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What is Polkadot?

In 2020, in addition to the popularity of DeFi, Polkadot is also a well-deserved hot spot. As early as the beginning of 2019, Bloomberg pointed out that there are four new projects that the blockchain industry should focus on, and Polkadot, known as one of the "cross-chain duo", is one of them.

Polkadot is a scalable heterogeneous multi-chain system. Although it does not have any inherent functional applications, Polkadot provides a dynamic data core structure that can be verified and supports global dependencies—the Relay Chain. In this way, transaction data and consensus transmission between different blockchains are coordinated.

In Polkadot, the Parachains network that needs to be accessed is an external system, reflecting the scalability and richness of the Polkadot network. As application-specific data structures, parachains are validated and interacted with by the nodes of the relay chain.

Although a parachain is not necessarily a blockchain, parallelized transaction processing can realize the scalability of the Polkadot system, share the security of the entire network, and communicate between parachains.

At the same time, Polkadot uses the nominated proof-of-stake mechanism (NPoS) to select consensus verification nodes for the protocol. In this mechanism, four roles of proofreader (Collator), validator (Validator), nominator (Nominator), and fisherman (Fisherman) are set up to improve the efficiency and security of the network through interactive verification, and almost all DOT ( Polkadot Governance Pass) holders can participate and become these roles to assist in the verification and governance of the network.

From a functional point of view, the verifier is the core role of the Polkadot relay chain. It is mainly responsible for verifying the state transition proof of the proofreader node and packaging candidate blocks according to the validity, similar to node miners. As a special node of the parallel chain, the proofreader maintains the parallel chain, provides candidate blocks after integrating transaction data, and sends data to the verifier.

The nominator is an interest group who entrusts the DOT deposit to a trusted verifier and can earn interest through DOT pledge. In addition, Fisherman does not involve the related process of block packaging. Like independent "bounty hunters", the goal of fisherman is to reduce the occurrence of malicious behavior in the network.

In addition, the parachains connected to Polkadot can be roughly divided into Heterogeneous Chains and Homogeneous Chains. Among them, the heterogeneous chain needs to use a bridge (Bridge), and connect to Polkadot through the parallel chain slot to realize data interaction.

The isomorphic chain refers to the "Pokadot" blockchain built by the blockchain framework Substrate. As the proud work of Gavin Wood, founder of Polkadot and former co-founder of Ethereum, the Substrate framework can create a brand new blockchain network in a few minutes through its modular function mechanism . After the isomorphic link enters Polkadot, it will automatically become a parachain with interoperability and overall security.

By aggregating independent blockchains to form a parallel chain three-dimensional network, Polkadot's multi-chain parallel data processing mode is expected to greatly increase the transaction throughput (TPS) of the network. At the same time, it is very easy to generate new value forms in terms of scalability, cross-chain asset interoperability, and verification governance. In addition, Polkadot can also realize the non-fork upgrade of the system, thereby avoiding the adverse effects of hard fork.

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Currently, Polkadot's ecological scale is continuing to expand. In August 2020, the total number of projects was 200, and the growth rate was as high as 50% within three months.

The data shows that in the past year (as of May), the number of Polkadot developers has surpassed several mainstream blockchain protocols such as Bitcoin, Ethereum, EOS, and TRON, and the number of monthly active developers has increased by 44%.

From 2019 to 2020, the Web3 Foundation initiated by Gavin Wood completed 6 batches of funding for a total of 129 Polkadot ecological projects, including 18 repeated funding projects.

Statistics show that the Web3 Foundation has accumulatively funded Polkadot ecological projects with a total of 6.45 million U.S. dollars, although it is not high compared to the Ethereum Foundation’s 21 million U.S. dollars, and the 129 projects it supports are also less than the latter’s 150 projects. However, compared with the amount of funding for EOS and Cosmos ecology, Polkadot's support scale is still leading.

Among these funded projects, more than a quarter belong to the underlying technology category, followed by the development tools category. In the Polkadot ecosystem at this stage, there are mostly technology development projects, and there are fewer detailed applications such as games, finance, and social networking, accounting for less than 10% of the total.

According to Subscan statistics, before Polkadot has yet connected to the parachain, its main network has an average daily active user of about 2,000, a daily transaction volume of over 2,000, and the number of selected verifiers exceeds 200.

At present, the market value of Polkadot is close to 5 billion US dollars, ranking ninth in CoinMarketCap, and showing a continuous upward trend.

According to official news, the Polkadot parachain card slot auction is about to start, which means that the Polkadot ecosystem will officially enter the stage of integration, formation, and scale expansion. Judging from the market response, in order to obtain the economic and security advantages provided by Polkadot, many projects are eager to try this.

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According to PolkaProject, there are currently 21 DeFi projects in the Polkadot ecosystem. Among them, 18 are based on the Substrate framework, accounting for 85.7% of the total.

At this stage, the Polkadot DeFi ecosystem is still in its infancy. According to the three-layer classification of protocol, settlement, and application of the DeFi technology stack, more than 70% of the projects belong to the protocol layer for creating interactive applications, while the Polkadot network itself focuses on the settlement layer.

In terms of application layer, widely discussed projects include Acala, Polkastarter, etc. Among them, Acala is Polkadot's first stablecoin system. As the underlying financial infrastructure, it provides functions similar to MakerDAO. After accessing the Polkadot parachain, Acala is expected to provide a variety of trading solutions.

Polkastarter is Polkadot's decentralized exchange (Dex), similar to Ethereum Uniswap. Aiming at pain points such as transaction congestion, high slippage, and high handling fees, Polkastarter uses the advantages of parallel chains to provide cross-chain token pools, and supports crowdfunding through auctions in a decentralized and interoperable environment.

In addition, Chainlink built on Substrate is a decentralized oracle network. In DeFi, oracles dominate smart contracts to access off-chain data, and its importance is self-evident. In particular, the current occurrence of oracle machine attacks frequently requires decentralized oracle machines to provide credible and verifiable data services.

It is worth noting that, based on the Polkadot Substrate framework, the deployment of DeFi protocols will have the advantage of being customizable. Especially in the financial field, developers can customize a blockchain network that meets the business design during project construction, fundamentally realizing the customizable requirements at the core level of the project.

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Four Hidden Risks

However, in the Polkadot DeFi ecosystem, it is still necessary to support the security and stability of the value system through multi-link linkage. For participants, while pursuing ecological value, it is even more necessary to grasp potential risk factors in advance.

Whether it is BTC, ETH, or derivative currencies such as DAI and LP tokens in the DeFi protocol, the stability of its value depends on the system security of the protocol itself, or the certainty of the stable currency against the USD account.

If the system suffers a large-scale attack, resulting in a large loss of assets, or a huge asset change in the bank account, once the consensus foundation is destroyed, this will inevitably seriously affect the market value of the relevant tokens.

02. Cross-chain transactions

Unlike the "linear" combination transactions of Ethereum DeFi, the Polkadot ecosystem has "three-dimensional" interoperability. There may be a wider range of transactions between various protocols, including lending, decentralized exchanges, derivatives markets, and tokenized assets.

In the field of DeFi, investors will inevitably seek high-value returns through multiple assets such as mortgages, loans, liquidity provision, LP pledges, etc. However, whether Polkadot cross-chain transactions can avoid the inherent systemic risks brought about by DeFi portfolio transactions is still unknown.

At the same time, hackers use flash loans and launch various attacks through combined transactions. The root cause is still the technical loopholes in the DeFi protocol itself. Therefore, for the Polkadot DeFi project party, it is still necessary to adopt methods such as preliminary audit, regular detection and real-time monitoring to actively prevent the occurrence of security incidents.

The oracle machine is an important "bridge" for the blockchain network to obtain various data and information from the outside world. Especially in terms of quotations, accurate and verifiable price data is of great significance to the security of DeFi protocols.

If the oracle machine makes a quotation error, it may not only lead to the liquidation of the agreement assets, but also easily lead to stealing attacks by trading robots. If it is not corrected in time, the entire system may fall into a serious crisis.

In Polkadot, although it is a three-dimensional structure of "relay + parallel", as a parachain, whether there are loopholes such as oracle machines still needs specific analysis of specific issues. If a problem occurs in a certain link, then whether good interoperability will cause a wider loss surface must be highly valued.

It is true that the Polkadot network has created a closer upstream and downstream relationship between DeFi protocols, but with the gradual expansion of asset lock-up scale in the future and the increasing number of various project teams, it is inevitable that there will be a mixed situation.

At present, cases of using DeFi to commit crimes have also begun to appear. As an investor, in addition to the various risks on the "chain", you need to be more vigilant in the face of the more complex market environment "off the chain", so as not to be deceived by the so-called "new things".

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