Building Blocks of Polkadot: Interconnected Web 3.0

VeradiVerdict - Issue #87

Polkadot is one of the most anticipated blockchain launches of the year, check out what it is, what makes it compelling, and some early use cases:

  • As blockchain becomes more popular, we’re seeing more diversity in blockchains. More and more, people are developing unique, tailored blockchains for custom functionalities and use cases after seeing the core concept’s success in other areas. As more chains develop and more services are hosted on separate chains, the industry needs an easy, secure way to communicate across different chains.

  • In 2016, Gavin Wood, co-founder of Ethereum and of the Web3 Foundation, published the Polkadot whitepaper. Polkadot is a decentralized secure protocol for cross-chain communication. At a high level, it consists of:

    • A relay chain, which is the backbone of the network. This provides deterministic guarantees on the flow of information, ensuring that it gets delivered and addressed appropriately. The relay chain is also forkless and future proof, which means protocol updates can be rolled out without requiring a fork of the entire mainnet, which ensures that stakeholders can maintain full operational control of the network and perform quick, easy upgrades.

    • Parachains, which are basically access points to the relay chain. Parachains are owned by customers and can be customized for different use cases and functionalities; their main purpose is to provide a domain-specific chain for different blockchain services to interface with the Polkadot network.

    • Bridges, which are how parachains communicate with external networks and blockchains, like Bitcoin and Ethereum. This essentially “bridges” the gap between the architecture of different networks and the Polkadot architecture.

  • All of this is managed by the DOT token, which gives users the right to govern the protocol by voting on referenda and changing the features, validate transactions by staking the DOT token on the relay chain, and bond parachains to the relay chain to take advantage of the relay chain’s security properties and enable different services to communicate with other services connected to the relay chain.

  • On May 26, Polkadot’s CC1 chain published its genesis block. This is essentially the entity’s first attempt at the relay chain for the mainnet, a central service point for different networks trying to communicate. At the moment, it uses a Proof-of-Authority protocol and has limited functionality while users claim their tokens and set up validating infrastructure. The Web3 Foundation has also launched a $6000 Dai competition to inspire developers to come up with new, inspired use cases for the initial chain.

  • Abstractions have been fundamental to growth in every sector of technology. As people discover more and more use cases for crypto and various distinct blockchains and protocols, it’s going to become increasingly necessary to have functional methods for communication across these systems. Similarly, as the communication layer becomes more robust, people will in turn find unique ways to interface different decentralized services. Some use cases already included file services across different file storage chains, shared financial systems, and mechanisms to incorporate off-chain data into programs that need the data for on-chain execution. As Polkadot strengthens and expands its functionality in the future, cross-chain communication will become a centerpiece of various blockchain networks and the crypto community will discover more, powerful use cases for blockchain technology.

The Diversity of Chains

In recent years, the blockchain community has seen the launch of several new blockchains –– each custom-tailored to its own use case. Bitcoin is primarily used as a decentralized financial ecosystem –– viewed in a similar light to fiat currency, traded assets, and more. Ethereum, while it maintains some of these “finance-y” characteristics, is more tuned for decentralized apps. Developers often fork chains, enabling them to modify the underlying protocol of the chain, to perfectly suit their new use case. 

This is a recurring characteristic with technology. Python, Java, and the hundreds of programming languages that are used today exist because someone wanted to create a “better” language that satisfied some unmet need. The explosion of APIs over the past 2 decades show that there’s huge use cases for communicating across different technological platforms. In kind, the diversity of chains also promises a diversity of use cases for blockchain. The industry of blockchain and cryptocurrency has seen immense growth since the original launch of Bitcoin, as innovators found smart and unique ways to modify existing protocols to suit new use cases and expand the decentralized universe. In tandem, the industry has constructed a new problem –– how do we get these chains to communicate with one another?

The Networking Problem

Decentralized applications and services are increasingly interfacing with multiple chains at once to execute their functions. For instance, a DeFi service might be built on Ethereum, using their enhanced smart contract capabilities, but might need to communicate with the Bitcoin blockchain to convert fiat currency into crypto. The need to communicate between chains is becoming more and more pressing for more and more crypto use cases. There’s never really been a standardized protocol that enables communication between chains (analogous to what HTTPS, TLS, etc. do for computers) ––such communication services usually have been internally developed for specific applications. Low-level protocols are in place (like atomic swaps), but there’s generally a lot of engineering overhead necessary to make these things work at scale.

To enjoy the same innovative growth that the Internet has seen, the community needs to come up with some kind of abstraction for cross-chain communication. It must be simple to communicate across blockchains and leverage multiple functionalities simultaneously, if we want to explore the space’s vast future. This idea of networking and enhancing cross-chain communication has largely been referred to as the problem of “blockchain interoperability.”

So, how should we get chains to talk to each other?

Meet Polkadot. Back in 2016, Gavin Wood, who also notably started Ethereum and Web3 Foundation, launched Polkadot as a protocol to help interface different blockchain networks. Last week, they launched the first chain candidate (CC1) that could become mainnet. 

Polkadot offers a decentralized, seamless way to help blockchain networks communicate with each other and cross-govern. The core of the protocol is the relay chain –– which can be thought of as the infrastructure for parachains to join the Polkadot network and harness its security and messaging guarantees; validators of the Polkadot protocol use the relay chain to maintain the security we universally accept from blockchains. Polkadot uses an innovative form of consensus called GRANDPA (technical overview here). At a high-level, GRANDPA is a finality algorithm that can finalize batches of blocks rather than individual ones. Polkadot uses another protocol, BABE, to produce the blocks that GRANDA finalizes. This separation allows the network to produce blocks at a constant rate, but wait on block finality in order to provide strong data availability and validity guarantees. 

Another core advantage of the relay chain (and parachains, which I’ll discuss next) is that the updates are forkless, meaning that Polkadot doesn’t need to create a fork of the current chain every time they want a new update. In particular, the protocol can push updates with full customizability, meaning it’s always backwards compatible with what the protocol has always done. Most importantly, it also enables the stakeholders to have complete autonomy over the behavior of the blockchain, and no minority group (including the chain operators) can have special privileges over the chain’s behavior. This is key to the long-term success of the network; if multiple applications rely on a shared system to communicate, it’s important that the shared system can update with relatively little drama and in a trusted, decentralized fashion.

Attached to the relay chain are what Polkadot calls “parachains.” Parachains are basically independent blockchains on the Polkadot protocol that can be uniquely optimized for different use cases and functionality. They connect with the relay chain and can communicate with the relay chain and other chains connected to the relay chain. These are fully under the jurisdiction of the parachain’s owner, which means they can be customized as much as they want; the business model is to have parachain owners lock a certain amount of DOT tokens with the Polkadot relay chain for however long they are connected to the network, kind of like a cloud subscription model. Check out this article for more information on parachain slots.

The final component of the protocol is bridges. Bridges are specialized parachains that enable external networks and blockchains, like Ethereum and Bitcoin, to communicate with blockchains in the Polkadot network. 

How is the protocol managed?

To manage these moving parts, Polkadot has the DOT token, which gives holders three key privileges: governing the Polkadot network, staking to secure the network, and bonding for parachain slots. Back in 2017, Polkadot sold SAFTs (simple agreement for future tokens) for DOTs, to be used once they launched the protocol. DOT’s governance privileges enable holders to vote on updates, protocol changes, and different features or modifications to the fundamental architecture of Polkadot. Users stake tokens in a new protocol called Nominated Proof of Stake (NPoS) to select its validators. The validators provide the data availability and validity guarantees to the Relay Chain and all of the parachains, as well as provide the interface for cross-chain messages. Finally, teams can bond DOTs for parachain slots, which is how they can access the security and messaging guarantees of the Relay Chain. Some parachain slots will also be granted from governance.

The community consists of validators, who stake DOTs to validate transactions, nominators, who seek out trustworthy validators, collators, who construct parachain blocks, and fisherman, who monitor the protocol and notify the community if there’s improper use of the network. 

There’s also a technical committee, which consists of people actively contributing to the Polkadot codebase, and a council that’s elected as high-level governance to propose and reject various referenda. The precise details of governance can be found here; conceptually, the council represents the interests of passive stakeholders in the network and the technical committee oversees the technical health of the chain, and can propose emergency referenda for various reasons.

What’s with the launch?

Polkadot’s CC1 published its Genesis block on May 26 –– it’s the first production-ready attempt of a mainnet relay chain. It’s not complete yet; there are things that have yet to be launched, like full-fledged decentralized governance, Proof-of-Stake consensus, the ability to transfer DOTs between users, and developing an ecosystem of parachains, described here

Currently, users can expect Polkadot JS apps and Polkadot nodes to work with CC1. As soon as it gets approved in the iOS and Google App Stores, they also expect Party Signer (a DOT-storing mobile app) to be functional with CC1. The core purpose of the initial chain is to ensure a secure launch of mainnet by enabling features one-by-one as the proper infrastructure falls into place.

Additionally, aside from the launch, Polkadot is offering a challenge of $6000 DAI, split among 3 areas: visualization, user tools, and the “surprise us” category. The idea is to incentivize developers to find novel, effective ways to leverage the Polkadot architecture and demonstrate its potential, while possibly also discovering some drawbacks and pain points to fix in future iterations.

What are some initial use cases?

Some particularly compelling ones include:

  • Interfacing file storage chains into a shared file system or file-requesting system (The Ocean Protocol)

  • Incorporating an oracle’s off-chain data into a chain’s execution (ChainLink)

  • Simultaneously holding financial assets distributed across different chains (ChainX)

  • Enhancing smart contract chains for easier and more effective contract implementations and execution (Edgeware)

As the protocol develops its functionality, there’s likely to be more and more services that want to interface with Polkadot as a means to communicate across blockchain networks; this ecosystem of use cases will grow exponentially as more and more people find easier, secure mechanisms for cross-chain communication via Polkadot.

Final Thoughts

Polkadot, and the collection of protocols that make it up, presents a unique future for the blockchain industry. In practically every other sector of technology, the development of abstractions has been essential to the exponential growth of the space. Mobile became huge once Apple and Google released the SDKs that allowed anyone anywhere to make and download millions of apps. The internet stimulates its own growth, as people discover new ways to connect with each other and build functionality on top of a shared ecosystem of technology. Even blockchain’s buzzword counterpart, AI, has seen immense growth after abstractions like PyTorch and Tensorflow. The problem of blockchain interoperability and cross-chain communication is fundamental to any decentralized system, and Polkadot’s enhanced capabilities to simplify and architect these communication channels will certainly enable more and more use cases for crypto. As Polkadot rolls out its full functionality, the industry will find new ways to leverage it into unique, compelling features. 

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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.

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