Polkadot — The foundation for a unified blockchain
It’s already been six months since our last overview. A successful series of parachain auctions had been launched on the test blockchain Kusama during the period. The start of parachain auctions in the main network which will take place on November 11 has already influenced the price for DOT token, but it’s still not the limit.
The token trading history in the test network showed that from the beginning of parachain auctions the price of a token for a slot buyout can be changed twofold. Despite the high correlation between KSM and DOT tokens for auctions are the most awaited events for Polkadot blockchain, the limit of price growth hasn’t been reached yet. An additional point in support of the DOT price will be the factor of blocking tokens for a period of one year or more.
As part of the analysis of the price movement on the model of real options, we keep the baseline scenario of a simple DOT price up to 52 USD.
Using the method of real options, we want to present an adjusted short-term forecast of options of price movement in the next month (based on 30-day recorded volatility):
BULL: 54.21$
Maintaining the overall positive situation on the crypto market will lead to an increase in demand and interest in DOT, given the high number of serious and large applicants for a slot in the parachain auction.
BASE: 46.93$
In case of absence of significant negative news, the price of the token will be supported by interest for the upcoming auctions.
BEAR: 35.04$
A situation in which the market, after reaching a historical high in prices, will enter a correction stage is possible. Before one of the most important stages in the development of the project, a massive sale of tokens isn’t observed as a likely possibility.
The original research was released in March 2021
History of the creation and characteristics of the technology
Date of creation: 2017
Purpose: An architecture for combining data from different blockchains
Developer: Web3 foundation
Capitalization: Over 30 billion USD
In 2016, Ethereum co-founder Gavin Wood announced the idea of a multiblockchain, a concept that allows for the exchange of data between different blockchain formats. The project had about USD 200 million to launch on ICO. And as early as May 2020, the Polkadot launch created the technological groundwork to link all the blockchains into a single cryptosystem.
Initially, the network was managed by the Web3 Foundation, but after about a month of start-up, after the network was stabilised, management was put in the hands of the users.
The blockchain architecture consists of three layers:
1. Relay Chain, which includes custom coin stacks (to implement a PoS governance model for the entire blockchain), a governance mechanism (voting and election procedures for significant control participants) and a parachain auction system.
2. Parachain and Parathread — data structures in the form of persistent processes and virtual memory analogues used by the slot owner within the original Polkadot blockchain to perform calculations and exchange information.
3. Bridgechains — chains of blocks that link parachain slots and alternative blockchains (e.g. Ethereum or Bitcoin)
All users have different roles to maintain all levels of processes within the blockchain:
Validators are the validators chosen for coin stacking and production of settlement blocks within the Relay chain. A cell of Validators must be active at all times in order to keep the core network functioning.
Collators are cells that work with both Polkadot’s internal blockchain and a parallel external chain, from which they receive data, authenticate it, and transmit it to validators.
Nominators are members who secure the network by passively stacking their tokens and supporting validators, and can vote for consuls.
Consul is an elected community representative who can put forward proposals from members of the system for a general vote, participate in the distribution of funds from the token repository, and present initiatives to the technical committee for discussion. The maximum number of seats is 24.
Technical Committee are system designers selected by the consuls, whose task is to provide technical expertise on issues to be voted on by the consuls in general. They can initiate an emergency vote if there is a threat to the functionality of the network.
Token Vault is an address within the core network where all free tokens generated by the blockchain are accumulated (not owned by network members as a result of blockchain creation). Tokens can be spent as a result of a proposal and consul vote to develop the project.
In general, the Polkadot blockchain system is a complex organisational structure, with multiple roles and ways of generating revenue. The introduction of a general voting (referendum) and consul mechanism allows for an innovative voting system with further growth in the number of participants, which, in theory, balances the interests of all participants in the network.
Current situation: Kusama Network and Substrat
Despite the short time since the launch of the main Polkadot blockchain, quite a few projects have announced their desire to start collaborative development or to host an existing architecture. One of the first was the Kusana Network, which was launched by the development team of the original Polkadot as a parallel public and experimental version for developers. It was supposed to serve as a kind of “sandbox” to test the functionality and reliability of data transfer when deploying parachain-based projects, before the project was implemented based on the main Polkadot blockchain. The main investor in most future developments is the Swiss fund Web3, which aims to popularise and prepare the infrastructure for the deployment of a new version of the global network, the internet of things (IoT). With his help, the parity.io project team has developed a special Substrat framework that greatly simplifies cross-programming between the Relay Chain Polkadot and an external blockchain, to combine them into a single data network.
Of particular note is the parachain auction system — open bidding for the redemption of the right to rent a slot in the Polkadot system. Participation in a common ecosystem allows the exchange of data, users, and liquidity between different blockchains at extremely high speed. This possibility solves several problems at once — the problem of security (due to cross computing between different blockchains, it will be almost impossible to tamper with the blocks in the chain of participating projects, and the process of block creation will be much cheaper due to participation of multiple parallel computing). It would also provide a common basis for cooperation regardless of the encryption protocol or programming language used.
At the moment, the procedure looks like a two week limited process in which all applicants place their DOT tokens as part of an application to buy the right to lease a slot in a parachute. The lease term is between one and four 6-month segments( there will be a new auction in two years). The maximum number of slots has not been precisely set yet, it is expected to be around 100 for the first few years, and could vary after that depending on the network’s ability and how it will be managed. An important detail is that DOT tokens are returned to the project at the end of the lease period.
Polkadot valuation model
In order to determine a fair price for a project that has not been in operation long since it went public, it is difficult to apply a value analysis — due to the lack of time for practical market evaluation of Polkadot capabilities, there is still a lot of theoretical potential in the price, while the real economic benefit has not been fully formed. Also, worth noting are several factors that have influenced the price — inflation (in August 2020 the community voted to split the token 1 to 100), and a DOT stacking yield of around 18%, with a minimum contribution of 210 tokens for the nominee and 1,734,340 for the validator. However, in the context of a fairly long public trading period, price per period and rate of change are available. Therefore, we used the real options method for the basic investment valuation of the DOT token. In the future, with the development of infrastructure and the launch of a stable slot auction system, an additional method for measuring the value of the project based on the realised value of the token will be added.
Real Options Method
Bear: 10.93$
Due to the newness, complexity of the blockchain code, there may be security risks in the protocol and a lack of demand for the product. This could lead to user frustration and migration to other crypto products.
Base: 54.14$
In the event of a slowdown, or delay in the timing of slot auctions, activity on the Polkadot blockchain could decrease and further growth would be limited.
Bull: 120.47$
If future auctions show high demand for the product and the project team sticks to the release date, the price is likely to keep a high growth rate.
Sources
https://wiki.polkadot.network/docs/en/learn-parachains
https://research.web3.foundation/en/latest/polkadot/economics/2-parachain-allocation.html
https://parachain.live/compare
https://polkaview.network/dot
https://yieldscan.app/
https://polkascan.io/polkadot
https://github.com/w3f/polkadot-white-paper https://polkaproject.com/#/project/29
https://telemetry.polkadot.io/
https://www.parity.io/defi-on-polkadot-an-ecosystem-overview/
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