). Such a platform would be similar to the current internet, except software and services would run on a peer-to-peer network, not the centralized servers of corporate entities like Microsoft or Amazon.
Polkadot is Wood's attempt to realize that vision. But to be successful, the platform first had to overcome the limitations of other blockchains -- specifically, a lack of scalability and cross-chain compatibility. To that end, at Polkadot's heart is the relay chain, a core blockchain secured by proof-of-stake consensus and tasked with orchestrating an ecosystem of side chains. Each side chain (a parachain) is a unique programmable blockchain capable of supporting smart contracts, dApps, and DeFi products. Certain parachains (bridges) can even connect to external networks like Ethereum.
In short, Polkadot is a multichain ecosystem of decentralized software and services, and the entire system can share data and tokenized assets both internally and externally. The platform will eventually support 100 parachains, at which point throughput could reach 1 million transactions per second (TPS).
No other blockchain is anywhere close to that -- though Cardano has teased the same number -- and those transactions will be finalized in as little as 12 seconds. By comparison, Ethereum currently handles 14 TPS and it takes six minutes for those transactions to reach finality, being irreversibly incorporated into the blockchain.
A new phase of development
In November, Polkadot began auctioning parachain slots to developers, a process in which teams bid on the right to connect their chain to the relay chain, and the winners are awarded a 96-week lease. So far, eight auctions have been completed, and six parachains have been onboarded. The process will continue for the foreseeable future.
Of particular note, the Moonbeam parachain was an early winner, and it recently went live on Polkadot. That's a big deal because it's compatible with Solidity, the programming language of the Ethereum blockchain. In other words, Moonbeam allows developers to deploy Ethereum dApps and DeFi products on Polkadot. And given Ethereum's vast ecosystem, that feature could significantly accelerate Polkadot's growth in the coming months and years.
In fact, Polkadot has already become the 10th largest DeFi ecosystem in the blockchain industry, with $1.2 billion invested on the platform. To put that in context, Cardano launched smart-contract functionality in September (earlier than Polkadot), but it ranks much farther down the list, with just $72 million invested on the platform.
A clear investment thesis
Polkadot's native cryptocurrency, the DOT token, serves three main purposes. The first is governance, meaning DOT holders can vote on issues like network fees and upgrades. The second is staking, meaning DOT holders put their tokens at risk in order to participate in transaction validation; currently, the reward for staking is 13.9% annual percentage yield. And third, developers must pay a refundable deposit with DOT tokens in order to connect their parachains to the relay chain.
That last use case is particularly important. As Polkadot's ecosystem of dApps and DeFi products expands, drawing more consumers and investors, it will become a more desirable development platform. In turn, developers will be willing to bid more to connect their parachains to the relay chain. In other words, as Polkadot becomes more popular, demand for DOT should rise, driving its price higher.
As a final thought, it's not just retail traders who are interested in Polkadot. Institutional investors also see the long-term potential. In fact, the DOT token is the fifth most popular digital asset among crypto hedge funds, according to research from PricewaterhouseCoopers. That's why this cryptocurrency looks like a smart buy right now.