The Polkadot (DOT +2.01%) blockchain network and its DOT token hold an impressive position in the cryptocurrency market today. DOT is the twelfth-largest cryptocurrency by market cap and number 13 measured by daily trading volume. This decentralized computing platform is still finding its sea legs in a turbulent market, and there are many competing cryptocurrencies with similar goals.
So this will not be a smooth ride, but I do believe that Polkadot is one of the most interesting cryptocurrency investments available right now. Here's why.
Image source: Polkadot.
A sterling pedigree
This cryptocurrency was co-founded by Ethereum (ETH +3.37%) co-founder Gavin Wood, who left that game-changing project to pursue a tweaked set of goals under the Polkadot banner. Disappointed in the Ethereum community's "crypto maximalism," where you're only supposed to support the home team no matter what comes up, Wood jumped ship to build a blockchain system that can connect to and work with a plethora of different blockchains.
He also started the Web3 foundation around the same time and made Polkadot the official cryptocurrency of that next-general web platform. As a reminder, Web3 is an evolved technology system where the social media networks and a handful of large companies controlling most of the current internet are replaced by blockchain-based systems and decentralized computing services.
So Polkadot was started by a member of cryptocurrency royalty who doesn't mind bringing in even smarter people than himself with better project ideas. That's a great start in life.
Technical advantages
Polkadot was custom-made to support Wood's Web3 vision. As a layer-zero protocol, Polkadot is essentially a bundle of interconnected blockchain networks that can also reach out and connect itself to new partner blockchains over time. In Wood's view, no blockchain is perfect. A long-term survivor in this market should be able to prune failing ideas and replace them with better alternatives. That's exactly how Polkadot operates, making it an outright cornerstone of the Web3 platform architecture.
Polkadot's network bundle starts with the central chain, which is the blockchain network on which the DOT token operates. In this proof-of-stake network, DOT owners can stake their tokens on the chain in order to generate staking rewards and help manage the Polkadot system as a whole. This blockchain is also where Polkadot's parachains ultimately connect back to the complete ecosystem. The central chain is like a city's central train station with connections to a bustling variety of destinations.
Parachains are the meat and potatoes of the Polkadot system. They are separate blockchain networks with different designs, functions, and goals. The first few examples include the Mangata X decentralized trading exchange, the Efinity cross-chain trading system for non-fungible tokens (NFT), and the Moonbeam chain, which manages and executes Ethereum-compatible smart contracts.
Parachain slots are issued to the winners of Polkadot's parachain auctions. The auction process also provides funding for the winning projects in the form of so-called crowdloans, which allows holders of DOT and the Kusama (KSM +2.33%) testing token to make repayable direct investments in their favorite parachain projects.
This is a sophisticated system with unique features for cross-chain functionality, project funding, decentralized platform development, and more.
Image source: Getty Images.
You're getting on this thrill ride on the bottom floor
The spot-market price for DOT tokens has increased by 500% since the public launch in the summer of 2020. That's an impressive return in less than two years, but it doesn't mean you missed the boat on Polkadot. If you don't like looking back at those huge all-time gains, you could also think of today's DOT price as a 68% discount from last November's all-time highs.
The Polkadot network has been fully operational for just two months, dating back to the activation of its first parachain networks. This platform holds some unique advantages over traditional smart contracts giant Ethereum and the usual group of so-called Ethereum killers. In particular, it was designed from the ground up to let app developers put together the best attributes from many different blockchain networks.
I expect big things from Polkadot's developers over the next couple of years, with game-changing projects percolating in fields such as decentralized finance, blockchain-based gaming, and NFTs. Early investors should see wealth-building gains as Polkadot's ecosystem expands.
