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What Is Polkadot (DOT)?

By Brian Nibley · November 05, 2021 · 4 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)?

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

For example, Polkadot allows Bitcoin and Ethereum could 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. Proponents believe this could solve some existing cryptocurrency challenges of interoperability and scalability, by processing many transactions on parachains at the same time.

The Polkadot network can process more than 1,000 transactions per second. By comparison, Ethereum can process about 30 per second. Some believe Polkadot could get even faster as it adds more parachains, eventually being able to process a million transactions each second.

Developer Gavin Wood, founder and former chief technology officer of Ethereum, launched Polkadot in 2017. Polkadot token (DOT) is the native token of the Polkadot blockchain. Continue reading this DOT crypto guide to learn more.

How Does Polkadot (DOT) 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.

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.

The most famous example of this problem might be the Steemit and Justin Sun debacle in early 2020. Sun took control of the Steemit network by acquiring large amounts of its native token and using them to back delegates (or “witnesses”) of his own choosing.

Developers hope that with NPoS, people will have an incentive not to take such actions, since there currently aren’t any crypto regulations around such activities.

DOT Coin Price

At the time of writing, the price of DOT was $48.60. DOT has a market cap of just under $48 billion. Daily trading volume is currently $3.2 billion.

Having begun the year of 2021 trading at $8.85, DOT is up nearly sixfold.

What Can You Use DOT Coin For?

DOT holders can speculate on the price of the cryptocurrency, trying to buy low and sell high. They may also choose to stake it to earn a regular payout in the form of DOT. Or, they may use DOT to nominate validators of the Polkadot network, who will then influence future developments of the protocol.

Recommended: What is Crypto Staking?

How to Store DOT Coin

The easiest way for most people to store their DOT coin is typically via a trusted third-party custodian like a crypto exchange. The exchange will store DOT coin in a crypto wallet hosted by the exchange immediately after purchase. Holding coins in this manner is only as secure as the exchange itself, but it leaves little opportunity for user error.

More advanced users or those holding large amounts of coin might want a hardware wallet that supports DOT. Hardware wallets require an additional investment but can provide an additional layer of protection.

Recommended: Cold Wallet vs Hot Wallet: Choose the Right Crypto Storag

Whichever method you use, you’ll need to keep track of your crypto transactions for tax purposes.

Benefits of DOT Token

Some potential pros of the Polkadot cryptocurrency include:

•   DOT holders can stake it to earn more DOT.

•   Users can play a role in the governance of the Polkadot network.

•   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 of DOT Token

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.

How to Buy DOT Coin

The process of buying DOT is similar to that of purchasing other digital assets. Doing so involves a few simple steps.

•   Step 1: First, select an exchange that supports DOT trading.

•   Step 2: Sign up for an account on the exchange of your choice.

•   Step 3: Fund your account. Make sure the exchange supports a trading pair of the currency you deposit. For example, if the exchange only supports BTC/DOT, you will have to deposit bitcoin. If they only support USD/DOT, you will have to deposit U.S. dollars.

•   Step 4: Place a buy order for DOT. This step could work slightly differently depending on the exchange. Beginner-friendly exchanges like Coinbase and Kraken allow users to simply place an order for a certain amount of DOT, which they execute at the current market price. Other exchanges require users to select an existing ask or sell order from the order books, and buy at that price.

•   Step 5: Optionally, users can then move their DOT off of an exchange, into their own cryptocurrency wallet.

After acquiring some DOT, users can either hold it and wait for the potential future price appreciation, or do one of the things mentioned in the “what can you do with DOT” section.

The Takeaway

Polkadot is a type of cryptocurrency built on a blockchain protocol that facilitates communication between other blockchains. Trading DOT can involve buying and selling, staking the coin, or using it to influence its future development.

The SoFi Invest® crypto trading app makes it easy to trade cryptocurrency like DOT, Bitcoin, Ethereum, Dogecoin, and Cardano. Users can manage crypto investments in the SoFi app, with the confidence of knowing their crypto is in a secure platform.

Photo credit: iStock/smrm1977

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