Polkadot (DOT) cryptocurrency: How it works and where to buy

By January 19, 2021DApps
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DOT is the native token of the Polkadot network.

Polkadot is a unique network which allows the transfer of data, money and assets between different blockchains.

Polkadot is different from other networks such as Ethereum, as it uses various blockchains instead of smart contracts, allowing developers a more granular approach to design. DOT tokens are the native currency of the Polkadot ecosystem and are used for proof-of-stake and governance.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

How does Polkadot work?

At Polkadot's core is a universe of blockchains, both public and private, which can all interact with each other through a process known as interoperability. Instead of using smart contracts to run applications, Polkadot uses parallel blockchains, known as parachains, to serve a similar purpose. Whereas a developer on Ethereum would use a collection of smart contracts to program a dapp, developers on Polkadot use parachains instead.

By programming individual blockchains to host dapps instead of smart contracts – which are bound to the parent blockchain's rules – developers are able to exercise greater control over design, including key features such as speed, fees and whether data is public or private. Smart contracts are still supported on Polkadot, although they must exist within a parachain.

For example, a bank might want to host customer data on a private blockchain that only employees can alter. Customers could then access this data using a third-party payments app which operates on a public blockchain. Permission to access either parachain could be moderated by a digital ID held on a smart contract parachain.

Tying these parachains together is the relay chain, which can be thought of as the central blockchain within Polkadot. By managing a network of parachains from a central relay chain, friction is reduced, enabling a faster and more efficient network for both the user and those that operate it.

What does the DOT cryptocurrency do?

The Web3 Foundation, which is responsible for developing Polkadot, categorises the function of the DOT token into three categories: Governance, Staking and Bonding.

Governance

Governance is the process whereby DOT token holders are given the ability to vote on how the blockchain is managed. For instance, token holders may vote on things like protocol upgrades and changes to the relay chain. Votes are proportional to the amount of DOT token a user has staked.

In the event that a DOT token holder does not exercise their right to vote, their stake will be allocated to a special council of 6-24 members who are elected to vote on behalf of absent DOT holders.

Staking

Polkadot uses a proof-of-stake mechanism which means that DOT holders can lock up their tokens and help secure the network, in return for staking rewards.

Staking can be performed in one of two ways, either by acting as a nominator or a validator. Both nominators and validators receive rewards for their participation.

Nominators will be the most common type of stakers on Polkadot, as their role is essentially limited to electing validators.

Validators on the other hand perform a critical role in the health of the network. Validators run a node which operates 24/7 to validate transactions on the network and ensure its efficient operation.

Additional tokens will also operate on the Polkadot network, similar to how Ethereum supports tokens such as the famous ERC-20 token standard.

Bonding

Lastly, DOT can be used to launch new blockchains on the network, known as parachains. In order to launch a parachain, DOT must be deposited in a process known as bonding. If a parachain is retired, DOT tokens are returned.

What to watch out for

Polkadot is a relatively new blockchain, which employs novel technology that has not yet been tried and tested compared to more established chains like Ethereum or EOS.

While the consortium of projects behind the development of Polkadot is highly experienced, the commercial success of the platform remains to be seen. Furthermore, Polkadot operates in a saturated marketplace against operational projects which have had several years to capture market share.

How to buy DOT

Here's a step-by-step guide to one way of buying DOT. Note that there might be other options available, so you may want to compare cryptocurrency exchanges to find the one that's right for you.

Polkadot is a unique network which allows the transfer of data, money and assets between different blockchains.

Polkadot is different from other […]

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