State of Polkadot Q1 2022

Key Insights

• After five years of research and development, Polkadot parachains are now live.
• At the close of Q1 2022, 13 parachains won parachain slots bonding 127.8 million DOT (11% of the total supply; worth $2.9 billion).
• A total of 28 more parachain slot auctions are scheduled through February 2023 (bringing the total to 41).
• Polkadot price and user accounts made all-time-highs around the time of the first parachain slot auction; however, both metrics have steadily declined since.
• Polkadot has an evenly distributed validator set, with 99% of validators having 1.8–2.6 million DOT staked.
• Polkadot developer activity remains among the strongest in crypto.
• The next major milestones are the implementation of the Cross-Consensus Message Format (XCM), parathreads, and performance upgrades.

Introduction to Polkadot

Polkadot is a Nominated Proof-of-Stake (NPoS) blockchain network designed to support various interconnected, application-specific Layer-1 chains known as parachains. Each chain built within Polkadot uses Parity Technologies’ blockchain development framework Substrate, which allows developers to select specific components that best suit their application-specific chain. Polkadot refers to the entire ecosystem of parachains that plug into a single base platform known as the Relay Chain. This base platform does not support application functionality but instead houses all validators and is responsible for securing, governing, and connecting the parachains.

Following roughly five years of research and development, the first parachains were launched on Dec. 17, 2021. At Q1 2022 close, 13 parachains have won parachain slots bonding 127.8 million DOT (11% of the total supply, worth $2.9 billion). As the first edition of quarterly coverage on Polkadot, this report will highlight important developments since the launch of parachains and evaluate the network’s Q1 performance. A full appendix of quarterly events and data is available at the end of the report.

Price History

The concept of parachains was first introduced in the Polkadot Paper in 2016. In October 2021, at the Substrate Sub0 conference, Co-Founder Robert Habermeier announced the Relay Chain was ready to support parachains. Over the following three weeks, the price of Polkadot’s native token DOT increased 57% to an all-time-high of $55.08 ($56.5 billion market cap) on Nov. 5, 2021, one day after the community approved the first parachain slot auction for Nov. 11, 2021. However, Polkadot, along with the broader crypto market, saw valuations decrease from November 2021 through Q1 2022. DOT ended Q1 2022 at $22.5 ($23.3 billion market cap), down 60% from the all-time-high.

During Q1 2022, Polkadot’s valuation change was in range with changes in other ecosystems. LUNA was the largest gainer at +18%, FTM had the largest drop at -38%, and Polkadot had the third largest drop at -19%.

Network Usage

Polkadot user accounts, both new and active, followed a path similar to price. In November, user accounts were up 131% over the year-to-date average and recorded multiple all-time-highs. However, each month since November saw a drop in both active and new users accounts. Although the drop in user accounts was a common macro theme, some internal reasons were also responsible.

The decrease in active accounts may be the result of users locking their DOT for the two-year lease period to support their desired parachain(s) in a slot auction. DOT locked in a crowd loan is inaccessible and therefore cannot be used across Polkadot. To combat the liquidity constraint, parachains Acala and Parallel Finance have introduced liquid staking.

The decrease in new accounts may be related to the fact that the first batch of parachains generated significantly more excitement than the second batch. The first batch of parachains (1–5) had 342% more DOT bonded than the second batch of parachains (6–11).

Conversely, the number of addresses holding DOT increased every month of 2021 and Q1 2022. The increase signals healthy interest in the Polkadot ecosystem despite decreasing valuations.

Staking and Decentralization

Polkadot uses a Nominated Proof-of-Stake (NPoS) consensus mechanism. Nominated PoS consensus differs from Delegated Proof-of-Stake (DPos) consensus because nominators, i.e. DOT owners who stake their tokens with a validator, are subject to slashing.

Validators are paid every 24 hours for completing payable actions, known as era points. Every 4 hours, a subset of validators are randomly assigned to validate all parachains with a multiplier on the era points earned. The combination of era points and random parachain validation results in a probabilistic guarantee that validators earn nearly identical rewards. Because validators earn near equal rewards and distribute these rewards pro rata to their nominators, nominators are incentivized to stake with lower-staked validators to earn higher rewards. The validator-nominator reward model is designed to decentralize Polkadot’s validator set. At Q1 2022 close, 294 of 297 (99%) of validators had 1.8–2.6 million DOT staked, confirming the nominator staking game theory is working.

Polkadot uses an inflationary token model; therefore, there is no maximum number of DOT. Inflation rewards are distributed to validators for securing the Polkadot network, with the remainder going to the treasury. The inflation rate varies in relation to Polkadot’s ideal staking rate, but averages approximately 10% annually. During Q1 2022, DOT maintained a consistent staking rate with a range of 53.8% to 58.6% of total DOT tokens staked.

It is possible for a single entity to run multiple validators. According to Subscan, in Q1 2022 there were seven entities running multiple validators, accounting for 20% of the total DOT staked. It is possible that additional entities are running multiple validators, but Subscan has not identified them.

Because of the even rewards distribution, running multiple validators nets a greater expected value. As a result, Polkadot validators self-bond the minimum of one DOT and nominate their DOT across a maximum of 16 validators to maximize the expected value of their staking rewards. Of the total DOT staked, roughly 99.7% is from nominators, and 0.3% is from validators self-bonding.

Parachain Auctions

The first parachain slot auction began on Nov. 11, 2021. At Q1 2022 close, 13 parachains won parachain slots bonding 127.8 million DOT (11% of the total supply, worth $2.9 billion). Polkadot has 28 new slot auctions scheduled through February 2023 (bringing the total to 41).

Of the first 13 parachains, seven are DeFi chains, three are smart contract platforms, and three are Web3 infrastructure chains. For a deeper look at each of the first 13 parachains, checkout the Polkadot Ecosystem Overview.

Polkadot vs. Kusama

Another unique component of the Polkadot ecosystem is the canary network Kusama. Kusama is a sovereign blockchain with a nearly identical codebase and architecture as Polkadot; however, Kusama has a quicker governance mechanism with 7-day voting vs. Polkadot’s 28-day voting. All new code rollouts are proposed, approved, tested, and implemented on Kusama before moving to Polkadot. As such, Polkadot and Kusama are closely related. Over the last five quarters, the market caps of both networks have closely tracked each other with a 0.797 correlation coefficient.

Conversely, user activity between the networks has little correlation. Over the last five quarters, the user accounts of both networks have had a weak 0.42 correlation coefficient. Both of the networks have seen user accounts trending downwards following the first Polkadot parachains.

Similar to the Kusama-Polkadot relationship, parachain project teams can launch a Kusama parachain to test new features under real economic conditions. Of the first 13 Polkadot parachains, 11 have Kusama parachains. On average, the Polkadot parachains locked ten times the USD value of the Kusama parachains. The lone exception was the Polkadot parachain Phala Network which had a greater USD value locked on its Kusama parachain Khala Network.

Developer Overview

Polkadot had the second largest developer community in 2021, according to the annual Electric Capital Developer Report. Polkadot began the year with 840 total developers and ended the year with 1,400 total developers, a net gain of 560 total developers (+67%). For comparison, Ethereum had the most developers with 3,920, and Cosmos had the third most with roughly 950.

Developer activity through 2021 and Q1 2022 was consistent, with 14/15 months (93%) registering over 10,000 developer activity events. The exception, October 2021, was a result of developers shifting focus to supporting prospective parachains in anticipation of the inaugural auctions. Q1 2022 saw a 10% drop in average monthly developer activity as developers prioritized enabling previously deployed features rather than developing new features. Overall, Polkadot’s developer activity is among the strongest in crypto.

Ecosystem Challenges

In Q4 2021, new users flooded Polkadot to partake in the inaugural, novel parachain slot auctions. However, excitement surrounding the ecosystem has steadily declined through Q1 2022.

To jumpstart excitement, Polkadot needs a spark, likely driven by a parachain or a protocol built on top of a parachain. A protocol needs to develop a new primitive(s) utilizing the cross-chain architecture and XCM communication. Developing new functionality and use cases will showcase the power of the network and organically attract users.

Additionally, users on the network often complain about the complexity of the Polkadot JS wallet. As of Q1 2022 close, multiple projects are working on a Polkadot ecosystem wallet including Talisman, SubWallet, Nova, and Polka Wallet.

Lastly, Polkadot suffers from a knowledge gap. The uniqueness of the architecture leads to common questions and comparisons with other open economy ecosystems. Polkadot could benefit from increased marketing and education efforts to combat common misconceptions.

The Road Ahead

The launch of Polkadot began in May 2020 with the Relay Chain genesis block and finished in December 2021 with the launch of parachains. Several post-launch developments and optimizations have been implemented in Q1 2022, and they are expected to continue through 2022.

Arguably the most important area of focus is the buildout of Polkadot’s Cross-Consensus Message Format (XCM). XCM is a communication language allowing parachains to exchange messages with other parachains, similar to Inter-Blockchain Communication (IBC) on Cosmos. Kusama, Polkadot’s canary network, has been testing a light client version of XCM, called HRMP. Expectations are that XCM will be implemented on Polkadot in Q2 2022. **Update, Co-Founder Robert Habermeier tweeted on Apr. 17, 2022 that XCM would be launched on Polkadot during the next runtime upgrade.

Another area of focus is the launch of parathreads. Parathreads are pay-as-you-go parachains. Instead of always being connected to the Relay Chain like parachains, parathreads pay for the Relay Chain’s security and interoperability as needed. Parathreads are useful for projects that do not wish to acquire a full parachain slot and/or existing parachains that no longer require a dedicated parachain slot.

Lastly, the developers will continue optimizing the network's performance. One major performance upgrade will come from Asynchronous Backing. It will allow parachains to build blocks concurrently with the relay chain and reduce the block time from 12s to 6s. Additional protocol updates are also in-development.

Closing Summary

The marquee event of 2021 was the launch of parachains. Parachains going live led to all-time-highs in price, user accounts, and parachain slot auction contributions. Unfortunately, the euphoria was short lived, and each of these metrics experienced month-over-month declines through Q1 2022.

During the same period, the foundational KPIs held steady. Polkadot maintained a healthy validator distribution by total stake, developer activity remained among the strongest in crypto, and users continued acquiring the token, signaling a healthy interest in the ecosystem.

Q2 2022 will be characterized by additional parachains coming online and the rollout of XCM. To gain more market share, Polkadot needs a parachain or a protocol built on a parachain to take advantage of XCM and the cross-chain architecture by building a unique use case. Because parachains only launched 4 months ago, they are still in their early days.

Appendix

Events

• October 13, 2021 - Robert Habermeier Announces Parachains
• November 11, 2021 - First Parachain Auction Begin
• November 18, 2021 - Acala Wins 1st Parachain Slot
• November 25, 2021 - Moonbeam Wins 2nd Parachain Slot
• December 2, 2021 - Astar Wins 3rd Parachain Slot
• December 9, 2021 - Parallel Wins 4th Parachain Slot
• December 15, 2021 - Polkadot Re-Brand
• December 16, 2021 - Clover Wins 5th Parachain Slot
• December 17, 2021 - Parachains 1–5 Connected to Relay Chain
• December 30, 2021 - Efinity Wins 6th Parachain Slot
• January 13, 2022 - Composable Wins 7th Parachain Slot
• January 27, 2022 - Centrifuge Wins 8th Parachain Slot
• February 2, 2022 - Report Polkadot Has Smallest Carbon Footprint
• February 10, 2022 - HydraDX Wins 9th Parachain Slot
• February 24, 2022 - Interlay Wins 10th Parachain Slot
• February 24, 2022 - 30 Additional Auctions Scheduled
• March 10, 2022 - Nodle Wins 11th Parachain Slot
• March 19, 2022 - Equilibrium Wins 12th Parachain Slot
• March 31, 2022 - Phala Wins 13th Parachain Slot

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