Fundamentals Report

Polkadot (DOT)
Polkadot offers the Perfect Trifecta: Blockchain
interoperability, decentralized governance, and
scalability

Contributors

Kelvin Ting, Head of Blockchain Strategy

[email protected]

Claire Zhao, Blockchain Researcher

[email protected]

Dmitry Sirotkin, R&D Engineer

[email protected]

Adam Wise, Product Lead – Blockchain Strategy

[email protected]
Executive Summary

Polkadot represents a unique value proposition in the cryptocurrency space.

While historically, projects were built on first-generation blockchains with limited
bandwidth and a lack of interoperability, Polkadot provides an infrastructure with
the potential to empower the development of blockchains in a scalable, secure,
and decentralized manner.

Polkadot is a blockchain of blockchains: A protocol which introduces mechanisms

to govern blockchains in a decentralized manner. Powered by the Substrate
development framework, developers are able to construct specialized, custom-
built blockchains tailored to the needs of their projects. The Polkadot blockchain
is centred around the Relay Chain, an overarching blockchain that governs child
blockchains.

Child blockchains connected to the Relay Chain are called parachains and
parathreads, and may be added to the Relay Chain via a process called a parachain
slot auction. The first batch of parachain slot auctions is scheduled for 11th
November 2021, followed by a second batch of auctions on 23rd December 20211.
Projects which have currently signaled their intention to participate in parachain
auctions include Acala, Centrifuge, and Equilibrium2.

Blockchain Interoperability
Polkadot connects independent blockchains into one unified network, including
public, private, and consortium networks. This opens the door to interoperability,
which is the ability for blockchains to communicate with one another, paving
the way for the creation of a truly decentralized blockchain environment, where
owners of usually incompatible cryptocurrencies may communicate with one
another in a trustless, secure manner.

Decentralized Governance
The governance of a protocol alludes to the ability for users of the protocol to
decide the future direction of the project. Holders of the Polkadot token on the
Relay Chain can participate in a sophisticated governance process, where they can
propose changes via referenda, which covers topics such as deciding on payment
changes in network fees.

Scalability
At the time of writing, Polkadot is not fully live and does not have parachain and
parathread capabilities. However, it can already support around 1,000 transactions

1 POLKASSEMBLY, #39 Proposal for First Parachain Auctions on Polkadot, https://polkadot.polkassembly.io/referendum/39

2 Parachains.info, Polkadot Auctions#1-5, https://parachains.info/auctions#tab-pane-crowdloans-polkadot-1-5
per second, a significant improvement over Ethereum’s 13 transactions per second.
Once parachains and parathreads have been implemented, it is expected that
Polkadot will be able to scale to over one million transactions per second3.

As of 11th October 2021, the circulating supply of DOT is at 987.579 million (its
current total issuance is 1.12 billion) with a price of $33.3, equating to a market cap
of $33 billion, which makes it the 9th most valuable asset in the cryptocurrency
market. The DOT price has increased by over 200% since mid-July. However, it is
still well below the high of $48 seen in mid-May 2021.

3 https://twitter.com/gavofyork/status/1255859146127179782
4 Data reference: CoinMarketCap, https://coinmarketcap.com/currencies/polkadot-new/
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Real-World Applicability of Polkadot

The advent of blockchain technology has provided a multitude of opportunities

to revamp the financial ecosystem and for investors to participate in a new asset
class. However, the ecosystem is plagued by three main issues: fragmentation
(i.e. lack of interoperability), governance, and scalability. Polkadot and its cousin
blockchain Kusama aim to address these problems by designing a next-generation
ecosystem with multiple blockchains, a Proof-of-Stake governance mechanism,
and interoperability.

This section discusses these three issues, which are inherent to the problems
deterring widespread adoption in the cryptocurrency industry, followed by
Polkadot’s approach to solving them.

Issue #1: Fragmentation

As they stand today, blockchains are fragmented across multiple standards,
making it impossible for them to maintain a shared state and communicate with
one another in a decentralized manner.

The solution for this issue is termed blockchain interoperability, where bridges
are created between various blockchains to address the fragmentation that
exists between them. Blockchains are built according to different standards and
are unable to share state, and as such, it is not possible to send funds from one
blockchain to another in a permissionless manner. For example, it is not possible
to send Bitcoin to an Ethereum address and vice versa.

Issue #2: Governance

The blockchain creates an online, decentralized ledger that allows transactions
to occur without a central party in a secure manner. To do this, Polkadot provides
rewards and incentives to network participants to maintain the network,
and penalties are imposed upon participants who fail to perform their tasks
appropriately or those who behave maliciously.

Early blockchain protocols reward miners, and holders of the protocol’s native
coin do not have a say in the direction of the growth of the protocol. Due to this,
the protocols are still somewhat centralized towards miners, and holders of these
coins are unable to influence future developments on the protocol.

Issue #3: Scalability

The scalability issue refers to the limitation blockchains face when processing large
amounts of transaction data in short periods. First-generation blockchain protocols
use models where each block can only fit a limited number of transactions at any

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

given period. The drawback is that with increasing popularity, the network can
be clogged with transactions during periods of high market volatility, resulting in
spikes in transaction fees and long transaction confirmation times.

Introducing Polkadot
Polkadot scales by spreading transactions across multiple parallel blockchain
shards called parachains and parathreads, all managed by the Polkadot Relay
Chain. In addition, Polkadot uses bridges to communicate between these chains,
providing interoperability.

Figure 1. Indicative Polkadot Architecture

The Polkadot network project aims to address the three aforementioned issues
prevalent with early generation blockchains: fragmentation, governance, and
scalability. Polkadot describes itself as a “heterogenous multi-chain framework”,
consisting of multiple blockchains called parachains, all of which run in parallel to
create a scalable ecosystem. This is similar to the Polygon network, which allows
the processing of transactions in parallel, albeit with more than one chain at any
given time5. Polkadot uses a Nominated Proof-of-Stake algorithm, where owners
of DOT tokens do not necessarily need to run nodes to perform validations and
earn rewards for staking but can also nominate nodes to allocate their DOT to, and
subsequently earn rewards.

5 A fundamentals report of Polygon (MATIC) written by EQONEX Labs is available at

https://learn.eqonex.com/polygon-matic-report 5
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Polkadot has not yet reached its full potential in terms of scalability as parachain
capabilities have not been released. However, these capabilities will be added
following the parachain slot auctions on 11th November 2021 onwards. This process
has a proving ground called the Kusama network, a standalone blockchain
released as an early version of the same code used for Polkadot. This means that
both Polkadot and Kusama share the same characteristics and design, including
Polkadot’s multi-chain framework and consensus mechanism. However, Kusama
has a different ethos from Polkadot: Kusama is the experimental playground
for early-stage software, whereas Polkadot is more conservative and prioritizes
stability and dependability. As Kusama launched at an earlier stage than Polkadot,
it already has more features implemented than Polkadot on its mainnet, such as
parachains. The parachain crowdloans held on the Kusama Network collectively
raised over 2.4 million KSM (amounting to over $800 million of market cap) from
more than 49k unique addresses6. A total of eleven winners have been selected
from two auctions held from June to October 2021 (see Appendix B).

6 Polkadot Blog, Polkadot Is Ready for Parachain Launch, Auction Date Proposed,
https://polkadot.network/blog/polkadot-is-ready-for-parachains/ 6
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Polkadot’s Approach to Scalability: parachains, parathreads, and the

Relay Chain
Rather than using a single blockchain to settle transactions, Polkadot links a
network of parachains and manages them via the Polkadot Relay Chain. The Relay
Chain is the layer on which security, cross-chain interoperability, and consensus
are managed.

The Relay Chain connects to multiple parachains, each dedicated to a specific

project or application. Parachains have continuous network connectivity, are highly
configurable, and enable developers and project owners to tune the blockchain to
a specific use case. Developers and projects may apply to insert a parachain into
the Relay Chain through an auction process. To do this, parachain owners will have
to lock up DOT for a period of between three months to two years in a process
called bonding, effectively allowing them to lease the parachain. Bonding periods
are applicable for intervals of every three months.

Projects that are built using Polkadot’s native modular framework (Substrate) will
be fully compatible with the Polkadot ecosystem. Created by Parity Technologies,
Substrate provides a modular way to build a blockchain and all the functionalities
required with ease of development. Instead of building a blockchain from scratch,
developers can simply pick one of the Substrate’s modules and configure them
with customized parameters. The Substrate Core module contains interchain
connectivity via the Polkadot protocol, making it easy to connect and operate on
the Polkadot network out of the box.

Polkadot plans to support up to 100 parachains with committed resources, each of

them having their own token economics, applications, and governance rules. Once
the parachain rollout is complete, up to 100 blockchains will run simultaneously
and process transactions in parallel to allow massive scalability.

Due to the high capital requirements associated with parachains, the barrier to
entry is high, and some projects may not secure a parachain. Projects that cannot
secure parachain slots can participate in parathreads, an on-demand service
which has a lower barrier to entry than owning a dedicated parachain. At the
time of writing, the parathreads functionality has not yet been deployed on either
Polkadot or Kusama, and as such, there is no way to predict price differences

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

between parathreads and parachains. Parachains and parathreads both expose

the same API and functionality. However, the difference is that parathreads operate
on a pay-as-you-go basis, whereas parachains are leased in a dedicated manner.

In its current manifestation, Polkadot has been benchmarked and has shown to
have a transaction throughput in excess of 1,000 transactions per second7, and is
already 76 times higher than Ethereum’s 13 transactions per second. However, this
is prior to the full release of parachains on the Polkadot network, which, while not
yet implemented, will theoretically increase its throughput to more than 1 million
transactions per second. The Polkadot roadmap does not define the timeline for
the integration of parachains8. However, the code development of Polkadot has
shown that active development has been in place over the last two years.

Addressing External Interoperability using Bridges

Bridges are software that allow the transfer of tokens and arbitrary data from one
chain to another, despite having different protocols and governance models in
both blockchains. For example, some bridges between the Bitcoin and Ethereum
network, such as Wrapped BTC (WBTC)9 and renBTC10, can wrap Bitcoin into an
ERC-20 token to make Bitcoin compatible with the Ethereum network, allowing it
to be compatible for use on DeFi applications.

Polkadot bridges make the Polkadot ecosystem compatible with blockchains

such as Bitcoin and Ethereum in a decentralized and trustless manner without
needing a central authority. An example of a bridge is PolkaBTC11, which bridges
the Polkadot and Bitcoin networks together, allowing users to transfer their Bitcoin
between the Bitcoin and the Polkadot networks. PolkaBTC will be deployed in the
form of a parachain once it has been integrated into Polkadot.

Addressing Internal Interoperability using XCMP

Within the Polkadot ecosystem, interoperability is also enabled across parachains.
This will be performed using the Cross-Chain Message Passing (XCMP) protocol12,
where parachains open communication channels with one another and exchange
messages in a standardized format. Using this technique, cross-chain transactions
are performed natively, paving the way for true interoperability.

7 https://twitter.com/gavofyork/status/1255859146127179782
8 https://polkadot.network/launch-parachains/
9 https://wbtc.network/
10 https://renproject.io/
11 https://polkadot.network/bitcoin-is-coming-to-polkadot/
12 https://wiki.polkadot.network/docs/learn-crosschain/ 8
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Adoption of Polkadot

The adoption of Polkadot may be measured at the ecosystem level as well as the
network level. At the ecosystem level, the number of Polkadot-native projects built
with the Substrate framework is examined, as well as projects which integrate with
any component of the Polkadot ecosystem, including parachains, parathreads, and
bridges. The network adoption metric involves the study of on-chain indicators
related to transaction activities.

Ecosystem Adoption
The ecosystem adoption metric covers the following:
• Adoption of the Substrate framework
• The number of decentralized applications (dApps) which have built solutions
using Substrate

Adoption of the Substrate Framework

Parachains on Polkadot and its sandbox cousin Kusama are built using the
Substrate framework, allowing developers to build custom blockchains and
connect to the Polkadot ecosystem. As parachains are not live on the Polkadot
mainnet yet, adoption trends can be observed from usage and behavior on the
Substrate framework, which can provide a basis for expected adoption trends
on the Polkadot mainnet. Chains developed on Substrate can connect to the
Polkadot ecosystem in due course, and are easily adaptable as parachains, as long
as they go through the parachain slot auction process explained in Appendix B.

At the time of writing, there have been 22 independent Substrate-based

blockchains whose mainnet versions have been launched13, including Polkadot,
Kusama, Darwinia, Centrifuge, Clover, and SORA. In addition, there have been eight
projects which have been launched and attached as parachains on the Kusama
network, including Karura, Bifrost, Khala Network, Shiden, and Moonriver.

Adoption of Decentralized applications

The adoption of Polkadot is also reflected in the increasing number of decentralized
applications (DApps) that build solutions with Substrate or interact with Substrate-
based blockchains in any way. Projects built with Substrate, or are added to the
Polkadot network, can be found on Polkaproject14. There are a total of 500 projects,
with 87 of them being given grants by the Web3 foundation15, an organization
which funds research and development on projects that build the decentralized
web.

13 Subscan explorer, https://www.subscan.io/

14 https://polkaproject.com/#/projects
15 https://web3.foundation/ 9
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Network Adoption
While the term address is widely used in the industry for a string of characters
which represent a wallet which can send and receive cryptocurrency, Polkadot
uses the term “account” to represent the same concept.

The Network Adoption metric covers on-chain data, which shows various statistics
of the Polkadot network, such as how many DOT accounts there are, and how
many accounts hold DOT.

Number of Accounts holding DOT

One of the indicators of the number of adopters of DOT is the number of accounts
that hold the token. Currently, 892,60416 accounts hold DOT on the Polkadot
mainnet at the time of writing.

The number of active accounts is a metric that measures the actual usage of
the Polkadot network by a unique participant. In addition, the number of newly
created accounts shows the rate of growth on the Polkadot network. Figure 2
shows the number of Daily Active Accounts which have at least one transaction a
day on either the receiver or the sender’s side, as well as Newly Created Accounts,
which shows the number of accounts which are created daily. The Newly Created
Account metric shows the daily in-flow of participation into the Polkadot network.

Daily Account Activity

Figure 2. Daily Active Accounts and Newly Created Accounts

16 DOT holding accounts, https://polkadot.subscan.io/account 10

Fundamentals Report - Polkadot (DOT) EQONEX Labs

DOT Transaction Amount and Daily Transfer Count

Figure 3 shows the number of daily DOT transactions, and the counts of daily
transfers. Since 16th July 2020, the average daily on-chain transaction volume was
13.6 million DOT. Volume spiked to 194.8 million on 18th August 2020, the day the
transfer function of the DOT token was enabled.

Daily Transaction Amount

Figure 3. Amount of DOT transferred daily

Transfers on the Polkadot network refer to the act of sending funds from one
account to another. This can be used as an indication of activity on the Polkadot
network. Figure 4 shows the number of daily transfers from 16th July 2020 to 11th
October 2021. From 12th July 2021 to 11th October 2021, daily transfers averaged
above 10,000, indicating a significant increase in the adoption of the network.

Daily Transfer Count

Figure 4. Daily Transfer Count

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

Utility of DOT

DOT is the native token of the Polkadot Network and will have three key functions
when the Polkadot network is fully live: Governance, Staking, and Bonding.

Governance
Holders of DOT tokens may participate in the Governance of the Polkadot
ecosystem. Governance is defined as “the means of achieving the direction, control,
and coordination of stakeholders within the context of a given blockchain project
to which they jointly contribute” 17. Early-generation blockchains such as Bitcoin
and Ethereum utilized governance models which were exclusive to miners. This
represents a paradigm shift as token holders are able to gain complete control
over the protocol.

The governance process in Polkadot involves the use of a Referendum for each
change to the protocol. There are two types of entities eligible to propose referenda,
which are: public DOT holders; or a collection of accounts intended to represent
the passive DOT holders called the Council.

DOT holders who wish to participate in the Governance process of the Polkadot
ecosystem may propose, prioritize, or vote on referenda, vote for council members,
or become members of the Council. All actions may be performed online with a
connected Polkadot wallet through the Polkadot Democracy page18.

Staking
Holders of DOT tokens may also use their tokens for Staking, which disincentivizes
participants from acting maliciously in the network. Polkadot uses a nominated
Proof-of-Stake (nPoS) consensus mechanism, where holders of DOT are able to
stake their DOT to earn rewards while securing the Relay Chain.

There are two types of entities or actors involved in staking: nominators and
validators. Validators are entities that set up nodes and run them 24/7 to validate
and verify transactions. However, the barrier of entry to become a validator is very
high, with validators requiring a significant stake before being selected to obtain
rewards.

17 Rowan van Pelt, Slinger Jansen, Djuri Baars & Sietse Overbeek (2021) Defining Blockchain Governance: A Framework for
Analysis and Comparison, Information Systems Management, 38:1, 21-41, DOI: 10.1080/10580530.2020.1720046
18 Polkadot Explorer, Governance Democracy, https://polkadot.js.org/apps/#/democracy 12
Fundamentals Report - Polkadot (DOT) EQONEX Labs

The minimum stake that is necessary to be elected as an active validator is dynamic

and can change over time. It depends not only on how much stake is being put
behind each validator, but also the size of the active set, and how many validators
are waiting in the pool. Currently, the minimum stake is 1.9087 million DOT 19.

Not every DOT holder can afford to run the infrastructure or set aside large
quantities of DOT for staking. Those who are unable to meet these requirements
or would not like to do so can nominate a validator to hold their DOT tokens and
begin earning rewards. To obtain staking rewards, nominators are required to
stake at least 120 DOT20.

Bonding
Being a truly decentralized protocol, there is no single entity which owns the
Polkadot ecosystem. There is only a limited availability of slots for parachains, and
as such, the parachain market is similar to the real estate market. Projects lease
a position on the network by placing a bond of DOT tokens in a process called
bonding.

The number of tokens which need to be bonded depends on an auction process

and multiple chains will bid to win the parachain slot. To raise the necessary DOT
tokens to bid on a parachain slot, bidders may either perform a crowd sale or use
their private funds for bidding. However, the mechanism of crowd sales differs
from those of Ethereum ICOs, where Ether is exchanged for the tokens which are
being sold.

At the end of the parachain slot lease, any bonded tokens will be released back into
the user’s wallet. Thus, the crowdfunding process is not a crowd sale, but rather,
in Polkadot’s terms, is called a crowdloan. This changes the dynamic of Polkadot
crowdfunding from a purchase-based one to one where projects reward users for
being early supporters of their project.

19 Polkadot Explorer, Staking Targets, https://ipfs.io/ipns/polkadot.dotapps.io/#/staking/targets

20 POLKASSEMBLY, Polkadot Refendum #34, https://polkadot.polkassembly.io/referendum/34 13
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Technical Details of Polkadot

The components of Polkadot’s architecture, being the Relay Chain, parachains,

and parathreads have already been described in the Real-World Applicability
section. The definitions of such components are shown in Appendix A. As such,
this section will describe the differences between Polkadot and Ethereum.

Both Polkadot and Ethereum provide infrastructure for developing decentralized

applications. However, they differ in the ways that they allow developers to add
functionality and deploy code.

Ethereum is a smart contract platform that allows for general computation to be

deployed on-chain, whereas Polkadot does not have smart contract functionality
on the Relay Chain, but will support smart contracts through parachains or by
connecting to smart contract blockchains such as Ethereum.

Ethereum is currently in the phase of transitioning to a Proof-of-Stake network, with

shard chains to achieve scaling, known as Ethereum 2.0. A high-level comparison
between Polkadot and Ethereum can be seen in Table 1.

Polkadot Ethereum

A platform for connecting A platform for smart contract

Vision
independent blockchains execution

Consensus Nominated Proof-of-Stake Proof-of-Work

Multiple chains, including a Relay

Single chain (Ethereum 2.0 is expected
Architecture Chain, multiple parachains and
to add shards besides its main chain)
parathreads

Smart Contract “ink!”, a Rust-based programming

Solidity
Functionality language for writing smart contract

Development Substrate, a native framework for Ethereum standards such as ERC-20

Framework building blockchains and ERC-721 for creating tokens

Scalability Sharding, expected to launch in

Parachains and parathreads
Approach Ethereum 2.0

Cross-Chain Message Passing (XCMP)

Interoperability Crosslinks for asynchronous cross-
for asynchronous cross-parachain
Approach shard communication in Ethereum 2.0
communication

Upgradeability Forkless upgrades with Substrate Hard fork upgrades

Transaction fees, parachain leasing, As payment for transactions in the

Token Utility
governance form of gas

State Transition
Abstract State Transition Function E-WASM
Function

Table 1: Comparison between Polkadot and Ethereum

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 Fundamentals Report - Polkadot (DOT) EQONEX Labs

History of Polkadot

Polkadot was founded by the Web3 Foundation, a non-profit organization that

researches and develops decentralized web technologies. The Web3 Foundation
offers grants for open-source software development and research around
Substrate, Polkadot, and Kusama. Since it launched in December 2018, the Web3
Foundation Grants Program has funded 300 projects to date.

Polkadot’s key founder, Gavin Wood, was the co-founder and CTO of Ethereum.
Wood proposed and developed Solidity, a programming language for writing
smart contracts, and released the Ethereum Yellow Paper21, which defined the
Ethereum Virtual Machine, the runtime system for smart contracts in Ethereum.
Wood left Ethereum in 2016 and founded Parity Technologies, where he began
working on Polkadot. There were seven significant milestones in the development
of Polkadot, which are illustrated in Figure 5.

October 2016 May 2020 June 2021

Release of July 2019 Adoption of the Deployment of
the Polkadot Second Round Phased Roll-out Parachains on
Whitepaper of Private Sale Strategy Kusama

October 2017 August 2019 July 2020 November 2021

(Expected)
Private Sale Launch of The Third
and Initial Kusama Round of Deployment of
Coin Offering Private Sale Parachains on
Polkadot and Other
Core Functionality

Figure 5: Timeline of the Polkadot Project

21 https://ethereum.github.io/yellowpaper/paper.pdf 15
Fundamentals Report - Polkadot (DOT) EQONEX Labs

October 2016: Release of the Polkadot Whitepaper

The Polkadot Whitepaper was published in 2016. It was here that the vision of
Polkadot, described as a “heterogeneous multichain network” architecture which
connects multiple blockchains designed for specific purposes together into a
single ecosystem, making for a highly scalable blockchain ecosystem.

October 2017: Private Sale and Initial Coin Offering (ICO)

The Web3 Foundation raised $145 million in ETH through a private sale and ICO.
2.76 million DOT was sold at $28.8 per token.22 Due to the redenomination, the
amount of the tokens sold is now equal to 276 million, with an effective sale price
of $0.288. After the sale, over $90 million of the funds raised during the ICO were
permanently frozen due to an exploit of a vulnerability in Polkadot’s multisignature
wallet.

July 2019: the Second Round Private Sale

In July 2019, Polkadot led their second private sale round, where 500,000 tokens
were sold for $120 each, raising $60 million.23 The supply is now equal to 50 million
DOT due to a redenomination process, where the denomination of the token was
shifted by two decimal places, essentially multiplying every available DOT token
balance by 10024. This resulted in an effective sale price was $1.2 per token for 50
million tokens.

August 2019: Launch of Kusama

The first version of Polkadot was released in 2019 as the Kusama Canary network,
an experimental development environment of Polkadot with real economic
incentives via the issuance of its native token KSM. Kusama then became an
independent network and continues to operate on its own.

May 2020: Adoption of the Phased Roll-out Strategy

Polkadot adopted a staged rollout strategy for its mainnet launch. The genesis
block of Polkadot was launched in May 2020 as a Proof-of-Authority (PoA) network
managed by six validators belonging to the Web3 Foundation. The network then
transitioned to Nominated Proof-of-Stake (NPoS) running with a decentralized set
of validators in June 2020. The rollout process for parachains began in December
2020 with the launch of the Rococo Testnet for testing parachain functionality.

22 Messari, Polkadot Funding Rounds, https://messari.io/asset/polkadot/profile/launch-and-initial-token-distribution

23 Messari, Polkadot Funding Rounds, https://messari.io/asset/polkadot/profile/launch-and-initial-token-distribution
24 https://wiki.polkadot.network/docs/redenomination 16
Fundamentals Report - Polkadot (DOT) EQONEX Labs

July 2020: The Third Round of Private Sale

Polkadot raised $43 million in its third round of private sale in July 2020. A total of
342,080 DOT were sold for $125 per token.25 The amount is now equal to 34.2 million
DOT and an effective sale price of $1.25 per token due to the redenomination.

June 2021: Deployment of Parachains on Kusama

The parachain rollout started with a test parachain slot auction on Kusama, and
from 15th June to 13th October 2021, Kusama completed two batches of parachain
slot auctions with eleven winners selected from the auctions. The first five winners
of the auctions have begun successfully producing blocks. Once parachains and
auctions on Kusama are stable and a full external audit is completed, the next step
will be enabling parachain functionality on Polkadot.

November 2021 (Expected): Deployment of Parachains on Polkadot and

Other Core Functionality
Polkadot’s core functionalities are currently under development including
parachain rollout, cross-chain message-passing, and the launch of parathreads.
The Polkadot governance has approved a proposal for scheduling the parachain
auctions on the Polkadot network. Starting on 11th November 2021, the first batch
of five auctions will take place every seven days, with a second batch of six auctions
to start on 23rd December 2021 and to take place every two weeks.

25 Messari, Polkadot Funding Rounds, https://messari.io/asset/polkadot/profile/launch-and-initial-token-distribution 17

Fundamentals Report - Polkadot (DOT) EQONEX Labs

Founding Team

Dr. Gavin Wood, Co-founder of Polkadot. He began

as one of the pioneers of blockchain technology as
co-founder and CTO of Ethereum. Wood invented
fundamental components of the blockchain industry,
including Solidity, Proof-of-Authority consensus, and
Whisper. At Parity, Gavin currently leads innovation on
Substrate and Polkadot. He coined the term Web 3.0
in 2014 and serves as President of Web3 Foundation.

Robert Habermeier, Co-founder of Polkadot. He was a

former core developer for Parity. He has a research and
development background in blockchains, distributed
systems, and cryptography. As a long-time member
of the Rust community, he has focused on leveraging
the language’s features to build highly parallel and
performant solutions.

Peter Czaban, Co-founder of Polkadot. He is also the

Technology Director of the Web3 Foundation, where
he works on supporting the development of the next
generation of distributed technologies. He obtained
his Masters of Engineering degree at the University
of Oxford, reading Engineering Science and focused
on Bayesian Machine Learning. Czaban has worked
across defence, finance, and data analytics industries,
working on mesh networks, distributed knowledge
bases, quantitative pricing models, machine learning,
and business development.

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

Conclusion

The Polkadot project introduces a paradigm shift in blockchain technology

by introducing democratic governance, interoperability between multiple
blockchains, and a highly modular and upgradeable blockchain development
framework. Though not fully launched, Polkadot shows a tremendous amount of
potential.

Unlike other Layer 1 blockchains, Polkadot is dedicated to creating a fundamental

layer, or a “Layer 0” to facilitate the scalability and interoperability of the network
connecting different blockchains. The long-term success of the Polkadot
ecosystem will be measured by how many of the existing blockchains will connect
to Polkadot via bridges and how much real-world applicability and adoption that
parachains will achieve.

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

Appendix A: Key Terms

This section describes the key terms commonly used in describing the Polkadot
network. Key terms are divided into two sections: the Architecture and the Actor
components. Terms listed in the Architecture component describe key software
components that power the Polkadot ecosystem, whereas Actors interact with
the various architecture components within Polkadot ecosystem.

A.1 Architecture
Bridges allow parachains and parathreads to connect and communicate with
external networks such as Ethereum and Bitcoin.

Parachains are sovereign blockchains that can have their own tokens and optimize
their functionality for specific use cases.

Parathreads employ a pay-as-you-go model and do not need continuous

connectivity to the network.

The Relay Chain is responsible for cross-chain interoperability and shared network
security. It is maintained by validators that are selected through the Nominated
Proof-of-Stake (NPoS) mechanism, who perform the verification of transaction
activity on the Relay Chain.

A.2 Actors
Validators are required to stake a certain amount of DOT and perform validation
on the Relay Chain. They also perform verification on the information contained
within parachain blocks. In return for their work, validators receive block rewards.

Nominators bond their stake to selected validators to help secure the Relay Chain.
Nominators share a portion of rewards from validators that perform properly and
lose the stake on validators that get slashed.

Collators are full nodes on both a parachain and the Relay Chain. They collect
parachain transactions and produce state transition proofs for the validators on
the Relay Chain. They can also send and receive messages from other parachains
using the Cross-Message Passing Protocol (XCMP).

Fishermen monitor the network and report bad behavior to validators. The existence
of fishermen was to prevent misbehavior and can be performed by collators.
However, at the time of writing, the role of Fishermen has been deprecated and is
no longer available on Polkadot.26

26 Fishermen: Deprecated, https://wiki.polkadot.network/docs/learn-availability#fishermen-deprecated 20

Fundamentals Report - Polkadot (DOT) EQONEX Labs

Appendix B: Parachain Auctions

Parachain Slot Auction

For a parachain to be added to Polkadot and have guaranteed block inclusion at
every Relay Chain block, it must acquire a parachain slot. The sale of the parachain
slots is conducted in the form of candle auction27, which randomly selects when
the auction ends. The highest bidder at the conclusion of the auction is considered
the winner.

Auctions require participants to possess a significant amount of DOT to win

the bid. Therefore, Polkadot introduced a decentralized crowdloan scheme that
allows project teams to source funds from DOT holders to fund their parachain
bids. In return, the DOT holders can share the benefits of the parachain, and the
parachain team will reward participants with a token. The mechanics are similar to
Initial Coin Offering (ICO), where project teams are funded through token sales. A
key difference between parachain auctions and ICOs is that participants maintain
control and ownership of their funds. As the leasing period ends, the parachain
will be unbonded, and all the DOT locked up in the parachain will be returned to
the participants.

Polkadot set an ideal staking rate at 50%, which means, ideally, half of the supply
is locked in staking. The remaining 50% will be used for bonding parachains.
The number of parachain slots is limited and estimated to be 100. Assuming all
parachain slots cost the same, the availability of DOT for each parachain bonding
will be up to 0.5% of the total supply.

Polkadot is expected to launch the parachain auctions in November 2021. The first
batch of parachain slot auctions is scheduled for 11th November 2021, followed by
a second batch of auctions on 23rd December 202128. Substrate-based projects, as
well as the projects that previously participated in Kusama parachains auctions,
will compete for the parachain slots in Polkadot. Meanwhile, DOT token holders
will further benefit by contributing to the crowdloans of their supported projects.

Its canary network, Kusama, successfully ran two batches of parachain slot auctions
and crowdloans from 15th June to 13th Oct 2021. Table B.1 shows the leader board
of the 11 winners in Kusama parachain slot auctions and their respective KSM
bonding amounts.

27 Candle auction, https://en.wikipedia.org/wiki/Candle_auction

28 https://polkadot.polkassembly.io/referendum/39 21
Fundamentals Report - Polkadot (DOT) EQONEX Labs

Project Crowdloan % of KSM Supply

Karura 501,137.66 KSM ($108,025,777.78) 5.01%

Bifrost 136,817.80 KSM ($29,492,592.27) 1.37%

Khala Network 132,280.75 KSM ($28,514,580.97) 1.32%

Shiden 138,457.86 KSM ($29,846,127.06) 1.38%

Moonriver 205,935.01 KSM ($44,391,574.29) 2.06%

KILT Protocol 219,999.93 KSM ($70,980,171.87) 2.20%

Calamari 218,246.65 KSM ($70,414,498.59) 2.18%

Basilisk 222,221.92 KSM ($71,697,068.53) 2.22%

Altair 187,835.18 KSM ($60,602,625.62) 1.88%

Parallel Heiko 202,793.43 KSM ($65,428,715.39) 2.03%

Kintsugi 199,999.93 KSM ($62,921,430.66) 2.00%

Total Locked 2,365,726.10 KSM 23.66%

Table B.1. Leaderboard of the Winners in Kusama Parachain Auction

A description of the 11 parachain winners are as follows:

• Karura is the all-in-one DeFi Hub of Kusama and Acala’s sister network. Karura
provides a platform for DApps and a suite of DeFi applications, including liquid
KSM staking, the Karura DEX, and the Karura Dollar (kUSD) stablecoin.
• Bifrost is a DeFi protocol that connects with Polkadot and different PoS
blockchains to provide staking derivatives through XCMP or smart contracts.
• Khala Network is the Phala pre-mainnet on Kusama. It is a Web3 cloud that
supports data privacy while remaining trustless.
• Shiden is a multi-chain decentralized application layer on Kusama Network
that supports smart contract functionality.
• Moonriver is a companion network to Moonbeam: A full Ethereum-like
environment with additional features such as on-chain governance, staking,
and cross-chain integrations. Moonriver provides a permanently incentivized
canary network, where new code ships first.
• Calamari is Manta Network’s canary-net, the plug-and-play privacy-
preservation parachain built to service the Kusama DeFi world. It combines
Kusama and zkSNARKs to bring on-chain privacy to transactions and swaps.

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

• Parallel Heiko is a decentralized lending & staking protocol built on top of the
Polkadot ecosystem.
• KILT Protocol is a blockchain protocol for issuing self-sovereign verifiable,
revocable credentials in the Web 3.0.
• Altair is an experimental network of Centrifuge Chain that enables users to
tokenize their most experimental assets and finance them.
• Basilisk is a canary network of HydraDX and an independent chain which
enables frictionless liquidity bootstrapping for new cryptoassets.
• Kintsugi is interBTC’s canary network developed by Interlay under the
supervision of Kintsugi Labs. Kintsugi’s kBTC brings open Bitcoin to Kusama to
kickstart liquidity for parachains like Karura, Shiden and Moonriver.

The first parachain winner was Karura, founded by the Acala Foundation, with
over 500k KSM contributed to their crowdloan campaign. Given KSM’s total
supply of 10 million, this bonding amount accounts for 5.01% of the total supply,
which is 10 times more than our prediction for the Polkadot network based on the
aforementioned ideal staking rate set by Polkadot (50%). The accumulated locked
amount over the 11 Kusama auctions is 2.366 million KSM: 23.66% of the total KSM
supply has been locked up in 11% of the parachain slots. The amount of KSM which
were contributed to the 11 Kusama auctions is shown in Figure B.1.

Figure B.1. KSM Contributed to the Eleven Auctions

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

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Fundamentals Report - Polkadot (DOT) EQONEX Labs

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