Polkadot: Networking For Blockchains.

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he Polkadot blockchain aims to provide interoperability and security to other blockchains, helping to solve issues like scalability.
In a multi-blockchain world, interoperability could be a potentially valuable function. If a small number of blockchains becomes dominant this value proposition will be significantly weakened though.
Polkadot is currently the leading interoperability blockchain, but its value is uncertain and dependent on how the blockchain ecosystem evolves in the future.
Polkadot (DOT-USD) is a third generation blockchain which aims to provide security and interoperability to other blockchains. If the smart contract market is fragmented across a number of blockchains, which are focused on specific use cases, Polkadot could become an integral part of the blockchain economy. I believe DOT offers significant upside from current prices, but is a risky investment due to the early stage of the project and the uncertain demand for Polkadot's functionality.

First generation - payments

Second generation - smart contracts

Third generation - scalability and interoperability

Interoperability
Potential blockchain applications include the Internet of Things (IoT), finance, governance, identity management, web decentralization and asset-tracking, but adoption is currently low and one of the main reasons is that there are still fatal flaws with existing blockchains. They suffer from a lack of extensibility, scalability and interoperability and there is a need for open and closed networks to have trust-free access to each other.

While there are a number of proposed solutions to these issues, including second layer solutions and network upgrades, interoperability blockchains are one promising solution. Interoperability becomes necessary if there is not one dominant blockchain and a proliferation of successful blockchains will increase the need for cross-communication over time.

The main problems addressed by interoperability blockchains include:

Scalability - Most blockchains still struggle to process a reasonable number of transactions without utilizing excessive resources (processing, bandwidth and storage).
Isolatability - Different parties and applications can have divergent needs that must be addressed under the same framework.
Security - It can be financially feasible although not necessarily profitable to launch an attack on smaller blockchains due to a lack of resources securing the blockchain. An interoperability blockchain can provide security to smaller blockchains, lowering the barriers to entry to creating a secure public blockchain.
Interoperability can provide functionality like:

Transfer of assets from one chain to another.
Locking of assets on chain A based on an event on chain B. This could be used to create financial products like derivatives.
Either two transfers happen or no transfer happens (atomic swap). This could be used as a replacement for escrow.
Cross-chain payments like the payment of a dividend to Chain A based on ownership of an asset held on chain B.
Existing approaches to interoperability can be broke into:

Systems which drop or reduce the notion of a globally coherent state machine.
Systems which attempt to provide a globally coherent singleton machine through homogeneous shards.
Systems which target only heterogeneity.
Polkadot
Polkadot is a blockchain protocol that unites a network of heterogeneous blockchains, allowing them to operate together at scale. Polkadot aims to address interoperability, scalability, speed, security, privacy, developability and governance, but is probably most focused on providing the core requirements for the settlement layer of a blockchain stack (security, scalability and decentralization). Polkadot's goal is to become comparable to how TCP/IP is the communication layer of the internet.

Polkadot enables use cases like:

Development of a State Machine (smart contract, payment, supply chain, etc.) without worrying about the consensus mechanism and economic model
Atomic swaps of tokens/coins across blockchains (public and private)
Decentralized exchanges without any central infrastructure attached
Calling smart contracts from other blockchains
Communication with IoT devices from any blockchain
The project is led by Gavin Wood, one of the founders and main developers of Ethereum, giving the project credibility from its inception. The Polkadot blockchain has been under development for a number of years and its mainnet was launched in 2020. As part of the development process an unaudited and unrefined release of Polkadot called Kusama was created to test the network's technology and economic incentives in a real-world environment. The Kusama blockchain can also be used by developers to test ideas.

Polkadot unites a network of heterogeneous blockchain shards, called parachains. These chains connect to and are secured by the Polkadot relay chain. This allows blockchains to pool their security together so that the individual chains can leverage the collective security without having to scale to build security. Shards can also connect with external networks via bridges. Using multiple interconnected chains helps to spread transactions across more nodes, which should decrease the cost of executing smart contracts and improve scaling and decentralization.

Gavin Wood has claimed that Polkadot is capable of up to 1 million transactions per second. The functionality of the Polkadot blockchain has been kept to a minimum, primarily providing security and interoperability. Instead of smart contracts, other blockchains (parachains) run on the Polkadot platform. Polkadot's cross-chain composability and message passing allows any type of data to be sent between shards, opening the door for a wave of innovation.

The project's roadmap involves phased upgrades to a fully decentralized infrastructure with all planned governance in place. The first phase is proof-of-authority, which involves assembling validators for the network. The project recently launched its second phase, which is known as nominated proof-of-stake. This refers to an initial go-live of the network's consensus model. Assuming all goes well, the next step will involve implementation of the network's governance model.

Relay Chain

The Polkadot relay chain is responsible for network security, consensus and cross-chain interoperability. The relay chain is similar to a blockchain like Ethereum in that it is state-based with states mapping addresses to account information such as balance and number of transactions. Messages do not pass through the relay chain, only proofs of post and channel operations (open, close, etc.) go into the relay chain. This enhances scalability by keeping data on the edges of the system.

Polkadot has implemented flat transaction fees, regardless of the number of transactions, to help avoid scaling issues although this increases the possibility of spamming and it is not yet clear how this problem will be resolved.

Parachains

Parachains are sovereign blockchains (like heterogeneous shards), which can have their own tokens and optimize functionality for specific use cases. Early blockchains had limited throughput and lacked runtime specialization making them impractical to scale for many real-world use cases. Sharding allows transactions to be processed in parallel, increasing throughput. In addition, nested relay chains can increase the number of shards that can be added to the network. To connect to the relay chain, parachains can pay as they go or lease a slot for continuous connectivity.

Bridges

In order to interact with chains that want to use their own finalization process (e.g. Bitcoin), Polkadot has bridge parachains that offer two-way compatibility. Bridges are special blockchains that allow Polkadot to connect to and communicate with blockchains with smart contract capabilities without affecting their native protocol.



Network Participants

The Polkadot consensus roles are validators, collators, nominators and fisherman.

Validators - Validators finalize new blocks on the relay chain and secure the relay chain by staking DOT and validating proofs from collators.

Collators - Maintain parachains by collecting parachain transactions from users and producing proofs for validators. Collators maintain a full node at their respective parachain and perform a similar function to miners in current PoW blockchains. Collators are full nodes of parachains and the relay chain and as such are a key component of message passing.

Nominators - Secure the relay chain by selecting trustworthy validators and staking DOT. Nominators receive a pro-rata reward or penalty depending on whether the validator nominated by them performs the desired function.

Fisherman - Monitor the network and report bad behavior to validators. Collators and any parachain full node can perform the fisherman role. Fisherman are incentivized to identify and prove malicious behavior among bonded network participants.



Polkadot achieves consensus through an asynchronous Byzantine Fault Tolerant (BFT) algorithm. Polkadot utilizes the GRANDPA finality gadget to give stronger and quicker guarantees on the finality of blocks (cannot be reverted after agreement has taken place). Polkadot also utilizes a hybrid consensus mechanism where the finality gadget is separate from the block production mechanism. This allows block production to happen independent of the slower finality process.

Modern blockchain implementations like the Parity Ethereum client can process in excess of 3,000 transactions per second when running on performant consumer hardware. Despite this, current real-world blockchain networks are practically limited to around 30 transactions per second, a level far too low for widespread adoption. This limitation is primarily due to the current synchronous consensus mechanisms requiring wide timing margins of safety on the expected processing time, which is exacerbated by the desire to support slower implementations. By decoupling the consensus process from the state-transition mechanism scalability can be dramatically improved.

DOT is the native token of Polkadot. There is a circulating supply of 960 million DOT and a max supply of 1.04 billion DOT. The DOT token serves three distinct purposes: governance, staking and bonding. Polkadot utilizes on-chain governance with voting rights based on the amount of DOT held. New parachains are added by bonding tokens and outdated or non-useful parachains are removed by removing bonded tokens. Polkadot offers staking for DOT with a current yield of 12%.

Polkadot has been designed with upgradability in mind, which should help to avoid the difficult and contentious upgrades other blockchains have faced. This is achieved through a forkless upgrade process using a transparent on-chain governance system. All DOT holders are able to propose a change to the protocol or vote on existing proposals and they can elect council members who represent passive stakeholders.

Polkadot governance roles include council members and a technical committee. Council members are elected to represent passive stakeholders in two primary governance roles: proposing referenda and vetoing dangerous or malicious referenda. The technical committee is composed of teams actively building Polkadot. They can propose emergency referenda, together with the council, for fast-tracked voting and implementation.

One problem with current blockchains is that all data that transacts across the network is public, limiting adoption by organizations that need to keep certain information private. An issue that could become more prevalent as regulations like GDPR continue to be introduced. The private transaction technology that Parity developed for Ethereum can also be implemented on Polkadot for parachains, making running a permissioned chain on top of Polkadot relatively easy. This allows for the private transfer of data without losing the benefits of interoperability.

For application platforms, developability is one of the most important features to attract developers and Polkadot provides this with the Substrate framework. The Substrate framework provides consensus, networking and webassembly runtime. Substrate is like a web application framework, but for building distributed or decentralized systems such as cryptocurrencies. Polkadot was built with Substrate and projects built with Substrate are able to run natively on Polkadot.

Competitors
There are 3 broad categories of competing interoperability blockchains:

Generic communication protocols aimed at developers - Cosmos and Polkadot
DeFi products aimed at displacing fiat exchanges and banks - ICON and Wanchain
TCP/IP for blockchain generic bridging protocol - Aion
Cosmos

Cosmos aims to become an internet of blockchains, providing interoperability and scalability to other blockchains. Polkadot and Cosmos are both protocols that provide an interface for different state machines to communicate with each other. There are fundamental differences in how Cosmos and Polkadot achieve this though.  Source Link