As DeFi grows, traders anticipate Polkadot to be the following Ethereum
Look no further than this year's rapid growth in the red-hot arena of decentralized financial markets, or DeFi, and it's clear why the Ethereum blockchain is currently dominating so much conversation in the digital asset industry.
The second-largest blockchain's native cryptocurrency, Ether (ETH), has risen 266% this year – twice as much as Mooning Bitcoin (BTC).
However, many savvy digital asset investors are hedging their bets and buying tokens connected to Upstart blockchains which, due to their versatility and programmability, could potentially gain market share from the Ethereum network, often referred to as the "world computer".
One such character is dot (DOT) from the Polkadot blockchain, of which Gavin Wood co-founded Ethereum. Wood wrote the original project white paper for Polkadot in 2016, just a year after the Ethereum network launched.
Since going live on exchanges in mid-August, after the Polkadot network carried out a 100: 1 split, the point token has risen by over 44%. During the same period, the ether of Ethereum has only increased by just over 8%.
DOT (fuschia) versus ETH (blue) since DOT started trading on August 18 in Kraken.
"The market and investor appetite for Polkadot's dot tokens was very high," said Keld van Schreven, managing director of the investment company KR1, which Polkadot is adding to its portfolio. An initial valuation from a fundraiser before the network launched was valued at around $ 3, he said. "Trading consistently above $ 4 since then has been really encouraging."
Parachutes and moonbeam
At the heart of Polkadot is the concept of “parachutes”, blockchains that, due to their more sophisticated design, can achieve a higher transaction throughput than Ethereum. According to Peter Mauric, Head of Public Affairs at Parity Technologies, the term stands for “parallel blockchains”.
"Parachains can process more transactions than a single blockchain because the transactions are spread across multiple computers, similar to parallel processing," Mauric told CoinDesk in an email.
A key player in the development of the network is Parity Technologies, a for-profit business tool headquartered in Europe for the open source platform Polkadot.
Parity is also the company behind Substrate, a suite of tools that developers can use to create blockchain applications using Polkadot, often referred to as decentralized apps or dapps.
Read more: Reef Finance Raises $ 3.9M for Cross-Chain DeFi on Polkadot
"Substrate packages everything Parity's core developers have learned to create, launch and maintain Ethereum 1.0, Bitcoin, Zcash and now Polkadot," Mauric told CoinDesk. "The hope is that this will strike a middle ground that a highly skilled development team can use to build and launch their own chain without the incredible hassle of building a blockchain from scratch."
According to supporters of Polkadot, software developers are also using Moonbeam, a Boston-based startup that built its own parachute to mimic a toolkit that would look familiar to Ethereum's developers.
"The purpose of the Moonbeam parachute is that we effectively implement to the point where we come closest to the core functionality of Ethereum," said Derek Yoo, the project's founder, in a video conference. Yoo has been actively involved in Ethereum projects to adopt the technology. "When we've done our job well, we try to create something that is low-friction and easy to adopt for an existing Ethereum project."
Projects bringing use cases for Polkadot include Interlay, which plans to launch a completed Bitcoin project called "PolkaBTC" in 2021, and cross-chain liquidity provider Equilibrium, which is the first Polkadot project to be reviewed by Quantstamp.
Van Schreven from KR1 says he is following around 230 projects being built on the platform.
When speaking to stakeholders of the Polkadot ecosystem, they discourage the term "Ethereum Killer" as many like to categorize it as many see Polkadot as an addition to the entire ecosystem rather than a rival.
Progress from or rival to Ethereum?
"We are still supporters of Ethereum," said van Schreven. "But we really see the polkadot approach as a kind of natural progression of the entire ecosystem."
Polkadot's ability to spin new blockchains is tempting from an investment standpoint, says van Schreven.
Despite Ethereum's support, van Schreven believes Polkadot's “clean sheet” will allow him to offer brand new features in terms of scalability, finality, and governance that developers will take over.
Read More: Parity Updates Polkadot's underlying technology to make building custom blockchain easier
Bottlenecks and throughput capacity have proven to be a problem for Ethereum, as evidenced by the increased congestion and transaction fees on the network in recent months.
And the governance of Ethereum seems to focus more on its leader Vitalik Buterin than on the rigorous systematic version of governance that Polkadot seeks to achieve, according to Schreven.
All of this could lead to more developers taking over the network – in part how Ethereum achieved its success – and Polkadot's parachutes could take things to the next level.
"Because of this cross-chain aspect of the polkadot ecosystem, the economic activity of all these chains will increase," added Van Schreven. "Obviously some of it will take Ethereum away."