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What Is Polkadot (DOT)?

By Brian Nibley · September 30, 2022 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is Polkadot (DOT)?

The Polkadot blockchain protocol is designed to help other blockchains work together in a single network. Polkadot aims to let different blockchains quickly communicate value or information without an intermediary.

For example, the Polkadot blockchain allows Bitcoin and Ethereum to transfer data to one another. It accomplishes this by using parallel blockchains, known as parachains, that take the burden of processing power away from the main blockchain, making the Polkadot blockchain generally more efficient.

Proponents believe this could solve some existing cryptocurrency challenges of interoperability and scalability, by processing many transactions on parachains at the same time. DOT is the native utility coin of the network.

How Does Polkadot Work?

Speed, scalability, interoperability, and security are paramount for many crypto projects — but achieving all of them is challenging. The Polkadot blockchain is an innovative platform that is attempting to address the so-called trilemma of many crypto platforms, thanks to its interconnected system of blockchains.

Polkadot’s Blockchain Ecosystem

The Polkadot network is made up of two kinds of blockchains: the relay chain, where all transactions are finalized, and custom, user-generated chains, called parachains that use the computing power of the relay chain to validate transactions.

On top of these, Polkadot has another layer composed of Bridges that enable data to move between different blockchains — and even connect with non-blockchain databases.

The network’s many parachains, each of which is like a blockchain unto itself, do a lot of the heavy lifting for the main relay chain. As a result, the Polkadot network can process more than 1,000 transactions per second. As the network grows and more parachains are added, Polkadot should get even faster.

What Is Kusama?

Kusama is an operational blockchain within the Polkadot network that enables the testing of new features for Polkadot before they are released. Kusama is sometimes called a “canary network,” or an experimental network used by developers who want to iterate quickly, or are preparing for deployment on Polkadot.
Kusama coin (KSM) is the native cryptocurrency of the Kusama network.

How Do You Stake on Polkadot?

​​What is Polkadot crypto and how does it work? Unlike some other types of crypto, DOT cryptocurrency has two main functions: holders can stake their DOT with validators who confirm transactions on the network and produce new DOT tokens, or they can use their DOT to nominate delegates who will have a say in the future of the protocol. In the second case, DOT works as a governance token.

DOT is considered an inflationary crypto as there is no maximum supply or cap, as there is with Bitcoin and other crypto.

The Polkadot blockchain uses a consensus mechanism known as Nominated Proof of Stake (NPoS), which is a variation of Delegated Proof of Stake (DPoS).

In NPoS networks, nominators can use their staked DOT tokens to back validators whom they believe will act in the best interest of the blockchain. One of the key differences between NPoS and DPoS, according to the official Polkadot website, is that NPoS punishes nominators who nominate bad validators.

Developers created the NPoS system to deal with one of the biggest problems that DPoS networks have faced in the past: the potential for some delegates to wield disproportionate control over how the network works.

Advantages & Disadvantages of Polkadot

Here are some pros and cons of investing in Polkadot (DOT).

Advantages

Some potential pros of the Polkadot cryptocurrency include:

•   DOT holders can stake it to earn more DOT, at a relatively high rate of interest (about 14%, as of September 2022).

•   It offers exposure to crypto assets that empower interoperable blockchains.

•   Rather than being full validator nodes, users can also be collators or fishermen. These roles require less technical expertise. Collators keep track of valid parachain transactions while fishermen report bad behavior on the network.

•   Developers can also use Polkadot and DOT coin to create and launch new kinds of blockchains.

Disadvantages

Some potential drawbacks of DOT include:

•   The NPoS consensus mechanism is new, making its future uncertain.

•   Altcoins can suffer deep price declines when a new competitor emerges or if investors lose interest.

•   To directly participate in network activities like staking or governance requires large amounts of DOT.

•   Becoming a validator requires substantial technical knowledge and time commitment, so nodes could wind up becoming controlled by a small number of people.

Who Created Polkadot?

Gavin Wood, chief training officer and core developer of Ethereum, helped create the project alongside co-founders Peter Czaban and Robert Habermeier, and published the whitepaper in 2016.

Wood is known for having invented Solidity, the language developers use to write decentralized applications (dapps) on Ethereum.

Despite having a record-high ICO (initial coin offering) in 2017, the project was hacked and the setbacks prevented Polkadot from launching until 2020.

Why Does Polkadot (DOT) Have Value?

DOT crypto is key to maintaining and operating the Polkadot ecosystem. Users who own and stake DOT can vote on network upgrades. Votes are proportional to how much DOT you have staked.

Price of Polkadot (DOT)

As of September 28, 2022, DOT was worth $6.43 and is the 11th largest crypto, with a market cap of $7.22 billion.

Why Use Polkadot (DOT)

Investing in DOT has a couple of important use cases. The first, obviously, is the potential for steady returns through staking. But a longer-term perspective could be that investing in DOT helps to support the innovations that Polkadot brings to the table, which could improve the cryptosphere for all.

How Can I Buy DOT?

You can buy DOT on most major crypto exchanges and investing apps. Here’s how to buy DOT on SoFi Invest®.

Step 1. Open your account.

Start by opening an Active Invest account with SoFi Invest, then set up a crypto account. You can get started with as little as $10, and you can trade DOT and dozens of other cryptocurrencies 24/7.

Be sure to check that the app or exchange carries the crypto you want to buy; sometimes there are geographic restrictions on trading certain types of crypto.

Step 2. Fund your account.

Fund your SoFi Invest account using a secure bank or wire transfer. The buying power in your account can be used to trade crypto as well as stocks or ETFs.

Step 3. Trade DOT!

Select DOT from the list of cryptocurrencies and go to the quote page. There, click “Buy” and enter the amount (in either dollars or coins), and finalize your transaction. You can only buy DOT with the buying power in your Invest account. Currently SoFi doesn’t offer the option to trade one type of crypto for another.

How to Sell DOT

Here’s how to sell DOT on the SoFi Invest app.

Step 1. Select the coin you want to sell.

From your crypto account, select DOT, then from the quote page click “Sell” to submit your trade in either dollars or DOT. As noted above, SoFi doesn’t currently offer the option to trade one type of crypto for another.

Step 2. Make the trade!

Complete your transaction.

Step 3. Keep taxes in mind.

Remember that selling crypto is similar to any other investment: Your gains are subject to taxes. Be sure to consider the tax implications of selling your DOT, and consult a professional as needed.

Does Polkadot (DOT) Have Staking?

Yes. But staking rules on different platforms vary, so be sure to understand what’s involved by checking the Polkadot website. Only nominators can stake coins, but the number of nominators is limited.

The Takeaway

The Polkadot crypto project is a next-generation blockchain that attempts to promote a heterogeneous multi-chain framework and tries to resolve many of the limitations that blockchains currently hold, like scalability and security, as well as true, trustless interoperability.

Polkadot is considered innovative, and somewhat successful, in that its ecosystem has fostered greater interoperability. This is important because blockchain networks remain isolated from each other, which is problematic for the future of crypto and for blockchain technology. The interoperability between banks, for example, encourages commerce throughout the world; without the ability to seamlessly transfer assets, economies would stall.

If you’re ready to start trading crypto, you can explore a number of options (including DOT) when you open an Active Invest account with SoFi Invest, and from there set up a crypto trading account. You can get started with just $10, and SoFi allows you to trade 24/7. SoFi does not offer a crypto wallet or staking at this time.

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)


Photo credit: iStock/smrm1977

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The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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