Polkadot: the Next Big Thing in Crypto (Polkadot Explained)
It still has a lot of room to grow from its price of thirty dollars per token. So lets take a look at this new token and see how it works and, if its worth investing in since basically the start of blockchains, one of the biggest focuses has been on decentralization with people. Now talking about how it can be used for much more than just bitcoin, you could build games track transactions. Even the internet itself could become decentralized off the backs of blockchain networks, but up until now, thats basically been a pipe dream due to slow transactions, siloed chains and high gas fees, but maybe not anymore, hey everyone and welcome to fintech in this video im going to Be talking about polka dot going over how it got started, discussing what makes it unique from other cryptos and talking about some catalysts in the near future, which could bring a lot of attention to this coin and to be clear, this is not an investment recommendation. This is just a cool technology that i think is worth looking into, and i think i could make some money with so hit the like button. If you want and lets start with an overview of what polka dot actually is polka dot in some ways is like a new and improved version of ethereum. Ethereum is one of the largest blockchain networks that lets you do everything from make games to mint nfts, but polka dot fixes many of the issues with ethereum, while also adding an incredibly powerful new feature: the ability to create new blockchains on the polka dot network.
But before we get too far into the details, lets rewind a little because its easier to understand where this leap forwarding technology takes us. If we understand where its coming from so bitcoin obviously launched way back in 2009, when satoshi nakamoto minted block zero on the chain – and it had certain nice features, like decentralized trust, so two people who didnt trust each other could trade bitcoin without worrying about one or The other ripping them off ethereum was the next step conceived in 2013 by programmer vitalik, buterin and finally built in 2015 by a team of developers. Ethereum was an order of magnitude more useful than bitcoin. In addition to the ether token you could transact with, it also had the ability to create smart contracts, paving the way for next generation, blockchain tools like decentralized apps or dapps, and non fungible tokens or nfts, and if you want more info on that, you can watch My video on minting my own nft, but ethereum still has its own issues, its still relatively slow, only processing 30 transactions per second, it still uses a proof of work model meaning to mine ether. You need to use a lot of high powered gpu farms that use up huge amounts of electricity and youre always restricted to the rules of the ethereum chain which, as brilliant as its creators, were, could not account for every possible future use case. So that was the situation in 2020, when dr gavin wood, one of the founders of ethereum, decided to start a new blockchain network polkadot.
Dr wood had worked as the chief technology officer for the ethereum foundation for several years, but after a while, he started to feel that ethereums design was limiting. This led him to write the poca white paper in 2016, a 21 page breakdown of his vision to improve the blockchain paradigm. It took another four years to achieve that vision in the same way that ethereum is an order of magnitude, more flexible than bitcoin polka dot. Could be considered another order of magnitude leap forward. It is built on substrate which allows people to quickly build very customizable blockchains. One of polkadots goals is to fully decentralize the web, putting users in control of everything they plan to do this by letting you create connections between different chains, both public and private. One way you can think about blockchain today is like the pre internet days of networks. Before the internet, you had networks of computers that could communicate to each other. For example, university computers within a campus could share files. The government had a network, the military had a network, but the internets revolution was being a network of networks. Polkadot is a similar sort of improvement on blockchain. It almost acts as the internet of blockchains, where you can build new chains on the existing chain while making use of polkadots built in security. So you can connect public and private blockchains. You can also create blockchains. On top of polkadot a concept known as parachains, which in itself is probably the most interesting investment opportunity, but polkadot has other benefits as well.
It is way faster than ethereum capable of processing 1 000 transactions per second compared to ethereums 30, and it has much lower gas fees. Gas fees for anyone who doesnt know are the fees. You need to pay to conduct any sort of transaction on a network. So, for example, when i minted my nft, i think i ended up paying something like 50 in gas fees just for that video granted, that was during a spike in crypto interest, but with polka dot youll be paying much less closer to one dollar per transaction. The last major benefit we should talk about before getting into the numbers behind polka dot is their proof of stake, validation system in bitcoin and ethereum right now, miners have to solve complex cryptographic, puzzles to produce new blocks. This was originally designed as a safety mechanism to prevent any one miner from getting too big, but it resulted in huge environmental and economic impacts. Video cards are incredibly expensive because miners bought them all up and just bitcoin alone uses as much energy as a small country. Polka dot gets around this issue by using a nominated proof of stake system where nominators back validators, with their own stake as a show of good faith in the good behavior of the validator. If you back a bad validator, you lose your stake and if the validator approves a bad transaction, they get penalized too. This removes the need to solve computational intensive puzzles, saving huge amounts of energy, so weve now covered.
Why polka dot is a useful technology, but lets now talk more about the polka dot token known as dot so right now you can buy dot for about thirty dollars each making it way cheaper than ethereums twenty eight hundred dollar price tag or bitcoins. Forty. Two thousand, of course, that doesnt mean nearly as much as the market. Cap of the coin, there are 1 billion dot tokens in existence, giving polka dot a total market cap of around 30 billion dollars. This makes it the eighth most valuable crypto after coins like cardano and tether. In fact, polka dot is less than half the value of cardano and less than 10 of the value of ethereum polka dot is also inflationary, meaning the total supply increases over time that inflation rate varies between six and ten percent in a given year. So if you were to just hold polka dot, no new investors came in and you didnt stake them. You would lose six to ten percent every year, but luckily for us there are places you can put polka dot to work. You can become a validator on the network and validate transactions by putting your dot on the line, and you will be paid for correctly validating transactions. The only problem with this is its not a passive role, and you need a decent amount of technical knowledge to do it. Another option is to loan out your dot on a platform like voyager right now they are paying out around 12.
As long as you have at least 20 dot deposited and ill have a referral link below if you want to use that also note that you cannot transfer polka dot out of voyager right now, so i wouldnt put any money in that youre gon na need in The short term, but there is still one more use for dot, and that brings us back to the concept of para chains, and this is where things get interesting, especially for investors. So, like i mentioned earlier, a parachain is just the name. They give for a blockchain running on top of polka dot, but the thing is not just anyone can spill up a chain whenever they feel like it. Their parrot chain has to first be approved by the community. They do this using a bidding system. So right here we have kusama pulled up. Kusama is just an early release of polka dot for proving out stuff like the bidding system, its kind of like a test run of polka dot. Kusama is running auctions right now to determine which pair of chains should be added to their network, and you can actually use your own tokens, basically loan them out to vote, for which project you would like to see win out depending on who wins, you can get Rewarded by the winning project for participating in the auction, for example, looking at moon river, this parachain was a winner in kusamas most recent auction and they gave out tokens to people who backed them.
Those backers then saw huge appreciation in the value of those tokens up around 10 times at the peak. But the thing is this: isnt, just a 10x return on investment, because, in addition to the moon river tokens that the backers received, they also got back the kusama that they loaned out for the auction. So as this becomes more popular, i dont know if the sizes of these rewards will change, but if you are lucky with picking winners, this could be a way to get massive returns on investment very quickly. Now these auctions are done using a mechanic known as a candle auction and candle auctions were originally employed in the 16th century for the sale of ships. They get their name from the inch of candle that determined the open period for the auction. Basically, the candle would slowly burn down and when the flame was extinguished, the auction would suddenly terminate and whatever standing bid was at that point they would win. So basically, they have a somewhat random timer that will terminate the auction to try to make it more fair and prevent any last minute swings in the winners. But why am i talking about kusama? What happened to polka dot? Well, like i mentioned, kusama is basically a proving ground for polka dot. They will continue to run auctions on this network and then at some point in the future. Polka dot auctions will also launch because these auctions are not yet available.
Some people have started hoarding polka dot tokens so that they have more available once those auctions start so everythings great polka dot is the perfect crypto and everyone will be rich. Well, obviously, its not that simple. There are some drawbacks to polka dots. The first big drawback here is that polka dot is unproven, its new and it doesnt have the same track record as something like ethereum. This is super obvious in the fact that the auctions havent even started yet, and even though we have no reason to doubt the founders, unless you are part of the team working on launching the auctions, you kind of have to take it on faith that these will Start happening while you hoard dot in the meantime and thats, assuming that, when larger players start to enter this network, that the auction system wont break down. If say, a really large group tries to push through their own para chain. Also, as i mentioned earlier, there is the fact that the token is inflationary, if you just hold dot waiting for when you can auction it without either staking it or doing something more active to earn more. Your value could slowly be whittled away by the increasing supply and the last issue that you may have, especially if youre a blockchain purist is polka dot. Doesnt seem all that decentralized. Whenever you pay a gas fee, a percentage of that goes to whats known as the treasury. The tokens in the treasury are at the mercy of the council, an on chain entity comprising several actors each represented as an on chain account on polka dot.
The council currently consists of 13 members, but this is expected to increase over the next few months to 24 seats, and the council actually has a decent amount of power. For example, if a validator who is supposed to validate transactions goes offline or misbehaves, their polka dot is forfeit to the treasury. The council, then has the power to pay those tokens back if they were taken erroneously or use that money for something else. In addition to the council, there is also the technical committee and the referendum chamber representing the three chambers of kusama governance teams, are added to the technical committee by a council vote and then the referendum chamber is basically any dot holders who want to vote on a Referendum so while polka dot is still decentralized, it has a governance structure, almost like an elected republic and less like a pure democracy. Now not everyone will think that these are actually drawbacks, but i just wanted to get that information out there for anyone whos curious. So we have a potentially world changing technology on this blockchain of blockchains. We also have the potential catalyst of polka dot rolling out auction functionality in the future, which will almost certainly generate a lot of publicity for the crypto. We also see one of the fastest growing development communities with polka dot, not as large as ethereum, yet but slowly catching up from its much smaller base. What i like about polka dot is, it has a clear value proposition.
It actually brings a tangible benefit and whether you think that is important for an investment or not im willing to bet that most people are more comfortable, putting their money in something that creates new value than something that doesnt, which is why i put a little bit Of money into polka dot, not enough to affect my overall portfolio but enough to stake with voyager and earn my 12, which you can also do if you sign up using the link in my description. But let me know if you think polka dot is the future or if you just think its a fad.