Polkadot (DOT -1.24%) 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.
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