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.
Polkadot remained steadfast in its mission to build during the challenging 2022 bear market. Throughout the year, Polkadot conducted its parachain auctions, introduced the latest version of its governance system, and successfully implemented the cross-consensus message format (XCM), all while continually upgrading the network without requiring hard forks
In Q1 2023, Polkadot continued its path of network development and expansion. The platform successfully onboarded six additional parachains, bringing the total number to 41. XCM continued to gain adoption and utilization, and four forkless runtime upgrades were enacted.
Note: The financial and network metrics refer only to the Polkadot Relay Chain and not to parachains.
Polkadot's financials had a steady Q1 2023, with its circulating market cap increasing by 51% QoQ, from $5.1 billion to $7.7 billion. This increase was slightly higher than the broader market's 46% increase. Polkadot is currently ranked between the 10th and 15th largest crypto project by market cap.
In terms of revenue, Polkadot generated $120,000 in Q1 2023, a 28% increase QoQ from $94,000. Polkadot revenue is calculated as the sum of all gas fees spent on the Relay Chain. Rather than coming from end users interacting with applications, gas fees on the Relay Chain are accrued through token transfers, staking, validator elections, governance voting, and parachain slot auction participation.
Polkadot’s native token DOT serves three primary purposes: governance, staking, and parachain bonding. DOT has an inflationary monetary policy and no maximum supply, with an average of approximately 10% annual inflation. Polkadot aims to maintain an ideal staking rate, which accounts for the sufficient backing of DOT to prevent possible security compromises while keeping the native token liquid. The current ideal staking rate is approximately 50%, although it varies with the number of parachains. During Q1, Polkadot had nearly 50% of its supply staked, indicating that the mechanisms were working. DOT's annual staking yield is approximately 15%, meaning that Polkadot stakers are earning a real yield of about 5%.
The Polkadot treasury is funded via block rewards, validator slashing, transaction fees, and staking inefficiencies. The treasury funds are designed to be spent every 24 days, known as the spend period, and then 1% of excess, unspent funds are burned. The treasury funds are held in a system account not accessible by anyone, so all expenditures are automatically executed on-chain.
During Q1, the treasury had 1.4 million DOT ($8.6 million) in expenditures. It was used for various initiatives including infrastructure deployments, community events, and liquidity provisions. Polkadot closed the quarter with a treasury balance of 44 million DOT ($280 million). The implementation of OpenGov will likely result in increased treasury usage.
The Polkadot Relay Chain has several primary functions, including securing, governing, and connecting the parachains. As such, its end users typically transact and use the network primarily through the parachains. However, the Relay Chain does support some end user functionality, including token transfers, staking, validator elections, governance voting, and parachain slot auction participation.
Relay Chain account metrics decreased QoQ with daily active accounts falling 16% from 8,300 to 6,900, and daily new accounts created falling 28% from 2,400 to 1,700. However, despite the decreases, both account-related metrics are consistent with historical averages. The Q4 spike in active accounts was driven by the launch of nomination pools, and it is unclear what drove the Q1 spike. The massive single day spike on December 16th was caused by an address related to Binance.
The Cross-Consensus Message Format (XCM) is a messaging format and language used for communicating between consensus systems. XCM plays a crucial role in Polkadot's interoperability among parachains and other consensus-driven systems. XCM enables complex cross-consensus interactions by providing a standard messaging format for blockchains to seamlessly communicate with each other. XCMP, or Cross Chain Message Passing, is the actual network-layer protocol to deliver XCM-formatted messages to other participating parachains. XCMP is currently available as XCMP-Lite (HRMP).
Since its launch in May of 2022, the usage of XCM has been steadily increasing, with approximately 240,000 XCM messages sent to date. The majority of XCM use cases have been related to asset transfers. However, this quarter, there was a noticeable spike in other use cases, such as operations and asset teleportation. The number of XCM channels also continued to grow, with Polkadot ending Q1’23 with 111 channels, up from 70 in Q4’22.
XCM V3 is the next iteration of XCM. This version will introduce new features such as enhanced programmability, bridging to external networks, cross-chain locking, improved fee payments, and NFTs. XCM V3 was merged into the Polkadot codebase in January and is currently in the audit and approval stage.
Polkadot's parachain slot auctions saw a continued decline in total DOT bonded during Q1 2023. In six slot auctions, 325,000 DOT ($2.1 million) was bonded, down 53% from last quarter. The average slot was won for approximately 55,000 DOT, which is significantly lower than the average slot acquisition of 20 million DOT during the first batch of auctions.
The reduced slot acquisition costs have driven more parachains to self-fund their slots, with four out of six slots being self-funded during Q1. A growing number of projects are taking advantage of the lower requirements to secure a slot in the Polkadot network. The ability to self-fund slots allows projects to launch their parachains more quickly without having to rely on outside funding sources.
The following six projects secured parachain slots:
The initial lease for the first batch of Polkadot parachains, which includes Acala, Moonbeam, Astar, Parallel, and Clover, is set to expire on October 24. In order to maintain the lease, the parachains must participate in a new auction and successfully bid for continuity. Once the lease expires, all of the original DOT that was bonded during the auctions will be made fully liquid. However, the DOT bonded for those auctions has been vesting linearly, so it's unlikely to have a major impact on the price of DOT.
Polkadot recently released a four-part blog post series featuring the first 41 parachains. Part I of the series covers DeFi, while Part II focuses on system chains, smart contracts, and social media. Part III is dedicated to data, ID, privacy, storage, and infrastructure, and Part IV explores sustainability, IoT, NFTs, gaming, and the metaverse.
Aggregate Polkadot parachain data can be challenging to gather, but we analyzed some of the data from the top parachains. TVL is well-dispersed among the leading Polkadot parachains, with Moonbeam leading the pack, closely followed by Acala, Astar, and Parallel.
It's worth noting that the above TVL metrics don't include liquid staking. When factoring in liquid staking, the numbers change significantly. Parallel's liquid crowd loan for participating in DOT auctions has $183 million in TVL, while Acala's liquid staking and liquid crowd loan have $170 million in TVL combined. The total liquid staking TVL is greater than the aggregated DeFi TVL.
According to the annual Electric Capital developer report, Polkadot once again had one of the largest developer bases, with over 750 full-time developers and 2,000 total developers. While Polkadot's total developer count grew by 2% YoY, its growth still lags behind emerging ecosystems like Solana and Polygon. Nonetheless, Polkadot's full-time developer count has grown by more than 16 times since 2018.
The Polkadot Blockchain Academy is accepting applications for its third cohort wave in Berkeley, California. The academy trains engineers to become skilled in Web3 technology. Its program covers topics such as cryptography, economics, blockchain, substrate, pallet development, Polkadot, parachains, smart contracts, and cross-consensus messaging (XCM). The previous waves took place in Cambridge and Buenos Aires.
Polkadot places a strong emphasis on developer tooling, providing a comprehensive list of open-source technologies that contribute to and rely on Polkadot, Kusama, and Substrate. This list is called the Polkadot Open-Source Tech Stack and is divided into various categories, such as user interface, tools, APIs and languages, ink smart contracts, chains and pallets, host, network maintenance tools, signatures, consensus, networking, and primitive. Polkadot offers these resources to make it easier for developers to build on its network and contribute to the growth of the ecosystem.
Polkadot's approach to consensus is unique, employing a Nominated Proof-of-Stake (NPoS) mechanism and a distinct validator-reward model. The model ensures that validators receive nearly identical rewards, incentivizing nominators to stake with lower-staked validators to earn higher rewards, and ultimately decentralizing the validator set. As of Q1, 97% of validators had between 1.7 and 2.6 million DOT staked, indicating the success of the model. As a result, Polkadot boasts a high Nakamoto Coefficient of around 70, well above the industry average.
In an effort to make staking accessible to all, Polkadot introduced Nomination Pools last quarter. These pools enable multiple DOT holders to combine their tokens and act as a single nominator, supporting a chosen set of validators with their aggregated stake. Nomination pools are available through the staking dashboard and popular wallets like Nova Wallet, Talisman, and SubWallet. As of Q1, Polkadot had 116 active nomination pools.
Polkadot's staking system is designed to balance network security with liquidity by maintaining an ideal staking rate. The current ideal staking rate is approximately 50%, but it varies based on the number of parachains. If the staked tokens fall below the ideal rate, staking rewards for nominators increase, encouraging them to stake more tokens on the network. Conversely, if the staked tokens exceed the ideal rate, staking rewards decrease. During Q1, Polkadot had nearly 50% of its supply staked, indicating that the mechanisms are effective in achieving the ideal staking rate.
Polkadot's OpenGov ushers in a new era of community-centered governance. This innovative model places the community at the center of decision-making processes and moves away from the previous leadership by Parity and Web3.
OpenGov enables every decision within the Polkadot network to result from referenda proposed by the community. For the first time, multiple referenda can run simultaneously, accelerating the approval of motions. Proposals are categorized into tiers with specific conditions, such as designated voting periods, a maximum number of eligible votes at a time, and a required DOT deposit. As tiers increase, the conditions for passing a proposal become more stringent.
The Council and Technical Committee are replaced by the Fellowship in OpenGov. The Fellowship fulfills three primary roles: acting as a technical advisor, maintaining and developing core protocols and code, and promoting Polkadot's technology. The Fellowship functions like a developer DAO, allowing all users to join and reducing centralization concerns. A ranking system featuring multiple mechanisms ensures decentralization, including a constitution, community voting for senior positions, and checks and balances to limit leadership control. While the Fellowship cannot pass referenda, it can whitelist them, making them easier and quicker to pass.
The Collectives parachain was launched on Polkadot to facilitate the smooth implementation of OpenGov. This chain hosts on-chain collectives serving the Polkadot ecosystem. It provides a home for the Fellowship and the Polkadot Alliance, which aims to promote the fair use of the Polkadot brand and open-source code.
The new model also introduces flexibility for delegation. It allows users to determine the set of calls they delegate their voting power to, based on conviction and the number of committed tokens. Occasional delegation and un-delegation calls are fee-free, encouraging tokenholders to use this feature without any cost. The new delegation features aim to ensure required turnouts for proposals, while preserving voter anonymity and maintaining a censorship-free design.
In November, OpenGov was launched on Kusama, and then in December, for the first time, two governance bodies voted simultaneously to approve an on-chain proposal, including the Fellowship. This vote demonstrated the system's capabilities and gave users a glimpse of the Polkadot network's future.
During Q1 2023, Polkadot enacted 16 referenda:
Polkadot performs forkless upgrades by separating the network's business logic from the nodes that maintain consensus. Instead of encoding the runtime in nodes, Polkadot nodes contain a WebAssembly execution host. The runtime is stored on the Polkadot blockchain itself, which means that upgrading the logic can be done by upgrading the logic stored on-chain. This approach allows stakeholders to propose and approve upgrades through an autonomous on-chain governance system. During 2022, Polkadot forklessly upgraded 16 times.
During Q1 2023, four forkless runtime upgrades were enacted:
In Q1 2023, Polkadot continued its path of network development and expansion. Polkadot experienced steady financial performance, with a 51% QoQ increase in market cap and a 28% QoQ revenue growth. Treasury expenditures of 1.4 million DOT ($8.6 million) were used for infrastructure, community events, and liquidity provisions, closing the quarter with a 44 million DOT ($280 million) treasury balance. Although Relay Chain account metrics decreased QoQ, they remained consistent with historical averages
The Polkadot ecosystem continued to expand, with a steady rise in XCM usage, a growth in XCM channels, and the onboarding of six additional parachains. Polkadot’s validator stability was maintained, with a high Nakamoto Coefficient and the successful adoption of Nomination Pools. Furthermore, nearly 50% of Polkadot's supply was staked, demonstrating effective ideal staking rate mechanisms
Polkadot's future looks promising, with a loaded roadmap featuring XCM V3, OpenGov, system parachains, asynchronous backing, and parathreads. Given its large and committed developer community, Polkadot is expected to deliver innovative products throughout 2023.
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Nick is a research analyst at Messari on the Protocol Services team. Prior to joining Messari, Nick worked in Deloitte's Consulting practice.
About the author
Nick is a research analyst at Messari on the Protocol Services team. Prior to joining Messari, Nick worked in Deloitte's Consulting practice.