DOT price soars as Polkadot continues breakout 2021

Polkadot (DOT), a blockchain ecosystem designed to be a scalable, sharded version of Ethereum, has had a strong start to 2021. Despite the token only being launched last year for active trading and transferability, the project has accrued value quickly. With a current market cap of USD9.9 billion DOT is the 11th largest asset on the Brave New Coin market cap table. The Polkadot native token DOT currently trades for $33. It is up approximately 78% in the last month, Year-to-date it has risen by over 250% and since its redenomination last August the price of DOT has risen ~1,133%.

In a blog post published on official Polkadot social channels, founder and lead developer of Polkadot Gavin Wood, rounded up the progress the project has made in 2020. He says Polkadot has had a successful 2020 and entered 2021 with the “wind very much behind its sails.”Polkadot founder Gavin Wood is expecting a big year. Photo source: Polkadot Network

What is Polkadot?

Polkadot is a project by the Web3 Foundation that delivers a framework that allows developers to build and join blockchains together. It was built by Wood (who is an Ethereum co-founder), Robert Habermeier and Peter Czaban, who is the technology director of the Web3 Foundation.

The network facilitates cross-chain communication and interoperability by connecting multiple blockchains into one unified network. The project’s Lightpaper explains that the network aims to offer advantages of heterogeneous sharding, scalability, upgradeability, transparent governance, and cross-chain composability over other projects.

Polkadot is a sharded blockchain. Sharding is database partitioning that spreads the computational and storage workload across a peer-to-peer (P2P) network so that each node isn’t responsible for processing the entire network’s transactional load – allowing networks to scale more efficiently. Shards on Polkadot operate as separate blockchain networks with transactions and data exchange across the sharded network executed in parallel with security guarantees.

The infrastructure of the network is composed of three core components; The Relay chain which is the central chain of the network where all of its validators reside and are staked to. Parachains, which are parallel blockchain shards that connect to the main Relay chain and are maintained by their own unique validators, called collators – and Bridges which are special blockchains that allow Parachains to connect to and communicate with external networks like Ethereum and Bitcoin.

Polkadot’s biggest official event of 2020 was the launch of its native blockchain. It began with a claims process for original participants, which was followed by the genesis block of a permissioned Proof-of-Authority (POA) network on May 26th. It has since transitioned to become a Nominated Proof-of-Stake (NPoS) network that is unpermissioned with control transferable by digital vote.

Beginning with 197 validators, the network has grown to encompass 297 and includes close to 7000 individual nominating accounts. Over this period the Polkadot ecosystem has also seen the launch of Westend, a long-awaited valueless testnet, and two versions of Rococo – Polkadot’s short-term parachain testnet.

What is the DOT token?

DOT tokens are the native network token of Polkadot and serve a number of distinct roles. For governance, DOT token holders control the direction of the network. Governance functions include determining fees on the network, auction dynamics and scheduling for the addition of parachains. Holders handle decision making around exceptional events such as upgrades and fixes to the Polkadot platform.

DOT holders also facilitate the consensus mechanism that underpins Polkadot. In order for the platform to function and allow for valid transactions to be carried out across parachains, Polkadot relies on DOT holders to play active roles. Participants put their DOT holdings on the line to perform chain functions, and the potential for losing one’s stake acts as a disincentive for malicious participation in the network. The amount of DOT required to participate in the network varies according to the activity undertaken, the duration DOT is staked for, and the total number of DOT staked.

Another function of DOT is that enables the addition of new parachains by tying up DOT in a process called Bonding. The DOT will be locked during the bonding period and will be released back to the account that bonded them after the duration of the bond has elapsed and the parachain is removed.

Polkadot’s Ethereum connection

Polkadot is considered to be an Ethereum competitor that allows builders to create and deploy Dapps using smart contracts. As mentioned, Gavin Wood was a co-founder of Ethereum and was the project’s first Chief Technology Officer. Wood created the Solidity programming used for writing the Ethereum smart contracts.

Dan Morehead, CEO of Pantera Capital Management, told Bloomberg in October 2020 (when Polkadot was worth around 10% of Ethereum’s value) that from his firm’s perspective it had a “much higher than 10% chance of being a competitor to Ethereum.” The Polkadot network’s value is now worth 17% of Ethereum’s. Speculation surrounding its capabilities to challenge Ethereum’s dominance of the blockchain platform has driven investors to make long term bets on DOT.

Polkadot differentiates itself from Ethereum by allowing smart contracts to run in an ecosystem of smaller blockchains called parachains. By using parachains and segmenting data across smaller groups of nodes, Polkadot is theoretically able to process data more efficiently.

This means that many expect the network to run large decentralized applications that can scale easily – something that has been a challenge for Ethereum so far. Polkadot also supports bridgechains that offer interoperability with other networks. Some of Polkadot’s most popular applications, like Bondly, are being built around connections with the Ethereum blockchain and other platform blockchains like the Binance Smart Chain.

Bondly, is a group of decentralized products that enables users to build unique marketplaces and facilitate digital OTC transactions between buyers and sellers. It gained notoriety when Logan Paul, one of the biggest YouTubers in the world, used it to launch a limited edition series of NFTs. Paul’s ‘Maverick’ NFT’s were available on BondSwap, one of Bondly’s unique products. Canadian Rapper Torey Lanez has recently used the BondSwap platform to launch a set of music based NFTs.

The Bondly whitepaper discusses the reasons why it chose Polkadot over other blockchain platforms. Factors for the selection include— customizable governance, customizable block production, the ability to exchange information and assets between parachains, cost savings (free) to implement smart contract functionality and proven cross-chain interoperability.

In his end of year blog post, Wood mentioned several interoperability projects as some of the biggest solutions set to be launched for the network in 2021. Frontier, is an Ethereum Substrate compatibility program. Substrate is the modular blockchain building framework offered to Polkadot developers for building custom blockchains and parachains. Frontier is designed to allow Substrate to run unmodified versions of Ethereum Dapps as well as host any of the tooling supported by Solidity including Metamask and Truffle.

According to Kelvin Koh, partner at The Spartan Group, the blockchain platform/Web3.0 space is not a race to the top, winner takes all environment. “I believe in a multi-chain world interconnected by bridges,” he says. “Polkadot and Cosmos will not replace Ethereum. I also wouldn’t rule out chains like Near, Solana, AVA, TRON and others seeing development activity.”

Another compatibility project being worked on is the Ethereum interoperability solutions Acala. Billed as an “all-in-one Defi Service center” Acala has launched a US dollar stablecoin, aUSD, with infrastructure similar to Maker and Dai. aUSD can be generated by providing collateral in the form of DOT, KSM, Bitcoin (BTC), ETH and a number of ERC20 tokens. Like Ethereum based stablecoins, aUSD will be set up to earn interest by being lendable across a range of DeFi protocols on Polkadot.

Wood says the Polkadot community now consists of well over 100 teams with projects covering a broad set of use cases. He says that China has over 30 teams building systems, projects and components for Polkadot. Polkadot is now also the 2nd largest blockchain network DeFi ecosystem after Ethereum and Wood says it “has the most developer traction and stickiness out of any next-generation protocol.”

Concerns about Polkadot governance and 51% attacks

Despite this momentum, there have been some bearish clouds circulating around the ecosystem in the last year. The most upvoted post on the official Polkadot Reddit channel is a November 2020 entry titled “ Polkadots Centralization Scandal with Evidence”. The post begins by stating “Polkadot is currently being exploited by colluding validators, namely P2P.org and Zug Capital, who are undermining the network’s security and making it vulnerable to a potential 51% attack.” The post explains that an oligopoly is forming between the two groups that is reducing competition on the network and potentially blocking referendum proposals designed to be decided by the wider DOT community.

The Reddit post cites a specific example of a recent democracy referendum that received 244 ‘YES’ voters and 14 ‘NO’ votes. The referendum was turned, however, because of two NO voters who the Reddit post author says belong to Zug capital and P2P.org. The two NO voters staked 900,000 DOTs and 212,355.55 DOTs on the NO outcome to sway the vote in their favour.

Two whales voting ‘NO’ skew the outcome. Source: Polkascan.10

The Polkadot community referendum model prefers the amount of DOT staked to a particular outcome as opposed to the number of votes offered. The poster goes on to explain how expensive it has become to join the Polkadot Active validator set and how this is pricing out smaller validators trying to join the network.Source: Cryptofees.info

Another mark against Polkadot is the lack of fees that the network generates. It generated just $4,032.00 in 24 hours on 15th March, this compares unfavourably against the enormous $22,354,575.73 generated by the Ethereum network. Even individual Ethereum applications like Uniswap V2, Sushiswap, Compound, Aave and Balancer generate far more earnings from fees than Polkadot.

Traditional valuation methodology like Price-to-Earnings ratio suggest that the DOT token is overvalued. The counter argument is that the fees story doesn’t factor in Polkadot’s interoperability capabilities and the long term potential of the platform. As a bridging blockchain, Polkadot’s value is tied to that of other permissionless networks like Ethereum and the Binance Smart Chain. As these networks grow and become more popular, Polkadot naturally piggybacks as an enabler to allow new users to access these networks as opposed to being a direct competitor.

Polkadot staking rewards

Data from crypto network staking rewards aggregator Stakingrewards.com counts Polkadot as the 2nd largest crypto network by total staked value. The network currently has $25,181,256,890 worth of staked value. In all, 64.23% of eligible tokens are staked to the network with an eye catching 13.05% offered as a reward to DOT holders who choose to stake their tokens to the network. This is a higher staking reward than those offered by competitor staking networks including Cardano, Ethereum 2.0, and Algorand.Source: Stakingrewards.com

Over the last month there has been a pickup in the total percentage of eligible DOT staked to the network. On February 16th the percentage of DOT staked to the network stood at 60.61% and has risen 3.62% in this period.Source: Stakingrewards.com

The average number of active accounts has surged since Polkadot was first launched as a proof of authority network on May 26th. When the network first released there were just 1,616 total accounts active (accounts sending or receiving transactions) per day. on March 1st there were 177,943 active accounts on the network. This represents growth of ~10,911% in just over 10 months. Since the start of this year, active accounts per day has risen by ~175%. Source: Polkascan.io

Another metric that shows bullish fundamental growth is total transactions per day on the network. Unlike active accounts per day which grew gradually, transactions per day have seen regular spikes in activity. There was a notable increase around December 25th. This may have coincided with Binance announcing on December 23rd that it would be setting up a $10 million fund to support projects on Polkadot.

On December 28th Twitter users also noticed that the ETH/BUSD pair on the Binance homepage had been replaced by the DOT/BUSD pair, giving DOT and the Polkadot network a lot more exposure to retail crypto investors. In addition to the sharp pickup in transactions, the price of DOT rose ~80% between December 23rd, 2020, and January 3rd, 2021. Closely correlated with the growth in total transactions per day, was the growth in total new accounts per day on the network.Total Polkadot transactions

Total Polkadot new accounts. Source polkascan.io

Google trends data for the term Polkadot has grown significantly in the last year and spike to hit yearly highs in the week between February 14th – February 20th. The search interest for Polkadot is most active in Indonesia and the Netherlands. Other popular related topics all of which are breaking out include “Cardano”. “Binance”, “Ripple”, “Wallet”, “Dogecoin”. This suggests that Polkadot is one of a group of large cap digital assets that the crypto curious are looking to explore during the ongoing bull run.

According to data from Socialblade.com, the primary Polkadot ecosystem Twitter account @Polkadot observed significant pickups in monthly gained followers since the start of 2021. It has more than doubled its total follower count in the first two months of 2021. In January 2021 the account gained 49,228 followers and in February 2021 it gained 56591 followers. The account currently has 226,988 and has been gaining about 1300-2000 followers a day in the last two weeks.Source: socialblade.com

Data from Subredditstats.com indicates the primary Polkadot ecosystem subreddit r/dot also enjoyed significant growth since the beginning of 2021. On January 1st, 2020 the subreddit had 1,579 members, It has grown in popularity to currently sit at 18047 members. This represents growth of 1043%.