Polkadot (DOT -5.68%) is a protocol designed to create a network of interoperable blockchains. This would allow independent blockchains to communicate with one another and work together. Ultimately, the project's goal is to build a completely decentralized web.
The native cryptocurrency on Polkadot is the DOT token. This is a governance token, which means token holders have control over the Polkadot protocol through voting. It's also used to validate transactions through staking and for bonding Polkadot's parachains (parallel blockchains).
It didn't take Polkadot long to find success since it was one of the largest cryptocurrencies in the world within a year of its launch. Here's a full guide to how it works and if it's a good choice for a cryptocurrency investment.
Metric | Polkadot | Cardano | Ethereum |
|---|---|---|---|
Launch date | May 26, 2020 | Sept. 27, 2017 | July 30, 2015 |
Native cryptocurrency | DOT | ADA | ETH |
Consensus mechanism | Proof of stake | Proof of stake | Proof of work (transitioning to proof of stake) |
Key feature | Multichain architecture | Development based on peer-reviewed research | First programmable blockchain |
Drawbacks | Limited number of parachains that are sold to highest bidder | Lengthy research and development process | Network congestion resulting in high gas fees and slow transaction processing |
Table by author.
Can I make passive income with Polkadot?
Yes, you can make passive income with Polkadot. Since it uses a proof-of-stake protocol to validate transactions, you can earn rewards by staking DOT tokens.
Polkadot has a somewhat complicated staking system. You're required to have a minimum number of DOT tokens to stake, and there are also maximum numbers of nominators and validators. Many investors opt to stake Polkadot through a crypto exchange because it's much easier.
The following exchanges support Polkadot staking:
It's worth clarifying that when you stake your crypto, you'll be earning DOT tokens. Since cryptocurrency is volatile, the value of your earnings will fluctuate based on Polkadot's price. If you want something more stable, you can trade those DOT tokens for stablecoins or sell them for cash.
Unique risks with Polkadot
One potential issue with Polkadot is the limited number of parachains. It estimates that the network will be able to support approximately 100 parachains, although it will take time to reach that goal. Parachain slots currently get sold in auctions and are leased out for up to 96 weeks.
This will likely make it difficult for smaller projects with less funding to secure their own parachain slots. The setup is tilted in favor of projects with a large amount of capital behind them.
Polkadot's governance system is also weighted toward those with more funds. DOT is a governance token, which gives holders the right to make and vote on proposals. However, you need to lock up DOT tokens to make a proposal, second a proposal, or vote. And, when you make or second a proposal, there's no guarantee your DOT tokens will be returned.
Because of how the system is set up, the individuals and companies with the most DOT tokens have significant influence over the project.
Is Polkadot a good investment?
Polkadot is an intriguing investment opportunity because it's only scratching the surface of its potential. It launched its biggest innovation, parachains, in December 2021, and it's gradually adding parachain slots.
Passive income is also a nice perk of holding DOT tokens. While you can stake many types of cryptocurrency, Polkadot tends to offer higher rewards rates than most.
The stiff competition Polkadot faces is worth considering. There are several popular blockchain platforms going toe to toe, with Ethereum being the most established. Cardano and Solana (SOL -2.29%) are also popular.
You may want to invest in Polkadot and other programmable blockchains so that you're not putting all your eggs in one basket. Another way to build a diverse crypto portfolio is cryptocurrency stocks.
If you decide to invest in Polkadot, remember that it's in the early stages of development. That means it's best to treat it as a long-term investment where you evaluate the results in years, not months. Like other types of cryptocurrency, Polkadot is also volatile, so you should expect to see plenty of price swings.
How to buy Polkadot
Because Polkadot is such a popular cryptocurrency, it's easy to buy. There are several top crypto exchanges that offer it.
Consider buying Polkadot on an exchange that will also let you stake it, such as Kraken, Celsius, or Crypto.com. You can earn generous rewards rates for staking Polkadot, so it makes sense to take advantage.
Polkadot didn't take long to shoot up near the top of the crypto market. Although it has gone through some ups and downs in terms of price, the launch of its parachains could help it reach new heights this year.
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