Once upon a time Polkadot was thought of as the most serious competitor to Ethereum. Just after launching on mainnet it was the fifth most valuable cryptocurrency for a brief period of time.

Polkadot lacks the mindshare it once had with CT, which is no surprise as price action and market cap capture the most attention.

This report will take a quick look at the state of the Polkadot network, the parachains I think are most interesting and the Polkadot 2.0 upgrades that could act as an important growth catalyst for the network.

A quick history lesson

The story of Polkadot is intrinsically linked to that of Ethereum. It all started when Gavin Woods, one of Ethereum’s co-founder and the brain behind Solidity started to think about what an Ethereum 2 could look like if things were built differently from the very beginning. As his ideas started to mature, Gavin ultimately quit his CTO position at Ethereum in 2016 to start his own experiment which ultimately became Polkadot.

Polkadot 101

In simple terms, Polkadot can be thought of as a Layer 0 network that connects independent blockchains, known as parachains, allowing them to communicate seamlessly. This design enables the efficient flow of data between these chains while ensuring they are all secured under the same umbrella. Polkadot is designed to be highly flexible, scalable, and cost-efficient.

The architecture of Polkadot is primarily composed of a base layer, called the Relay Chain, and various parachains.

This architecture solves scalability problems as numerous blockchain can run in parallel, in a fully interoperable way, while maintaining their unique sets of trade-offs. All this architecture is secured by a single consensus mechanism.

Polkadot’s security mechanism is based on a shared security model whereby all chains connected to the Polkadot network benefit from the collective security of the Relay Chain.

When designing Polkadot, Gavin Wood took everything he learned from developing Ethereum and tried to improve it. This led to the creation of Substrate, a modular framework that provides the foundational building blocks needed to build a blockchain. This framework is designed to be flexible and adaptable, allowing developers to create a blockchain that fits their specific needs.

Bittensor, which is the number one AI project by marketcap, is actually built on Substrate, but opted against having a parachain.

The State of the Network

At a high level, the health of a blockchain is closely tied to the strength and resilience of its network. One way to assess this is by looking at decentralization within the network. This can be quantified by the Nakamoto coefficient, where a higher value indicates greater decentralization and network strength.

Recent data from NakaFlow places Polkadot at the top among the industry’s major networks in terms of the Nakamoto coefficient. This will rise even higher as the validator set it is about to change to 500.

The Ethereum number is considered to be around 1-2 due to the concentration of staking among a few key players, like Lido and Coinbase.

On another positive note, the monthly voting power in Polkadot governance decisions is globally on the rise. This is a positive indicator of the growing influence of the OpenGov system in shaping the overall direction of Polkadot

Another important metric is the number of monthly active developers, as developers are ultimately responsible for building the future of the chain. According to data from Developer Report, Polkadot ranks as the fourth most active chain in terms of development, with around 761 full-time developers.

These metrics suggest three things: (1) Polkadot is a fully mature chain with a high level of decentralization, making it both secure and resilient, (2) the network’s direction is increasingly being controlled through decentralized governance, and (3) the large number of active developers shows the network is still actively growing and evolving.

Network activity

Polkadot’s design is such that most of the network activity happens on the parachains, not on the main chain (Relay Chain). Therefore, to assess network activity, we must focus on the parachains. Currently, there are 51 live parachains, with 215,000 to 250,000 monthly active users (MAU) across them in recent months. However, this number has dropped from a peak of around 650,000 MAU in April.

They did hit an ATH in number of transactions during the last month, which is encouraging. These types of metrics can be gamed, so more thorough analysis would have to be done on this to work out how valuable these new transactions are.

XCM (Cross-Consensus Messaging), which enables asset transfers between different consensus systems within the Polkadot ecosystem, has already surpassed 900,000 transfers. Currently, the daily XCM transfer volume ranges between 1,000 and 1,500. In any case, these numbers are relatively low, suggesting that cross-chain communication between different parachains is still limited.

TVL was a bit hard to work out, as it depends on what you want to include.

Using DeFiLlama it looks like TVL across all parachains is relatively low, currently at around $120 million. The largest parachains by TVL are Hydration, with $42 million, followed by Moonbeam with $30 million and Astar with $24 million.

The standout Parachain (at least in my opinion)

peaq

peaq is a Layer 1 blockchain purposely built and optimized for DePINs (Decentralized Physical Infrastructure Networks) and Machine RWAs. Built on Substrate, it provides developers with a modular framework that offers both flexibility and ease of use.

As of time of writing, there are already 45 different DePIN projects building on this chain, and we can expect even more to come soon.

Having looked at all of the parachains, I think peaq is currently best placed to bring adoption to Polkadot.

A few use cases possible on peaq

I’m a big believer in DePIN. It’s still early days, but I think this is one of the strongest crypto use cases and we will see many new networks thrive in the coming years (Helium is already leading the way). Community owned infrastructure is going to be transformative and disruptive.

peaq equips DePIN builders with all the decentralized backend logic they need to build their apps in record time. They are the only L1 that offers a wide range of out-of-the-box Modular DePIN Functions like Machine IDs (think of them like passports for machines), role-based access control, data verification, AI Agents & more. Devs can get their apps to market quicker, with all the functionality they need, and because peaq is highly interoperable they aren’t siloing their app to a new L1.

A few interesting DePINs that I’m aware of:

@silencioNetwork (noise pollution tracking)

@NATIXNetwork (AI camera network)

@charge_xyz (electric vehicle charging)

@teneo_protocol (data layer for DePIN and AI)

DePIN as a catalyst

I have many friends that are simply never going to come on-chain to speculate. They aren’t psychopaths like us. They know about crypto, but they are unwilling to jump through the hurdles of onboarding to buy tokens to make money.

But user friendly apps that offer them money for providing services, essentially giving them pre-funded wallets, could be a huge catalyst.

A day in the life of a DePIN user visualized:

Bob starts his day by turning on his home’s DePIN-enabled smart meter, which earns him tokens for contributing to the neighborhood’s energy data network. During his morning jog, a noise pollution monitoring app on his phone silently collects urban sound data, rewarding him with crypto for mapping his city’s acoustic environment. On his drive to work, he activates a decentralized mapping app that records real-time traffic and road condition data, earning tokens for each mile driven. Throughout the day, Bob’s smartphone acts as a node in a distributed IoT network, providing connectivity for nearby smart devices and earning him a steady stream of tokens. During lunch, he sets up a small weather station on his office balcony, joining a decentralized climate data network that compensates him for accurate local weather reporting. On his way home, Bob turns on his car’s dashcam, which doubles as a node in a decentralized traffic monitoring system, earning him additional tokens for capturing and sharing road footage. In the evening, he activates his home’s spare internet bandwidth helping to train AI, passively earning crypto while he surfs the web. Before bed, Bob checks his earnings from the various DePIN apps, satisfied with the day’s contribution to decentralized infrastructure and the crypto rewards he’s accumulated.

I think we need to hit a kind of critical mass of viable DePIN apps all at once in order to really see this become a proper catalyst.

There are still a lot of missing pieces to turn this imagined story into a reality (e.g., privacy concerns, regulatory hurdles, technological limitations, economic sustainability), but it’s an idea in my head that I can’t shake off. And one that seems possibly more realistic than other catalysts right now, because it is genuinely to the benefit of an average person.

Peaq is still in its testnet phase, and its network, Krest, is a live parachain within the Kusama ecosystem, which is Polkadot’s testnet network. When it switches to mainnet (this will happen very soon), it could become one of Polkadot’s hottest parachains and represents a significant hope for the network.

A few other promising parachains worth checking out:

Mythos

Mythos is a gaming parachain. There is a strong focus on mobile games. The main goal of Mythos is to reduce the barrier-to-entry for innovative game developers wanting to build thriving play-and-own-economies. They have some pretty hot IP building on top of them right now: NFL Rivals game & Pudgy Penguin’s mobile game.

Gaming remains one of the most likely mass adoption verticals.

Centrifuge

Centrifuge is one of the most successful RWA projects. They built Centrifuge Chain on Parity Substrate with an initial bridge to Ethereum.

Centrifuge provides both the infrastructure and ecosystem to tokenize, manage, and invest into a complete, diversified portfolio of real-world assets. They have $651M in total assets financed and 1550 assets tokenized today.

Hydration

Hydration is a next-gen DeFi protocol which is designed to bring liquidity to Polkadot. The Hydration Omnipool is an innovative Automated Market Maker (AMM) which unlocks efficiencies by combining all assets in a single trading pool. It enables efficient on-chain trading by combining assets in a single pool, reducing slippage and providing a seamless trading experience.

There are some pretty decent yield opportunities with single sided liquidity and socialized IL on Hydration currently.

DOT - Demand and supply analysis

DOT is the native token behind the Polkadot network and serves as the central economic mechanism that aims to align all stakeholders and balance the needs of the ecosystem. DOT was created as an inflationary token with an annual inflation rate of 10%, and there has just been a governance vote to reduce this to 8% with it decreasing further over time.

This inflation serves two main purposes for Polkadot: first, a portion of the new supply is allocated to incentivize stakers (validators and nominators) to secure the network; second, another portion is directed to the Treasury to fund future ecosystem development.

On the other side of the tokenomics, the demand for DOT is closely linked to the three main functions it currently serves within the Polkadot network:

-Governance: DOT holders actively participate in decision-making processes that shape the future of Polkadot through the OpenGov governance system. Currently, Polkadot has around 1.3 million DAO members (represented by on-chain wallets), over 19.1 million DOT in the Treasury, and more than 1,000 proposals have been submitted.

-Consensus: DOT holders play a crucial role in securing the network by staking their tokens. In return, they earn staking rewards in DOT. As of writing, approximately 58.46% of the total DOT supply is staked, and the historical rewards rate stands at 16.8%.

-Parachain slot acquisition: Previously, parachains connected to Polkadot by leasing a slot on the Relay Chain through an on-chain auction. The winners of these auctions would lock up DOT for the duration of the lease period. This model, however, had certain limitations, such as high entry barriers and lack of flexibility. To address these issues, Polkadot is in the process of implementing an upgrade with Polkadot 2.0, which we will talk about shortly.

DOT becoming deflationary

The generated revenue from coretime sales (new upgrade that has just gone live) will be burned. In this way total supply is decreased while demand remains the same, adding a deflationary pressure to the DOT token.

Polkadot is an evolving project, it’s possible that in the future the DAO votes to increase DOT’s role within the ecosystem, ensuring that the value generated by the entire network, including all parachains, accrues more directly to token holders. While this remains speculative, I’m just trying to demonstrate that DOT could be further integrated into the value capture mechanisms of the Polkadot ecosystem.

The vision of Polkadot 2.0

Polkadot 2.0 represents a big series of changes and improvements that aim to reimagine the Polkadot network. It is not tied to a single event but rather encompasses a range of improvements designed to make the network more flexible, faster, and scalable.

Ultimately, the vision of Polkadot is to become a platform where blockchain resources can be accessed as easily as cloud computing services, where projects can start small and scale seamlessly as they grow, and where the underlying infrastructure adapts to the needs of the applications rather than constraining them.

Rather than bore you with the exact technical details, I’ll just explain them simply because it’s better you actually understand the benefits of the upgrades.

The three key improvements:

Async Backing: Async Backing makes everything move faster and allows more “traffic” (data) to flow through. This means apps can do more complex things and handle more users. This improvement is already live and operational on Polkadot.

Agile Coretime: Agile Coretime is a new model for parachain slot acquisitions. With this new model, developers no longer need to commit vast resources upfront to secure a place on the network. Instead, they can start with just the resources they need, purchasing computational power on-demand or in bulk as their project requires. This dramatically lowers the barrier to entry, allowing innovative ideas to flourish without the burden of excessive initial costs. This makes it easier and cheaper for new projects to start and grow.

This model is now live on Polkadot. As I mentioned earlier, the revenue from coretime sales is burned, which adds a deflationary mechanism for DOT.

The first coretime sales have happened, and this image shows the value of buying security on Polkadot (3.5B+), which shows how much rollups could save on Polkadots. I think it’s a bit early to truly ascertain the actual cost of coretime, but nonetheless here is a fun image to demonstrate how cheap this really is.

Image by@0xGoku_""> @0xGoku_

Elastic scaling: Imagine an app is a popular restaurant that sometimes gets really busy. This feature is like being able to magically expand the restaurant when it gets crowded. It helps apps handle sudden increases in users without slowing down. This scalability is crucial for devs who want to build the next big mainstream app – they can now be confident that their platform can grow with their user base. This improvement is expected to be live in late 2024.

Polkadot 2.0 isn’t just about improving the tech. It’s also getting a fresh look and feel to make it more appealing and easier to understand. There is a makeover for the entire Polkadot brand - new website, clearer explanations of what it does, and a more modern visual style.

The goal is to breathe new life into the Polkadot ecosystem, making it more exciting for both developers and users.

Ultimately, Polkadot 2.0 aims to solve some of the underlying tech constraints and act as a rebirth. If the upgrades are successful then developers can do whatever they want, building innovative apps without bumping into technical roadblocks.

An cool example of going beyond current tech constraints could be something like high frequency trading via Hydration with the utilization of dozens of cores.

Wallets I liked:

There is a perception that Polkadot UX is terrible and the wallets aren’t great, but I actually found both the Talisman wallet and Nova wallet great, and don’t think it’s an issue.

GIF

Talisman has a lot of nice features like:

• Organizing your accounts with folders

• Watching accounts (if you want to track whales)

• 1 click staking

• Multi-chain support

• Quests tab to earn rewards

You can download Talisman here if you want to try it out

Nova is an exceptional mobile wallet. The UI/UX is great. The onboarding is possibly the fastest of any mobile wallet I’ve tried. You can do absolutely everything you need to (vote, swap, stake, use apps etc.) via a simple mobile app.

Overall takeaways

Once upon a time Polkadot was seen as the most exciting upcoming solution to the scaling issues that Ethereum was facing. In the bear market of 18-19 I remember being told by many smart people that Polkadot was going to be the endgame for blockchains.

Polkadot hasn’t really been able to match that hype and enthusiasm up until this point, and smaller projects were unable to launch on Polkadot due to the high barrier to entry with the auction format. However, Polkadot 2.0 changes this. All developers can launch their projects without the huge initial cost, and pay a lot less for blockspace, which could be very attractive for rollups looking to save money.

peaq is a particularly exciting parachain that already boasts 45 DePIN projects. In my opinion, DePIN is one of the most likely categories to attract new on-chain users, so this could be a very important source of adoption for Polkadot.

Polkadot still has a large number of developers committed to the network, and projects building, but the next few years will be make or break.

Polkadot’s strong performance in decentralization metrics and active governance participation indicate a healthy, community-driven ecosystem, and this could be a significant differentiator in the long run.

But I think Polkadot lags in the social layer relative to Ethereum or Solana, or at least that is how it feels as someone that spends a lot of time on CT. Polkadot needs more passionate, loud evangelists putting forward their arguments for why they believe in the tech in order to convert more users and developers to the cause.

The DOT token has struggled over the last few years with the price marginally higher than it was at launch in 2020. In crypto, narrative tends to follow price, and languishing token performance doesn’t help with user or developer adoption, and naturally reflects the state of the network.

But, the upgrades to upcoming Polkadot gives the network a chance of competing. The reality remains that Polkadot needs apps to find product market fit, as all blockchains do. We will need to see an uptick in the network fundamentals and adoption in order for this to translate into a meaningful increase for DOT’s market cap.

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