Ethereum (ETH) was the first smart contract-enabled blockchain to debut back in 2015. Since then, subsequent blockchain platforms have all been dubbed Ethereum Killers in the expectation they might lift Ethereum’s crown.
No project has come close yet, but Polkadot (DOT) might be best positioned for the task. That’s owing to the ever-innovative Gavin Wood. He’s Polkadot’s charismatic founder, Ethereum co-founder, and inventor of Solidity, the programming language used to build Ethereum smart contracts.
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How does Polkadot compare to Ethereum, and is one better than the other? This guide provides you with easy explanations of Ethereum and Polkadot, ETH and DOT tokens, and compares the pros and cons of each.
First there was Bitcoin; then there was Ethereum. The progression of blockchains from simple currency + store of value to complex, decentralized, programmable world computers was enabled by Ethereum.
Here is a short version of Ethereum’s history
In 2013, a gifted teenage programmer named Vitalik Buterin began experimenting with the Bitcoin codebase. His goal was to build a decentralized computer capable of hosting unstoppable applications built and accessible by anyone.
This vision is sometimes referred to as a world computer. A world computer in the Ethereum sense means a virtual computer that works much like your personal computer. The key difference is the world computer is decentralized, hosted by countless participants, and can’t be shut down or censored.
Amongst endless possibilities, decentralized finance applications have appeared on top of Ethereum. Decentralized exchanges and bankless peer-to-peer lending apps are processing billions of dollars worth of tokens without intermediaries of any kind.
Clearly, Ethereum has massive potential to change traditional finance and any circumstance requiring trust, mediation, and third parties.
Dawn of the smart contract era
To achieve technical aims exceeding Bitcoin’s capabilities, Buterin and Gavin Wood, then Ethereum’s CTO, set to work conceptualizing and creating Solidity, a scripting language for smart contracts.
Smart contracts are the core innovation behind Ethereum. The easy way to understand smart contracts is they’re lightweight computer programs that trustfully automate actions built into the contract itself.
To clarify this point more, let’s use an example. Say you want to loan money and someone else wants to borrow it…
- Using Ethereum, you create a contract with the loan repayment terms and associated wallets.
- Then, you deposit funds to the smart contract, and the borrower deposits collateral.
- The smart contract facilitates the loan + liquidations in the event collateral value dips.
The above example is just one of the infinite ways developers can program smart contracts. Other smart contract use cases taking off include tokenized derivatives, synthetic assets, liquidity pools, and decentralized exchanges.
How much trust have people put in smart contracts? Right now there’s just under $60 billion locked in Ethereum-based smart contracts.
Ethereum 2.0 and move to proof of stake
Earlier we mentioned Ethereum’s design is based on Bitcoin, which uses a proof of work consensus algorithm.
If you aren’t familiar with proof of work, perhaps you know about Bitcoin mining. Essentially, mining refers to a decentralized network of participants competing to earn more BTC by verifying block-bound transactions for validity.
Ethereum uses a mining setup just like Bitcoin, a fact that largely explains why Ethereum’s transaction throughput capability is relatively poor. In the first half of 2021, the Ethereum network settled trillions of dollars worth of transactions — all while being capable of a meager 15 transactions per second.
The transition to Ethereum 2.0 is significant because the network will finally ditch proof of work in favor of proof of stake. PoS is a far faster, more flexible, and eco-friendly consensus algorithm that replaces miners with stakers.
True to their name, stakers must stake 32 ETH tokens to validate the network and earn a portion of block rewards. If a staker acts maliciously and validates dishonest transactions, their stake is slashed to disincentivize anyone from doing so again.
Dive deeper with our guide to Ethereum 2.0
Moreover, ETH 2.0 ditches the prior single blockchain approach by introducing sharded multi-chains. Sharding makes Ethereum 2.0 faster, more efficient, and very secure by making validators responsible for validating only their shard, or chain, and not others.
The move toward sharding and a heterogeneous multi-chain future are interesting for Ethereum because it quite resembles Polkadot’s current design — but more on that later.
ETH token explained
The Ethereum token, better known as ETH, is an essential cryptocurrency.
Why? Because ETH is the first widely used utility token — a term describing tokens with functions beyond mere currency.
ETH for paying gas fees
All transactions on the Ethereum network require the sender to pay a fee called gas. The only way to pay gas fees is with ETH tokens.
So if you’re a developer creating a high-volume app like Uniswap, you need ETH tokens to cover the costs of running smart contracts (because smart contracts create transactions when triggered).
ETH in DeFi
ETH is second only to BTC in terms of popularity, trading volume, and circulation. If Bitcoin is gold, ETH is silver.
The reserve currency status ETH enjoys gives it valuable utility in DeFi as a yield-bearing asset. Immensely popular stablecoins like DAI are value-backed by ETH deposited in the MakerDAO vault.
When you deposit ETH to mint DAI, you can earn interest on DAI across DeFi savings protocols like Aave, Compound, Curve, and Yearn Finance. To simplify things, you can also deposit ETH directly in most DeFi protocols to earn interest.
Additionally, entire decentralized exchanges rely on ETH as a base pair in liquidity pools. Of the billions of dollars locked in Ethereum-based DeFi, a significant amount of those funds are locked as ETH by yield farmers.
With Ethereum 2.0 just around the corner, ETH staking is the token’s most important utility. Ethereum 2.0 staking pools are already live for anyone to deposit ETH to earn staking rewards.
- The largest smart contract blockchain platform in the business
- Ethereum is the undisputed home of DeFi and NFTs
- First-mover traction has locked up tons of developer mindshare
- Hosts all of crypto’s most used decentralized applications
- Impending ETH 2.0 update boosts network performance
- Current speed limits result in frequent network congestion
- Ethereum fees are often cost-prohibitive for developers
- High gas fees make DEX and DeFi transactions expensive
- Ethereum development is often disorganized and slow
- ETH 1.0 uses PoW and contributes to climate change
Polkadot is a smart contract blockchain prioritizing decentralization, speed, and security in pursuit of Web3. Unlike Ethereum, Polkadot is designed as a web of standalone blockchains connected to a relay chain. Think of a bicycle wheel with many spokes connected to a hub.
To understand Web3 and why Polkadot is building it, we need to back up a moment and talk about Gavin Wood.
Gavin Wood is a gifted programmer credited with inventing the Solidity language, and consequently, smart contracts. As Ethereum’s first Chief Technology Officer, Wood sought to build a decentralized internet capable of hosting uncensorable applications and public good utilities.
Despite achieving some of the stepping stones to his vision along the way, Wood became frustrated by the Ethereum foundation’s slow pace toward building ETH 2.0. After all, multi-chain Ethereum 2.0 was always Wood’s target — Ethereum 1.0 (the current proof of work version) was supposed to be very temporary.
So in 2016, he left Ethereum and founded Web3 Foundation and Parity Technologies. Both organizations were tasked with researching and developing the project that evolved into Polkadot — a project bearing close similarities to his vision of ETH 2.0.
Conceptually, Polkadot intends to form the protocol layer of a new Web3 internet that’s fully decentralized, interoperable, secure + private, and scalable to billions of people globally. To get there, Polkadot has innovated relentlessly with new blockchain architecture.
At Polkadot’s core is the relay chain, a simple blockchain responsible for coordinating the Polkadot ecosystem of connected parachains. The relay chain doesn’t support smart contracts to keep its functionality generalized and geared toward governance matters.
In keeping with the wheel analogy, the relay chain is Polkadot’s hub and is the site of parachain auctions, governance votes, and validation.
Parachains & parathreads
Whereas the relay chain is the hub, parachains are Polkadot’s spokes. Each parachain is a blockchain capable of independently running its consensus algorithm, utilities, tokens, and so on.
Because the relay chain doesn’t support smart contracts or other specific features, those responsibilities pass onto parachains. However, parachains are not bound to any rules apart from the requirement that they are trustlessly validated.
Polkadot limits the number of parachains to 100 — a hard limit creating competition amongst projects hoping to connect to Polkadot. To connect, potential parachains must win a parachain slot auction by outbidding other projects.
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Once a parachain wins a slot, it bonds DOT tokens to pay for its slot lease (parachain slots are never sold, only leased). If these auctions sound complicated, it’s because parachain slots are scarce and Polkadot prioritizes serious, high-quality projects.
Instead of winning a parachain slot auction, a project can connect as a parathread instead. Parathreads are not standalone blockchains. They’re meant for decentralized applications wanting Polkadot’s scalability, throughput, and security without the expense and development associated with building parachains.
Polkadot explains its security model by describing it as pooled security. In other words, each parachain brings additional security to the network, increasing security as it grows.
The way Polkadot’s shared security works is by allocating the task of validating to the relay chain. This makes it nearly impossible for malicious actors to attack a parachain because they’re protected by the economic security of the large relay chain.
As activity and economic incentives on Polkadot grow…
- The number of validators does too
- More DOT tokens are staked
- Greater number of staked DOT equals more security for all
So, in reply to the imaginary questioner asking why would anyone want to connect to Polkadot? The answer is, apart from performance benefits, pure and simple security.
DOT token explained
The Polkadot token, or DOT, is a utility token with numerous purposes within the Polkadot ecosystem.
To earn a parachain slot, projects must raise and bond DOT tokens. While some projects will have private venture capital funds to acquire DOT tokens, others will source them publicly via crowdloans.
Polkadot crowdloans are a crowdfunding model for borrowing DOT tokens from the public. In exchange for bonding your DOT tokens during a crowdloan, the project in question gives an amount of their native token.
A very cool aspect of DOT bonding is your tokens are always yours! When you lease them to projects raising DOT for parachain auctions, the tokens never actually leave your wallet. Instead, they’re delegated from your wallet and are unlocked at the end of the lease.
DOT tokens are used for voting in governance matters called referenda. Voting on Polkadot referenda is always a yes or no binary — there is no in-between, keeping votes simple.
This being Polkadot, there’s a twist on governance that gives you more or less voting power. Using voluntary locking, you can lock your DOT tokens to increase voting power the longer the lock duration.
DOT staking rewards
Polkadot is a proof of stake network secured by validators staking DOT tokens on the relay chain. Staked DOT tokens act as collateral ensuring validators act honestly. If they don’t, their DOT tokens are slashed.
Right now, DOT staking rewards are fixed at 12% on Kraken Exchange or 10% if using the Polkadot JS wallet.
- Fully sharded architecture makes Polkadot extremely scalable
- All parachains are fully interoperable with each other
- Several projects are ready to compete for parachain slots
- Network security is pooled
- Polkadot has an enthusiastic community
- 100 parachain limit may discourage smaller projects
- Polkadot isn’t fully live yet (only the relay chain is)
- Network fees are still an unknown
- Ethereum has a several years head start
Ethereum and Polkadot are attempting to accomplish similar aims through very dissimilar means. While Ethereum builds the world computer, Polkadot’s Web3 comes together piece by piece.
Ultimately, both platforms are infrastructure for replacing the internet as we know it with private, secure, and community-owned and operated networks. They just get there in different ways.
Forkable vs. forkless
One of the most contentious aspects of blockchains is the question of how to upgrade them. Ethereum is community-centric in the extreme, so upgrades are accomplished by forking off and creating an entirely new chain.Polkadot’s relay chain features onchain governance that votes on upgrades. If an upgrade is voted on and passed, it’s immediately deployed to the relay chain without contentious forking. In this way, Polkadot is anything the community wants it to be without resorting to epic hash power fights.
Proof of stake vs. proof of work
Polkadot uses proof of stake consensus, whereas Ethereum runs on proof of work. PoS is far more environmentally friendly because it demands drastically less electricity than PoW.
Running PoS also benefits everyday DOT token holders. It’s easy to stake your DOT and turn a constant 10-12% return, whereas Ethereum mining is complex, energy-intensive, and requires a significant upfront investment.
Besides the environmental and economic benefits, PoS helps Polkadot scale with greater network performance — a quality that should come in handy serving billions of people.
Single chain vs. multi-chain
Ethereum uses a single blockchain to process all transactions, run all apps, and validate the network with mining. It does all this while using a slow PoW consensus algorithm that seriously restricts throughput. That’s why network congestion is so frequent during high traffic days.
Polkadot eschews the single-chain design for a fully interoperable multi-chain ecosystem. Instead of using one chain to do everything, the Polkadot philosophy lets different chains specialize and share resources.
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