Polkadot (DOT) is a distributed blockchain computing platform that serves as a base layer for other sovereign blockchains (called Parachains) for verification and sharing security. The platform is built using the Substrate blockchain development framework, and its core functionality is powered by RelayChain. The relay chain uses the Nominated Proof-of-Stake (NPoS) consensus mechanism, and its state machine is compiled into WebAssembly (Wasm). The core function of the Polkadot relay chain is to verify and provide security for its parachain. Parachains are added to the relay chain via bidding slots, a process known as candlelight auctions. However, this model will be canceled in 2024 and changed to Coretime’s model.
Polkadot’s technical advantages
Polkadot’s technical architecture offers several advantages. First, Polkadot adopts a weight-based transaction fee model rather than the typical per-gas model. This means that transaction fees are determined and charged before execution, and the calculation includes three components: a weight fee that reflects computing resources, a length fee based on transaction size, and an optional tip to incentivize block authors. These fees arise from various activities such as token transfers, staking, validator elections, governance voting, and parachain slot auctions.
Market performance in the fourth quarter of 2023
In the fourth quarter of 2023, the overall cryptocurrency market experienced a sharp increase in market capitalization, mainly driven by expectations for spot BTC ETFs. DOT’s float market capitalization grew 111% quarterly to $8.38 billion, more than double the overall crypto market’s 54% growth rate. The growth in the fourth quarter brought DOT's year-over-year growth rate to 94%. DOT’s market capitalization ranks in the top 15 of all crypto projects.
Polkadot’s revenue and economic model
In the fourth quarter, Polkadot’s revenue reached $2.8 million, a year-over-year increase of 2880%. This surge is primarily attributed to a significant increase in external trading in late December, which was caused by Polkadot inscription activity. Even excluding the four-day peak of Inscription activity, Polkadot’s revenue will double from the previous quarter. It’s worth noting that due to the structural design of the network, Polkadot’s revenue is generally lower compared to its competitors.
Polkadot’s native token DOT has three main uses: governance, staking, and parachain crowdloan. As of the end of Q4, Polkadot’s collateralization ratio stood at 52%. Since DOT uses inflation, there is no maximum supply. DOT's monetary policy is designed around the "ideal pledge rate", which refers to the DOT pledge ratio that the network hopes to achieve in order to maintain sufficient security. This pledge rate aims to balance network security and token liquidity. .
Polkadot Treasury and Governance
Polkadot’s treasury is funded through block rewards, validator penalties, transaction fees, and staking inefficiencies. Treasury funds are held in a system account and used to allocate expenses within a 24-day spending cycle. Unused funds will be destroyed at a 1% rate. All treasury expenditures are automatically executed on-chain, ensuring transparency and accountability.
During the fourth quarter, the Polkadot treasury supported various initiatives. The introduction of OpenGov on June 15 revolutionized treasury management, allowing proposals on different tracks to proceed in parallel. As of the end of the quarter, the Polkadot treasury held approximately 44 million DOT (equivalent to $367 million).
Relay chain and external transactions
The Polkadot Relay Chain has several primary functions, including securing and connecting parachains. As such, its end users typically transact and use the network through parachains. Currently, the Relay Chain does support some end-user functionality, including token transfers, staking, validator elections, governance voting, and participation in parachain slot auctions. However, with the proposal of RFC-0032: Minimal Relay Chains, several subsystems are planned to be migrated to system parachains.
In Polkadot's blockchain framework, external transactions (extrinsic) are a key element that promotes the state transition of the relay chain. It acts as a general-purpose transaction that encapsulates external data that the network needs to verify and track. Typically, external transactions carry signatures and reference specific functions, making interactions such as token transfers between accounts possible.
Developer ecosystem
Polkadot has one of the largest developer bases in the crypto industry. According to data from Electric Capital, Polkadot's total developer count averaged nearly 2,100 in December 2023, with 792 classified as "full-time," putting the ecosystem in second place behind Ethereum. Polkadot provides developers with comprehensive support through its open source technology stack, covering multiple categories such as user interfaces, tools, APIs and languages, smart contracts, chains and modules, network maintenance tools, consensus, networks, and more.
Nominated Proof of Stake (NPoS) consensus mechanism
Polkadot uses a unique consensus mechanism called Nominated Proof of Stake (NPoS). Validators are paid every 24 hours based on payable actions they complete (called era points). Every four hours, a subset of validators are randomly selected to validate all parachains and double their era points. The combination of era point and random parachain verification provides probabilistic guarantees for validators to earn nearly identical rewards.
Conclusion: Overall, Polkadot, as a distributed blockchain computing platform, has demonstrated strong potential through its unique technical architecture and economic model. As the market grows and technology advances, Polkadot is expected to continue to lead the development of the blockchain industry in the future.