• Thu. Jun 13th, 2024

What Is Polkadot 2.0 and DOT?

What Is Polkadot 2.0?

Polkadot 2.0 will be focused on applications, with Agile Coretime introducing a more flexible system for allocating blockspace, where developers can purchase blockspace based on their needs. This enables the system to better manage its computational resources based on actual demand, optimizing efficiency.


Key Takeaways

  • Polkadot is a Layer 0 solution that enables its parachains and applications to enjoy interoperability across the Polkadot network while inheriting the security of Polkadot. 

  • DOT is the native token of the Polkadot network and serves different purposes including maintaining the security and governance of the network.

  • Polkadot 2.0 will introduce key changes to the Polkadot network. This is part of an ongoing effort to create a flexible network, lowering barriers for projects and creating more value for users of the network and DOT.

  • A key aspect of the 2.0 upgrade is the modification of the slot auction method to a coretime-based method that allows parachains to access blockspace based on their needs.


Polkadot is one of the top 20 cryptocurrencies by market cap, with investment firms like Grayscale featuring the crypto asset in select funds including the GDIF (Grayscale Dynamic Income Fund)

In terms of network adoption, the project reports that over 80 para chains have joined the Polkadot network. About 39 parachains operate on the main network while Kusama, its canary network, hosts over 43 parachains. Artemis reports an average of 10,000 active addresses on the network daily, with average daily transactions exceeding 45,000.

Introduction to Polkadot and How It Works

Polkadot is a Layer 0 solution built from the ground up to tackle blockchain interoperability, offering developers a platform to build applications and chains. Polkadot’s architecture consists of a main Relay Chain – which handles the network’s security, consensus, and interoperability – and multiple parachains, which are application-specific Layer 1 blockchains (parachains) that can have their own tokens. 

Parachains don’t need to develop their own consensus mechanism for security, as Polkadot’s Nominated-Proof-of-Stake (NPoS) along with its consensus mechanism will secure these parachains. In addition, any Layer 1 chain attached to Polkadot will also enjoy Polkadot’s native interoperability and share information and resources with other parachains. 

Originally, Polkadot leased Polkadot parachain slots, which provides the winner with access to a “freighter of blocks” regardless of whether they need it. This potentially leads to a waste of energy and resources while creating high entry barriers, which brings us to Polkadot 2.0. 

Polkadot 2.0 and Agile Coretime

Polkadot’s future development is focusing on blockspace redistribution, shifting from a chain-focused ecosystem where each parachain owns an execution core at all times, to an application-focused ecosystem that treats all cores as resources to be used as needed by all applications. By focusing on applications, Polkadot 2.0 will also let projects leverage the collaborative potential across parachains to create inter-chain solutions. 

This new system will allow applications to reserve and purchase blockspace based on their needs, potentially increasing the platform’s attractiveness to potential builders on Polkadot. The coretime marketplace turns blockspace into a commodity that can be easily leveraged by applications based on their needs, where owners can split or trade coretime. 

The coretime marketplace model is expected to lower the barriers to entry for developers, while also allowing for more flexible allocation of coretime based on an application’s needs. This will improve the efficiency of blocks on Polkadot, where blocks are produced when needed with the goal of achieving full block capacity, instead of producing empty blocks in times of light traffic. 

Moving to a coretime marketplace model instead of fixed lease also potentially increases the liquidity and reduces the lockup periods for DOT tokens. It will also contribute funds to the Polkadot treasury as coretime purchase fees are sent to the treasury managed by the Polkadot DAO. Polkadot is also introducing a system of burning a portion of these fees to reduce inflation, where burning is a deflationary measure to balance the circulating supply of the token.

What Is DOT?  

DOT is the native token of Polkadot. At time of writing, it confers Polkadot governance rights on its users, and can also be used for staking and bonding to add new parachains to the Polkadot network. Moving forward, it will also be used for coretime purchases.

Staking

Polkadot is a Proof-of-Stake (POS) blockchain; the relay chain uses the Nominated POS (NPOS) to select validators from the validator pool to verify transaction data. To strengthen the network’s security, validators are required to lock up a specified minimum amount of DOT tokens in their node. A validator’s probability of being selected to validate a block is influenced by the number of DOT tokens locked up in their node. This way, validators are committed to the network. The algorithm applies penalties to defaulting validators, such as token slashing which leads to depletion in the validators’ locked asset. 

Validators are also rewarded for their role in protecting the network using the DOT token. For every block mined by a validator, they are rewarded with DOT from the undistributed supply. Apart from validators, other DOT holders are also invited to contribute to the network’s security through nominator staking programs. This strengthens the network further as more assets are committed to the consensus layer.

Polkadot makes it easy for anyone to stake DOT natively with as little as 1 DOT. By staking DOT natively, anyone can participate in governance while maintaining full control over their assets. At time of writing, the average reward rate on Polkadot is 15.33% (after validator commission). 

Governance

The Polkadot OpenGov is the government structure of the Polkadot project. It guides the operations of the Polkadot DAO – a decentralized governance system owned by every DOT holder. Each holder has a stake in the project government relative to the number of DOT tokens they hold. Administrative and technological improvements to the project are first passed to the community where it is voted on by members of the DAO. Holders are invited to engage in proposal discussions and vote on the governance portal using their tokens. The Polkadot DAO votes on technical issues like network upgrades, and financial procedures including the management of the treasury funds. 

Auctions

Currently, new parachains are added by bonding tokens through auctions, where DOT tokens are used in bidding for a parachain slot. By bonding your DOT tokens, you are locking them up with the network in exchange for some benefit. Even with the termination of the parachain slot auction model in Polkadot 2.0, the network retains the bonding structure for the staking programs. Tokens staked to the consensus system are also bonded to the network. 

Core Time Purchase (Coming Soon)

As mentioned earlier, the Polkadot 2.0 upgrade will turn blockspace on Polkadot into a commodity that can be purchased and traded by applications on-demand. Instead of sourcing large amounts of DOT tokens to bid for a parachain slot, applications can purchase coretime using DOT tokens. Parachains can reserve bulk core time or purchase just as much core time as needed for the network’s operation at a given time (on-demand). 

According to the project, this is a more agile model and lowers the participation barriers for projects. It also creates an additional revenue structure for the project. Pending the DAO decision, revenues from core time sales can be burnt, used to fund the treasury, or used in a combination of these cases.

DOT Morphing: Software Not Security?

Many crypto projects are hanging in limo as the U.S. Securities and Exchange Commission (SEC) defines the framework for commodities and other financial instruments. Currently, based on the SEC’s framework, nearly every digital asset offered and sold for fundraising was likely to constitute a security upon launch. However, such digital assets can be re-evaluated at a later date.

However, the Web3 Foundation is in active communication with SEC on the status of DOT as a security. According to the Foundation, DOT is not a security because

“DOT is used for the purposes for which it was designed – among other things, to bid for and secure parachains and facilitate on-chain governance. Control of the Polkadot network has long been in the hands of DOT holders. Today, DOT is not a security. It is software”

– Daniel Schoenberger, Chief Legal Officer at Web3 Foundation

To this effect, the Foundation argues that possession of the asset is not necessarily profit-motivated. The morphing process is the re-categorization of an asset from a potential security into software. In a statement released in November 2022 by the Web3 foundation, the Polkadot has ‘morphed’ and is no longer a security. According to the protocol, Polkadot is software built for engineers and is not an investment mechanism for retail, nor created to be a sort of alternative currency or method of payment.

Note that this process is still ongoing at the time of writing and the SEC has not officially declared DOT not a security.

Final Thoughts

While the slot auctioning model has served the Polkadot network to date, it is rigid as parachains are limited to the core time they are able to reserve in the initial auction. This creates a resource imbalance as some parachains are left with more than enough resources while others scramble for network resources. 

With Polkadot 2.0 and Agile Coretime, turning blockspace into an on-demand and commoditized resource could be an ingredient for a more flexible network capable of scaling infinitely. Pending the stable launch, it will be interesting to see how the network benefits from these changes. As users of the network and community members of the project, it is important to understand the provisions of the upgrade and what it could mean for you. This article covers some key aspects of the upgrade and is only meant to educate readers. It is not financial advice. Always do your own research.