This cryptocurrency was created with the direct participation of Gavin Wood (co-founder of the well-known Ethereum). It is unique in that it expands the functionality of its predecessors in terms of creating a decentralized Internet. Below is the basic information that investors need to know about it.
Bitcoin is a blockchain-based platform built to decentralize electronic payments. It replaces central regulators (central banks) with a distributed network of miners, creating a more efficient and inclusive financial system.
As transactions occur, miners group the transaction data into blocks, solve (using video card processors) cryptographic puzzles to validate each block, and then add each new block to the blockchain. Every time a miner successfully completes these steps, he is rewarded with Bitcoin. In other words, this system deals with fraud prevention and minting new currency, eliminating the need for financial institutions.
Among other things, excluding financial institutions from the chain of transactions lowers fees, which allows participants to save more money. This also means that the personal data of the members will not be collected by these institutions and that anyone with a connected device can access the system.
Ethereum extends this functionality with a more flexible programmable network. In particular, the Ethereum blockchain stores more than just transaction data – it also supports self-executing computer code. This allows the creation of smart contracts and decentralized applications (dapps) on the Ethereum network. Plus, like Bitcoin, Ethereum removes the need for third-party oversight and gives users more control over their personal data.
Polkadot is another blockchain-powered network, but it has been designed to be more scalable than its predecessors.
Polkadot is a whole ecosystem of interconnected blockchains. The relay chain ensures the security of the entire network. And the side chains (parachains) increase the network bandwidth.
Notably, each of these sidechains is a separate blockchain, and each can be optimized for a specific purpose, just like Ethereum is optimized for smart contracts. These chains can be used for file storage, financial services, communication, or supply chain transparency.
Bridges is the last piece of the puzzle. They allow chains to connect to external networks such as the Bitcoin or Ethereum blockchain. In other words, Polkadot not only maintains its own ecosystem, but also integrates with existing networks, providing connectivity between a wide variety of blockchain platforms.
The Polkadot advantage
The Bitcoin network processes about three, while Ethereum processes about 15 transactions per second. For comparison, last quarter Visa processed 4,840 transactions per second. In other words, Bitcoin and Ethereum have a scalability issue. They are now actively working on this problem, but Polkadot has left them far behind.
Using its sidechains (parachains), Polkadot can process many more transactions in parallel, increasing its throughput by orders of magnitude. The first parachains are scheduled to launch later this year and, according to Wood, this will allow the network to process up to 1 million transactions per second !!!
The best way to understand Polkadot is to consider its functionality in the context of a real-world example.
Consider the following scenario:
- Parachain A is intended for storing files such as data on academic degrees, diplomas and professional certificates;
- Parachain B optimized for smart contracts in the form of job offers.
Let’s say a medical institution posts a vacancy using a smart contract for Parachain B… Instead of filling out a long form and attaching multiple documents, you can give permission Parachain B access to your reference information (such as proof of academic degree, medical license, etc.) stored on Parachain A…
A smart contract can automatically verify your credentials, and the secure nature of the blockchain will ensure their legitimacy. If you qualify, the smart contract can automatically initiate a job offer.
This approach could greatly simplify the application process, helping the health facility operate more efficiently.
Further, suppose that Parachain C is designed to collect data from IoT devices such as cameras or biometric sensors; but Parachain D optimized specifically for financial transactions such as payroll.
When you come to work (or log into your account), Parachain C can transfer this data to a smart contract for Parachain B… Further, based on data on hourly wages (recorded in the contract) Parachain B informs Parachain D about how much you need to pay. Then Parachain D transfers money from your employer’s account to your account, automating the payroll process and giving you instant access to the money you earn.
In general terms, Polkadot’s goal is to create a fully decentralized Internet where users can securely access any type of decentralized application or service.
Notably, Polkadot’s ability to connect and protect the blockchain ecosystem makes it a more scalable solution than its predecessors like Bitcoin and Ethereum.
By the way, Ethereum 2.0 also plans to offer similar functionality. However, Polkadot will continue to be faster in terms of transactions per second, and will provide stronger guarantees of transaction validity with fewer validators (i.e. miners) per sidechain.
Polkadot as an investment
I’ll start right away with the caveats, the novelty of cryptocurrency makes it a very risky investment. For example, Dogecoin skyrocketed 12,000% earlier this year, thanks to the hype on social media and several tweets from Tesla CEO Elon Musk. But the coin, inspired by the Shibu Inu dog meme, has since lost more than half of its value.
In May of this year, under the influence of a combination of various factors (including China’s promise to crack down on cryptocurrency trading and mining), the cryptocurrency market literally went into a dive. Since then, more than $ 1 trillion has been wiped out from the crypto market.
However, if this kind of volatility doesn’t scare you, keep Polkadot in your field of vision. The development team of this digital currency has very ambitious plans. And if their efforts bring the expected results and Polkadot manages to lay the foundation for a new Internet, then this cryptocurrency will literally take off to the stars.
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