Why Polkadot Might Be a Great Buy for Crypto Investors
In May 2020, a team of developers – including Ethereum co-founder Gavin Wood – launched Spotted (CRYPTO: POINT). This unique cryptocurrency extends the functionality of its predecessors with the aim of creating a decentralized internet. Here’s what investors need to know.
Bitcoin is a blockchain-based platform designed to decentralize electronic payments. It replaces central regulators (i.e. banks) with a distributed network of miners, creating a more efficient and inclusive financial system.
Image source: Getty Images.
As transactions occur, miners aggregate transaction data into blocks, solve crypto puzzles to validate each block, and then add each block to the blockchain. Each time a miner passes these steps, they are rewarded with Bitcoin. In other words, this system manages the prevention of fraud and the minting of new currencies, thus eliminating the need for financial institutions.
Notably, removing financial institutions also reduces many transaction costs, which means traders keep more money. It also means that consumer data is never collected by these institutions and that anyone with a connected device can access the system.
Ethereum extends this functionality with a more programmable network. Specifically, the Ethereum blockchain stores more than transaction data – it also supports self-executing computer code. This allows the creation of self-applicable smart contracts and decentralized applications (dapps) on the Ethereum network. Again, this eliminates the need for third-party monitoring and gives users more control over their personal data.
The creation of Polkadot
Polkadot is another blockchain-powered network, but it was designed to be more scalable than its predecessors.
To that end, Polkadot is more than just a blockchain – it’s an ecosystem of connected blockchains. The central chain (called the relay chain) ensures the security of the entire network. And side chains (called parachains) increase the capacity of the network.
Notably, each of these parachains is its own blockchain, and each can be optimized for a specific purpose, just like Ethereum is optimized for smart contracts. But other examples include blockchains designed for file storage, financial services, communication, or supply chain transparency.
Bridges are the last piece of the puzzle. These allow parachains to connect to external networks like the Bitcoin or Ethereum blockchain. In other words, Polkadot not only supports its own ecosystem, but it also integrates with existing networks, enabling communication between platforms that normally cannot communicate.
The advantage of Polkadot
Over the past few days, the Bitcoin and Ethereum networks have processed around three transactions per second and 15 transactions per second, respectively. For the context, Visa processed 4,840 transactions per second in the last quarter. In other words, Bitcoin and Ethereum have a scalability problem. And while the two work to resolve this issue, Polkadot appears to be ahead.
By using parachains, Polkadot can process more transactions in parallel, thus increasing throughput – at least, that’s the theory. The first parachaines are expected to launch later this year. But when they do, Wood thinks the network can handle up to 1 million transactions per second.
The best way to understand Polkadot is to put its functionality in context with a real world example. Consider this scenario: Parachain A is designed for storing files, such as school diplomas and professional certifications; and Parachain B is optimized for smart contracts, such as job applications and vacancies.
Let’s say a healthcare facility publishes a post using a smart contract on Parachain B. Rather than filling out a long form and attaching several documents, you can allow Parachain B to access your basic information (for example example, proof of diploma, medical licenses, etc.) stored on Parachain A.
The smart contract could automatically verify your credentials and the secure nature of the blockchain would ensure their legitimacy. If you qualify, the smart contract could automatically trigger a job posting. This would simplify the application process for everyone, helping the healthcare facility to operate more efficiently.
Image source: Getty Images.
Based on this scenario, let’s say Parachain C is designed to collect data from IoT devices, such as cameras or biometric sensors; and Parachain D is optimized for financial services like payroll.
When you arrive at work (or log into your account), Parachain C could relay this data to the smart contract in Parachain B. Using the hourly wage or agreed wage, Parachain B could then notify Parachain D that you need to be paid. . Parachain D could then send money from the employer’s account to your account, automating the payroll process and giving you instant access to your paycheck.
Here’s the big picture: Polkadot’s goal is to create a completely decentralized internet, one where users can securely access any kind of decentralized application or service. In particular, Polkadot’s ability to connect and secure an ecosystem of blockchains makes it a more scalable solution than its predecessors.
As a final thought, Ethereum 2.0 plans to offer similar functionality. Even so, Polkadot will still complete transactions faster, and the Polkadot network produces stronger guarantees of transaction validity with fewer validators (i.e. minors) per side chain.
Polkadot as an investment
Be careful, the novelty of cryptocurrency makes it a very risky investment. For example, Dogecoin climbed 12,000% earlier this year, fueled by the hype on social media and a few tweets from You’re here CEO Elon Musk. But the memes-inspired coin has since lost more than half of its value.
In fact, a constellation of factors (including China’s pledge to crack down on cryptocurrency trading and mining) plunged the entire market into a plunge in May. Since then, more than $ 1 trillion in value has been wiped out of the crypto market.
However, if you can handle this type of volatility, keep Polkadot on your watch list. The development team behind this digital currency has an ambitious vision. If he succeeds in laying the foundations for a new internet, Polkadot could be a winner in the long run.
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Trevor Jennevine owns shares of Tesla and Visa. The Motley Fool owns shares and recommends Bitcoin, Tesla, and Visa. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.