State of Polkadot Q1 2024

Key Insights

• Polkadot ecosystem daily active addresses reached an all-time high of 514,000, a 48% increase QoQ and 192% increase over six months. Moonbeam continued to be the leading parachain, and Manta Network saw the largest increase.
• XCM messages were up 94% QoQ and 314% over the past six months. XCM messages and channels have increased every quarter for the past year.
• Gavin Wood shared a proposal for the future of Polkadot, introducing the Join-Accumulate Machine (Jam). Jam merges features from Ethereum and Polkadot, aiming to enhance scalability and performance while maintaining resilience.
• Referendum 457 seeks to diversify the Polkadot Treasury with USDT and USDC and allow Treasury proposals denominated in stablecoins. This referendum aims to convert 3.4 million DOT using HydraDX’s DCA feature.

Primer

Polkadot (DOT) is a distributed blockchain computing platform that acts as a base layer for other sovereign blockchains, called parachains, for validation and shared security. Polkadot was built using Substrate, a blockchain developmental framework. Furthermore, Polkadot’s base layer is known as the Relay Chain, which utilizes a Nominated Proof-of-Stake (NPoS) consensus mechanism, and its state machine is compiled to WebAssembly (Wasm).

Polkadot Relay Chain’s core function is to validate and provide security to its parachains. Parachains are added to the Relay Chain through Parachain Slot Auctions. Today, the auction process is a candle auction that lasts for one week in which potential parachains “bid” DOT tokens to secure a parachain slot. However, this model is being updated in 2024.

Lastly, parachains on Polkadot can communicate with one another through the Cross-Consensus Mechanism Format (XCM). The XCM is a messaging format that standardizes messages between Polkadot’s parachains, allowing for greater interoperability.

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Key Metrics

Financial Analysis

Market Capitalization

In Q4 2023, DOT's market cap increased 111% QoQ to $8.4 billion. Following this strong quarter, in Q1 2024, DOT's circulating market cap further rose by 16% QoQ to $12.7 billion. DOT is up 270% from the bear market low. It ended the quarter ranked 16th among all crypto protocols. DOT remains 80% off of its all-time high of $55.5 billion on November 8, 2021.

Revenue

In Q4 2023, Polkadot's revenue amounted to $2.8 million, marking a significant increase of 2,880% QoQ. This surge was primarily attributed to the substantial rise in extrinsics in late December, driven by the Polkadot Inscriptions. In Q1 2024, revenue metrics fell significantly on a QoQ basis. Revenue (USD) was $241,000 (-91% QoQ), and Revenue (DOT) was 28,800 (-92% QoQ). It would be more accurate to compare revenue to Q3 2023. From that benchmark, revenue (USD) was up 249% and revenue (DOT) was up 97%. Of note, Polkadot's revenue tends to be relatively lower compared to its competitors due to the network's structural design.

Supply

Polkadot’s native token DOT serves three primary purposes: governance, staking, and parachain bonding. As of the end of Q1 2024, Polkadot had a staking rate of 52%. DOT has an inflationary monetary policy and no maximum supply. DOT’s monetary policy is determined by its compliance with an ideal staking rate, which accounts for the sufficient backing of DOT to prevent possible security compromises while keeping the native token liquid. If the staked amount falls below the ideal rate, staking rewards for nominators increase, encouraging more staking. Conversely, if the rate exceeds the ideal, staking rewards decrease.

Treasury

The Polkadot treasury is financed through block rewards, validator slashing, transaction fees, and staking inefficiencies. The treasury funds, held in a system account, are allocated for expenditures within a 24-day spend period, with any unspent funds subject to a 1% burn. Notably, all treasury expenditures are executed automatically on-chain, ensuring transparency and accountability.

Polkadot Referendum 457 seeks to diversify the Polkadot Treasury with USDT and USDC and allow Treasury proposals denominated in stablecoins. This referendum aims to convert 3.4 million DOT (1.7 million USDT and USDC each) over the following year by using HydraDX’s DCA feature to convert a small amount (100 USDT & USDC per trade, 36,000 USDT & USDC per day) on a daily basis. Additionally, the referendum would send 5,000 DOT to HydraDX as a pre-payment for transaction fees and utilize a pure proxy account on HydraDX for the swaps. Acquired USDT and USDC would then periodically be sent to the General Treasury in 5,000 USDT and 5,000 USDC chunks. The stablecoin denominated treasury would add an increased level of predictability to the Treasury.

As of the end of Q1 2024, the Polkadot treasury held approximately 37 million DOT ($347 million). This represents a decrease of 5.3% in USD and 16% in DOT compared to the previous quarter.

Network Analysis

Usage

The Polkadot Relay Chain has several primary functions, including securing and connecting the parachains. As such, its end users typically transact and use the network primarily through the parachains. The Relay Chain does support some end user functionality, including token transfers, staking, validator elections, governance voting, and parachain slot auction participation. With RFC-0032: Minimal Relay, it is proposed to migrate several of these subsystems into system parachains.

In late October, the DOT locked from the first batch of parachain auctions completed its final unlock, leading to the yearly high of active addresses on October 24th. Address activity continued its positive trajectory in Q1 2024. Returning addresses reached 8,200 (+9% QoQ), new addresses totaled 3,100 (+23% QoQ), bringing active addresses to 11,300 (+12% QoQ).

In Polkadot's blockchain framework, an extrinsic is a crucial element that facilitates state transitions within the Relay Chain. It acts as a generalized transaction, encapsulating external data that the network needs to validate and track. Commonly, extrinsics carry a signature and references to specific functions, enabling interactions such as token transfers between accounts. Through extrinsics, Polkadot efficiently handles external inputs, ensuring a seamless operation of its blockchain network.

From December 20th to 23rd, Polkadot extrinsics surged due to Polkadot Inscriptions. During this period, the Polkadot Relay Chain processed an average of 4.3 million daily extrinsics. The network successfully managed this influx without any performance decline. Excluding these dates, the average daily extrinsic count still showcased an increase of over 100% QoQ, with 17,000 extrinsics. In Q1 2024, daily extrinsics were flat QoQ when compared to the filtered Q4 2023 figures.

Development

Polkadot boasts one of the largest developer bases in the crypto industry. According to Electric Capital, in December 2023 Polkadot averaged nearly 2,100 total developers, of which 792 were classified as full-time, placing the ecosystem second behind Ethereum.

Polkadot provides comprehensive developer support through its open-source tech stack, encompassing various categories such as user interface, tools, APIs and languages, smart contracts, chains and pallets, network maintenance tools, consensus, networking, and more.

Q1 2024 highlights included:

• Further expansion of the Polkadot Blockchain Academy, including a new Founders Track, plans for further growth in the Asia-Pacific region, and a remote option.
• The Polkadot Alpha Program was launched to support developers across the development life cycle, including with Agile Coretime.
• Dune Analytics integrated Polkadot and Kusama data..
• The Web3 Foundation will shut down W3F Registrar #0 for Polkadot and Kusama.
• The Web3 Foundation has granted Decentered Studio a grant to craft events, boosting community collaboration.
• Polkadot launched a new SDK, Polkadot Play, targeted at gaming.

Additionally, Polkadot founder Gavin Wood introduced the Join-Accumulate Machine (JAM) in a “graypaper”, outlining a scalable, trustless virtual machine that merges features from Ethereum and Polkadot. JAM combines global singleton environments and secure computation across nodes, aiming to enhance scalability and performance while maintaining resilience.

Decentralization and Security

Polkadot employs a unique consensus mechanism called Nominated Proof-of-Stake (NPoS). Validators receive payments every 24 hours based on their completion of payable actions, known as era points. Every four hours, a subset of validators is randomly selected to validate all parachains with a multiplier applied to their era points. This combination of era points and random parachain validation creates a probabilistic guarantee that validators earn rewards that are nearly identical. 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.

The active validator set on Polkadot has been stable at 297 for years, with no immediate plans for changes. During Q1 2024, the validator reward model continued to demonstrate its effectiveness in promoting validator stake decentralization. Of the 297 validators, 289 fell between 2.19 million to 2.8 million DOT staked.

The even reward distribution of the validator model incentivizes node operators to operate multiple validators. This strategy has been adopted by multiple entities.

The Nakamoto Coefficient refers to the minimum number of entities required to control a significant portion of the network, often leading to consensus failures. For PoS blockchains, this threshold is tied to the control of over 33% of the total stake. The Polkadot validator model resulted in an average Nakamoto Coefficient of 93 during Q1 2024, higher than other leading networks.

Governance

OpenGov, the new governance model for Polkadot launched in Q2 2023, has transformed the referendum lifecycle and decentralized decision-making process. The system encompasses the Lead-in Period for proposal submission, the Decision Period for voting and approval, and the Enactment Period for execution, allowing multiple referenda to run concurrently for faster decision-making. The Council and Technical Committee have been replaced by the Fellowship, a developer DAO that ensures decentralization through community voting and checks and balances, along with flexible delegation based on conviction and token commitment.

Following the launch of OpenGov, there has been a notable increase in governance activity. The number of Referenda, Delegators, and Direct Voters have increased for three consecutive quarters, demonstrating the system's impact on engagement. Specifically, referenda increased to 217, marking a 5% growth QoQ and a 57% increase over the past six months.

Ecosystem Analysis

XCM

The Cross-Consensus Message Format (XCM) is a standardized messaging format and language that enables seamless communication between parachains and other consensus-driven systems. XCM plays a crucial role in facilitating interoperability and complex cross-consensus interactions. It allows blockchains to exchange messages, perform operations, and transfer assets, among other use cases.

In Q1 2024, Polkadot's XCM activity continued to increase. Daily XCM transfers reached 2,700, showing an increase of 89% QoQ. Non-asset transfer use cases, termed as "XCM other," rose to 185 daily, which is a 214% increase QoQ. The total daily XCM messages were 2,800, up 94% QoQ and 314% over Q3 2023. The number of active XCM channels grew to 230, marking a 13% increase QoQ.

Parachains

During Q1 2024, Polkadot conducted eight parachain auctions, bringing the total to 66. The auctions resulted in 1 million DOT being bonded, marking the highest amount since Q2 2022. Out of these eight auctions, five were renewals by Darwinia, Bifrost, Unique Network, Litentry, and NeuroWeb (formerly Origin Trail). The other three slots were awarded to new parachains: SORA, which is a non-debt-based monetary framework using crypto to foster global financial stability and inclusivity; Mandala, a hybrid Layer 1 bridging the gap between emerging and global blockchain markets, beginning with Indonesia; and Hyperbridge, an interoperability coprocessor.

As part of what is loosely termed “Polkadot 2.0", the parachain auctions and general model will be overhauled. It introduces a marketplace for allocating "core time" instead of “slots” on a long lease basis, allowing more agile and on-demand access to resources. The new approach aims to address drawbacks and encourage seamless application deployment and collaboration across chains. The transition would signal a shift from a chain-centric to application-centric focus within the Polkadot ecosystem.

In Q1 2024, parachain active addresses reached an all-time high of 514,000, a 48% increase QoQ. Moonbeam further extended its position as the leading parachain with 217,000 monthly active addresses (+110% QoQ). Nodle followed with 54,000 monthly active addresses, doubling from the previous quarter. Astar saw a moderate increase to 26,000 (+8% QoQ), and Bifrost Finance's active addresses slightly increased to 10,000 (+2% QoQ). Acala experienced a decline, with monthly active addresses dropping to 13,000 (-16% QoQ).

The Manta Network witnessed the most significant rise among parachains in Q1 2024, with a significant increase to 15,000 daily active addresses. The increase was jumpstarted by the MANTA token TGE on January 18, 2024, which was subsequently listed on Binance. This launch helped push Manta’s TVL to a peak of over $440 million.

In Q1 2024, parachain transactions averaged 11.8 million monthly, decreasing by 34% QoQ due to an abnormal spike in Q4 2023 from the unstaking of DOT from the first batch of parachains. Compared to Q3 2023, transactions were up 30%. Phala Network, the leading parachain, reported 4.3 million monthly transactions, showing a slight increase of 3% QoQ. Moonbeam's transactions surged to 2.7 million (+71% QoQ). NeuroWeb saw a decrease to 2.1 million monthly transactions (-38% QoQ), and Astar dropped to 940,000 monthly transactions (-27% QoQ).

Additional updates included:

• Composable's Liquid Staked DOT (lsDOT) is now live. Additionally, lsdDOT will soon be plugged into its upcoming Restaking Layer.
• Picasso Networkintegrated IBC with Ethereum, enabling asset and data transfers across the Cosmos, Kusama, and Polkadot ecosystems.
• DED Game launched a promotional brick-breaker game and a $1m marketing campaign.
• Polkadot released ablog highlighting leading AI protocols in the ecosystem including NeuroWeb, a decentralized knowledge graph, Phala Network, a decentralized computing network, and Bittensor, a full-scale AI development network.

Roadmap

Polkadot has completed and shared the official release of Polkadot 1.0, marking the completion of the Polkadot whitepaper. Additionally, the network's codebase has been fully transitioned to a repository managed by the community through Polkadot OpenGov and the Technical Fellowship.

The next iteration of Polkadot, Polkadot 2.0 as deemed by the community, will be determined by community discussions and consensus. Polkadot founder Gavin Wood proposed ideas such as "additional, more flexible and capital-efficient mechanisms for allocating Polkadot's blockspace beyond the parachain model, and an idea for creating opt-in' treaty-like' agreements between multiple blockchains called “accords''.

Moreover, in his annual year end review, Gavin Wood listed Parity’s core technical priorities. These priorities included Agile Coretime, On-Demand Parachains, Ethereum Snowbridge, and the Kusama bridge. He also introduced new technologies Elastic Scaling and JAM which are expected to be introduced in 2024. Furthermore, the expansion of DAO primitives, including new fellowships, multi-asset sub-treasuries, an expanded XCM, and the development of novel primitives, is in progress. Sassafras, a forkless block-production consensus algorithm, has been developed and will undergo testing in 2024. Parity Labs is actively working on various new technologies, including CoreJam, as they continue to shape the network's future.

Closing Summary

Polkadot started 2024 continuing its strong performance from the previous year. In Q1 2024, ecosystem active addresses reached an all-time high of 514,000, a 48% increase QoQ and 192% increase over six months. Moonbeam continued to be the leading parachain, and Manta Network saw the largest increase. Concurrently, XCM messages set an all-time high and were up 94% QoQ and 314% over the past six months.

Notable advancements included the introduction of the Join-Accumulate Machine (JAM), a trustless virtual machine merging features from Ethereum and Polkadot, Referendum 457 which seeks to diversify the Polkadot Treasury with USDT and USDC and allow Treasury proposals denominated in stablecoins, and Picasso integrating IBC with the ecosystem.

Looking ahead, the Polkadot community is poised to further shape Polkadot 2.0. The ongoing development of technologies like Agile Coretime, On-Demand Parachains, and Elastic Scaling will ensure further growth and innovation. These efforts, combined with the strategic expansions and the support from the community, forecast a promising year for Polkadot.

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