Welcome to our investor guide on Polkadot, one of the premier smart contract platforms. If you want to invest in one of the railways of the future, Polkadot should definitely be on your list of technologies to watch and in this guide we take you through all the features that put Polkadot ahead of most competitors.
We also take you through the basics of setting up an exchange account so you can start your Polkadot trading. Also, how to safely store your digital assets after you buy Polkadot by using Vaultavo’s industry leading team. Let’s get to it!
What is Polkadot?
Polkadot is a layer zero, smart contract blockchain infrastructure. Most smart contract protocols are layer 1, but Polkadot has a unique approach as a cryptocurrency security. Polkadot founder Gavin Wood, who was also a founding member of Ethereum, realized that there was a lot of redundancy baked into blockchain space; too many protocols had to replicate foundational infrastructure technologies before they could add their unique featuresto protect crypto. He envisioned a powerful ecosystem where different protocols could specialize and focus on their niche by building on top a unified framework of interoperable blockchains where the layer 0 provides a base layer security and governance system -essentially a blockchain of blockchains. Thus, Polkadot was born.
Gavin Wood founded Polkadot in 2016 after realizing that Ethereum was unable to scale in its current form and thus went back to the drawing board to start anew. Gavin is a legend in the space not only for being the founder of Ethereum but also for creating the Solidity coding language which most smart contracts are written in. Smart contracts are essentially programmable agreements that are executed on-chain and allow for a wide range of applications from decentralized exchanges to lending platforms, yield aggregators, NFTs and more.
Polkadot was built by Parity technologies, a software company based in London and its development is overseen by the Web3 Foundation, a non-profit organization based in Switzerland. The Web3 Foundation is responsible for helping new projects attract funding and on-board the Polkadot ecosystem as well as further developing the base layer protocol. This whole package is included when you buy Polkadot. But to be more specific the token of the Polkadot ecosystem is actually called DOT, so be sure to look for DOT on an exchange if you want to buy Polkadot with an institutional crypto custody service.
Polkadot uses a nominated proof-of-stake (PoS) consensus mechanism. PoS uses a different type of transaction verification than the proof-of-work consensus mechanism which is utilized by Bitcoin and Ethereum; Ethereum also plans on transitioning to PoS. PoW relies on computing power while PoS relies on delegation of tokens, the more tokens a validator has delegated to it the more likely it is to mint blocks on the blockchain. We now have a better idea of what Polkadot is, but let’s take a look under the hood on what is actually happening and why it makes sense to invest in Polkadot.
How does Polkadot work?
System Architecture
Polkadot’s nominated PoS system is unlike any other blockchain that you are likely to find. The Base protocol of Polkadot is called the Relay Chain and is only responsible for securing DOT transactions and governance, simple and elegant. All smart contract capabilities come from the Parachains which can be thought of as branches extended from the central hub which is the Relay Chain. Transactions on this platform are much quicker than PoW chains. Polkadot can handle up to 1,000 transactions per second compared to Bitcoin’s estimated 7 transactions per second or Ethereum’s estimated 20 transactions per second.
There are one hundred Parachain slots, thus there is room for one hundred smart contract blockchains that each perform a niche role in the Polkadot ecosystem. These blockchains are interoperable and can communicate, share data and functionality with ease and with high security compared to other layer 1 blockchain which require bridges, that often have weak security, across ununified network designs.
There are three types of Parachains. Common good parachains are slots dedicated to blockchains that provide a service that benefits the whole Polkadot ecosystem. This might be like an Ethereum bridge that enables all Parachains to connect to Ethereum dApps or an Oracle which provides live data streams e.g. price feeds or time. Then there are Parathreads, much shorter lived Parachains that are pay as you go might only temporarily utilize the Polkadot ecosystem, a number of Parathreads can connect to a Parachain slot simultaneously. Finally, there is also the standard Parachain, which is a fully dedicated slot that requires a lockup period of two years.
Governance
So who decides what blockchains can occupy a coveted Parachain slot? It is decided by Parachain auctions, an essential part of the Polkadot governance system. When you buy Polkadot, your DOT tokens can count as votes in the Parachain auction. Some choose to sit out this process and are simply Polkadot trading, not engaged in governance at all, but there are benefits to be had by participating which we will outline in the next section on token utility. Projects hoping to build on Polkadot must win a Parachain Slot by bidding DOT tokens, the highest bid wins a slot. The first two Parachain Slots were awarded to Acala and Moonbeam with many more to come.
The governance structure on Polkadot is currently centralized with the council and technical committee. Founder, Gavin Woods, realized this is a major issue especially as regulatory scrutiny increases. The decentralization of this governance structure will be prioritized to enable stakeholders to make decisions regarding treasury spending and development considerations.
Token utility
What makes the buy Polkadot investment a particularly interesting one is that when you delegate your DOT to a project during the Parachain Auction it may be locked up for the during of the auction which could be up to two years. However, protocols incentivize delegation to their project through PLO (Parachain Loan offerings). If you buy Polkadot and delegate it to a PLO, you will receive the tokens from that blockchain as a reward for your delegation and lockup with them.
If that blockchain is successful the rewards from the PLO could be very lucrative even more so than with Polkadot trading. Theoretically, the Polkadot auction lockup period should also restrict the circulating supply, and thus if demand stays approximately the same the price of DOT should appreciate. The main utility from the token thus arises from its value in the context of parachain slot auctions, however, Polkadot does also provides impressive staking rewards, up to 14% which is higher than if you, say, buy Cardano and stake it with them; they only provide a 5% staking reward.
We recommend that you do not buy Polkadot if you do not intend to participate in the Parachain slot auctions or staking, because without involving your coins in these processes they will be diluted by Polkadot’s rather rapid inflation rate, which will lower the value of your tokens. If you feel this participation is too labor intensive or confusing, rather stick to short-to-medium term Polkadot trading so as not to be affected by the inflating supply.
How to get Polkadot
This guide has been a good primer for the Polkadot ecosystem and now many of you would like to know ‘How can I buy Polkadot?’. In this section of our Polkadot trading guide we take you through the steps you need to buy Polkadot, including cold wallet storage options.
Choose an Exchange
To start Polkadot trading the first thing you need to do is to sign up to an exchange and to create an account. There are a number of things to take into consideration when choosing a trading platform. First, make sure that it is certified and registered in your region. You should ideally choose a platform that a friend or family member of yours has been using for a few years and that has an unimpeachable record with security options such as fingerprint authentication. Make sure that they support the payment method you prefer, be it debit/credit card, bank transfer or e-payments such as Venmo or Paypal.
Finally, be sure that the exchange lists the coins you want to trade. For example if you want to start online crypto trading and want to buy Solana, go to a cryptocurrency market source such as Coinmarketcap or Coingecko. From here you can simply click on the icon for Solana and then click on the ‘Markets’ tab which will direct you to all the exchanges where you can buy Solana with your digital asset smart-card.
Setting up your account
Setting up an account is usually a very quick process. On the trading platform of your choice you will find a ‘Sign up’ button. Follow this link to the section where they prompt you for your name, surname and email address to open a cold wallet. Once you provide your email address, it will send you a verification email containing a link that directs you back to the site. At this point you will be greeted with a message reading ‘email verified’ or something similar.
Next, you will need to choose a password as a cryptocurrency security measure. Choose a strong password that contains capital and non-capital letters, a number, and a special character. Be sure to write your password down and store it somewhere safe in case you ever forget it and also be sure not to share it with any that might compromise your assets.
Verify your identity
Most legitimate trading platforms require identity documents such as a passport or driver’s license in order to comply with KYC (know your customer) and AML (anti money laundering) regulations. Take a photo using your smartphone or upload a photo via cloud sharing. Your documents should be verified within a day, some even verify them within minutes as institutional crypto custody services. Once this is complete only one step remains before you can start to buy Polkadot.
Deposit funds and start Polkadot trading
You have chosen your trading exchange because it hosts your preferred payment method. Now use this method to deposit the funds to your exchange account and you will be able to transfer your national currency into a stablecoin such as TetherUSD (USDT) or CircleUSD (USDC). These stablecoins are pegged 1:1 with the dollar and also have liquid trading pairs with nearly all cryptocurrencies. Use your stablecoins to start polkadot trading or to buy Polkadot so you can start staking or participating in the Parachain Slot Auctions. Always secure your digital asset smart-card with fingerprint authentication.
Store your crypto with Vaultavo
It is unfortunate that most people in the cryptocurrency space are unaware of the risks of keeping their crypto assets on centralized exchanges. Let’s say you buy Polkadot on an exchange, it get sent to your online crypto wallet on the exchange and most would assume that it is safe there, but this is not the case.
Not only do exchanges have inferior security due to their larger attack surface but they usually also have clauses that stipulate that in the event of bankruptcy, they may seize your assets to pay of their outstanding debts. This is why it is best to get your crypto assets off of centralized exchanges. Vaultavo has a state-of-the-art biometric smart card that is the perfect solution for digital custody.
Not only is it convenient and can function as your normal bank card, thanks to its Visa and Mastercard integration, but you can safely store your crypto on it and secure it using your fingerprint. There is no way for you to forget your seed phrase as it is literally on the tip of your finger. Check out our Vaultavo website for more information on our premium crypto custody product.
Is now a good time to invest in Polkadot?
We believe we have provided a good starting point to help you answer the question ‘Should I buy Polkadot?’. Based on our analysis the future potential and fundamentals for Polkadot looks strong, however, the macroeconomic outlook for the foreseeable future is very bearish. The post-covid recovery has been weak in most countries and the Ukraine-Russia war and related sanctions have resulted in supply chain shortages and a general downturn in stock markets and high risk assets.
Thus if you want to play it safe in the short term it may be best to avoid high risk assets and therefore you should not buy Polkadot. If you want to be in crypto but want less volatility you can rather buy Bitcoin or buy Ethereum as these assets are more mature, and have much higher market capitalization which makes them slightly more stable and attractive in current market conditions.
If, however, you have disposable income, that you wish to risk over a long time horizon then perhaps you can risk it to buy Polkadot as it appears to have great long term potential. First it will need to weather the storm of the bear market however. Be sure to consult a financial advisor before making any investment decisions. This article is purely for educational purposes and should not be considered financial advice in any capacity.
Conclusion
This concludes our investor guide on the Polkadot cryptocurrency. We believe Polkadot’s clever infrastructure design, parachain tokenomics and passionate developer community bode well for its future and makes it one of the best smart contract platforms to watch going forward.
We hope this guide was useful in helping you decide if you should buy Polkadot. Be sure to check out the Vaultavo website for more investor guides and for top tips on how to best protect your digital assets.
Polkadot Trading FAQs
What is the best place to buy Polkadot?
If you want to start Polkadot trading your best bet is likely a mainstream centralized exchange. These exchanges tend to have the lowest trading fees and greatest variety in cryptocurrencies to choose from. When choosing a trading exchange platform make sure that it supports your preferred payment method and that it lists the tokens you want to trade.
Does Polkadot have NFTs?
Soon. Moonbeam is a smart contract blockchain that is built on Polkadot and it hosts NFTs among a variety of other things. If you want to buy Polkadot NFTs or create and publish your own NFTs, Moonbeam is a great place to start. Head to our FAQ section to learn more about these options.
How to make money with Polkadot?
Just like any other crypto asset, through Polkadot trading you could profit if you buy Polkadot at a certain price and resell it at a higher price at a later point in time. There are also two other easy ways to make money using the DOT token. First, you can stake the token to earn staking rewards at approximately 14% per year. You could sell the staking rewards and that would essentially be free money just for locking up your DOT tokens for the year. Secondly, you can delegate your tokens to a PLO (parachain loan offering), here you basically lock up your tokens with a successful Parachain blockchain and then receive their native token as reward after two years, at which point you will also receive your DOT tokens back. These reward native tokens can often become valuable and reselling them could pocket you some serious money depending on how much you delegate.