What makes Polkadot unique?
Most blockchains operate on their own and are entirely independent from one another. For example, Bitcoin (BTC -0.38%) has its own blockchain, as do Ethereum (ETH -2.38%), Cardano (ADA +1.08%), and other cryptocurrencies. They don't communicate with each one another, so decentralized apps (dApps) built on Ethereum and Cardano couldn't interact.
That's where Polkadot comes in. It's a multichain network, which means it can join different blockchains together. Developers who use it can build their own blockchains that are also able to interact with all the other blockchains in the Polkadot network.
Interoperability opens up new possibilities for the blockchains on Polkadot. Let's say that one blockchain allows users to invest in tokenized versions of stocks. It could obtain data from a separate blockchain with up-to-date stock price data.
Another benefit for developers is that Polkadot takes care of validating transactions and network security. Transactions are processed on the network's relay chain. This allows developers to focus entirely on their blockchain projects without needing to build a secure system for validating transactions.
Where Polkadot came from
Gavin Wood, a co-founder of Ethereum, came up with the idea for Polkadot and released its white paper in 2016. The next year, Wood and Peter Czaban founded a nonprofit organization, the Web3 Foundation, dedicated to the development of Polkadot. Robert Habermeier, who has a research and development background in blockchains, is also a co-founder of Polkadot.
In October 2017, the Web3 Foundation raised $145 million in Ethereum by selling DOT tokens. However, the wallet storing the ETH tokens was hacked, and about $90 million in funds were frozen. To recoup the loss, the foundation held a private token sale in 2019.
Polkadot rolled out in multiple phases. The initial version of the network launched on May 26, 2020. It completed the launch when its first five parachains went live on Dec. 17, 2021.
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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