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State of Polkadot Q2 2023

Jul 10, 2023 ⋅  16 min read

Key Insights

  • OpenGov officially launched. Polkadot's new fully-decentralized governance model, OpenGov, introduces concurrent referenda, community-centered governance bodies, and enhanced delegation flexibility, enabling a more efficient and transparent decision-making process.
  • XCM V3 officially launched. This new iteration of the messaging format introduces advanced programmability, bridging capabilities with external networks, cross-chain locking, improved fee payment mechanisms, and support for NFTs.
  • Polkadot’s native token DOT was not flagged by the SEC as a security. The omission follows the Web3 Foundation stating DOT had morphed and was no longer deemed a security after three years of discussions with the SEC.
  • Acala and Moonbeam re-leased their parachain slots. The initial leases for the first batch of parachains expire in October, indicating increased competition for slots as new projects seek to join and existing projects aim to re-sign.

Primer on 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.

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Key Metrics

Introduction

The second quarter witnessed significant developments and events in the crypto industry, none larger than the Securities and Exchange Commission (SEC) lawsuits against Binance and Coinbase. The lawsuits alleged that certain base layer tokens were securities; however, notably absent from the SEC's list was Polkadot's native token, DOT. This omission follows the Web3 Foundation's statement that DOT had undergone a transformation and was no longer considered a security after extensive discussions with the SEC.

Throughout Q2, Polkadot remained committed to the development and expansion of its network, exhibiting consistency in key network fundamentals such as staking, treasury usage, and parachain activity. Noteworthy milestones achieved during this period include the launch of OpenGov, introducing an advanced governance model, and the introduction of XCM V3 on Polkadot's mainnet. XCM V3 has already demonstrated increased use cases for XCM, with further growth anticipated in the future. Additionally, the ongoing re-signing of slot auction leases by parachains has resulted in an upsurge in DOT bonds.

Financial and Network Overview

Note: The financial and network overviews refer only to the Polkadot Relay Chain and not parachains, unless otherwise stated.

Market Capitalization and Revenue

Polkadot's market capitalization experienced a 16% decrease QoQ, declining from $7.74 billion to $6.24 billion. In comparison, the total crypto market capitalization saw a 2% increase QoQ, with BTC rising by 7% and ETH by 6%. The growth in BTC, ETH, and the overall crypto market was primarily driven by the emergence of spot BTC ETF applications.

As of the end of the quarter, Polkadot ranked as the 12th largest crypto project by market cap and the fourth largest base layer protocol, following Ethereum, Cardano, and Solana.

Polkadot's financial structure is based on a weight-based fee model, where transaction fees are determined and charged prior to execution, distinguishing it from the gas-metering model. The fee calculation encompasses three components: a weight fee reflecting computational resources, a length fee based on transaction size, and an optional tip to incentivize block authors. These fees originate from various activities such as token transfers, staking, validator elections, governance voting, and parachain slot auctions. It's important to note that transaction fees do not apply to parachain transactions.

In Q2, Polkadot's revenue amounted to $81,000, representing a 32% decrease QoQ. It is worth noting that Polkadot's revenue tends to be relatively lower compared to its competitors due to the network's structural design. Therefore, when evaluating the protocol, alternative valuation models such as The Expected Demand for Security Model and Multicoin's Sum of The Parts Framework should be considered alongside traditional revenue metrics.

DOT Token

Polkadot’s native token DOT serves three primary purposes: governance, staking, and parachain bonding. DOT has an inflationary monetary policy and no maximum supply. DOT’s monetary policy is determined by its compliance to 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.

As of the end of Q2, Polkadot had a staking rate of 46%. This indicates that the amount of DOT staked was below the ideal staking rate, triggering increased staking rewards. At the current staking rate, DOT stakers earn an annual staking yield of 16%, providing a real yield of 9%.

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.

In Q2, the Polkadot treasury supported various initiatives, including wallet upgrades and integrations, client upgrades, and community events like meetups and hackerspaces. The introduction of OpenGov on June 15 represented a significant milestone, revolutionizing treasury management and enabling concurrent proposals with distinct requirements. OpenGov's implementation is expected to drive increased usage of the treasury, delivering substantial benefits to the Polkadot community. As of the quarter's end, the Polkadot treasury held approximately 46.5 million DOT ($240 million).

Accounts

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.

Following the launch of OpenGov in June, the Polkadot Relay Chain experienced an increase in account activity. This surge can be attributed to heightened governance activity, as the Relay Chain plays a crucial role in facilitating governance processes. Throughout Q2, the Relay Chain witnessed an average of 5,800 daily active accounts, marking a 16% QoQ decrease. Across the Polkadot ecosystem, there were 3.9 million unique accounts (public key addresses) by the end of June, up 200,000 QoQ and 600,000 year-to-date.

It is vital to emphasize that Relay Chain activity does not represent the entire network activity. To gain a comprehensive understanding of network activity, it is necessary to consider the activity on parachains as well as XCM activity.

Developer Activity


Polkadot boasts one of the largest developer bases in the crypto industry, with over 750 full-time developers and a total of 2,000 developers, as highlighted in the Electric Capital Developer Report. The platform 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.

To further its developer community, Polkadot has made significant investments in initiatives like the Polkadot Blockchain Academy, which is planning its third cohort wave in Berkeley, California. The academy aims to equip engineers with Web3 technology skills. Additionally, the Polkadot Developer Heroes Program has been introduced to foster collaboration and recognize exceptional developers. No specific launch date has been announced for the Polkadot Developer Heroes program.

Ecosystem Overview

Cross-Consensus Message Format (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.

The recent launch of XCM V3 on June 15 has generated significant excitement. This new iteration of the messaging format introduces advanced programmability, bridging capabilities with external networks, cross-chain locking, improved fee payment mechanisms, and support for non-fungible tokens (NFTs).

Leading up to the launch, XCM had been gaining traction for various purposes, and this trend is expected to gain further momentum. Notably, non-asset transfer use cases accounted for 18% of total XCM messages. Although there was a decrease in overall message count, the number of active XCM channels expanded from 111 to 155. Prominent XCM channels, based on total transfers, include Moonbeam <> Acala, Acala <> Moonbeam, Acala <> Parallel, Interlay <> Moonbeam, and Parallel <> Acala.

Parachain Accounts

When examining daily active users among parachains, Moonbeam and Nodle emerge as the clear leaders. Moonbeam witnessed a spike in activity following the launch of Uniswap V3 in June, indicating continued excitement in the network. Nodle holds the second position and operates as a decentralized wireless network catering to IoT devices.

Astar ranks third among the parachains, while Acala and Unique Network closely trail behind. Astar recently unveiled details about Astar 2.0, an upcoming upgrade aimed at improving various aspects of the network, and the core development team announced a $3.5 million investment from Sony. Similarly, Acala introduced the Acala Exodus Plan, which shares a similar focus on enhancing tokenomics, staking mechanisms, and introducing new infrastructure and functionalities. Completing the top five is Unique Network, which exhibits 777 daily active users and operates as an NFT-optimized parachain.

During Q2, the entire Polkadot ecosystem averaged 295,000 monthly active users, including extrinsic signers and token receivers.

Parachain TVL

Like active accounts, Moonbeam is the leader in TVL. Moonbeam concluded the quarter with a TVL of $60 million, leading the second-ranked parachain by more than double the value. The subsequent three parachains, namely Acala, Astar, and Parallel, all maintain TVL figures in the $20 millions. Collectively, the top four parachains contribute to a total TVL of $140 million. However, it is crucial to acknowledge that the aggregate TVL across all parachains is higher, but accurately determining this value remains challenging.

When considering liquid staking, the TVL landscape undergoes significant changes. Parallel emerges as the protocol with the highest TVL, reaching $190 million, primarily driven by its liquid crowd loan platform. Acala follows as the second-largest protocol, with a TVL of $170 million, also supported by its liquid crowd loan platform.

Parachain Auctions

The original slot auction schedule planned 41 auctions from November 2021 through March 2023, with a new slot auction occurring bi-weekly. However, in Q2 2023, after the completion of the first 41 auctions, a transition was made to holding one slot auction per month, resulting in three slot auction winners for the quarter. Six slot auctions are scheduled for Q3.

During Q2, two of the three winners were re-signings: Acala and Moonbeam. Acala and Moonbeam’s initial leases were set to expire on October 24. Consequently, it is reasonable to anticipate that more protocols from the original cohort, including Astar, Parallel, and Clover, will attempt to win slots to extend their leases. This combination of existing projects seeking re-signing and new projects aiming to join the network will intensify competition and should lead to increased amounts of DOT being bonded.

The sole new parachain during the quarter was Moonsama. Moonsama is the first NFT marketplace on the Moonriver Network geared toward generative NFTs. The platform aids the exchange of digital assets between on-chain and off-chain applications and is designed to integrate with various metaverses. Key features of Moonsama include an auto-chess style battle engine and the Moonsama Multiverse Chat.

Finally, 467,000 DOT ($2.4 million) was bonded in Q2 2023, reflecting a 43% QoQ increase.

Additional Ecosystem Highlights

  • Mythical Games announced plans to migrate its Mythical Chain from Ethereum to Polkadot to launch its new Mythos ecosystem.
  • Kilt announced a partnership with Deloitte and Polimec to issue reusable KYC credentials.
  • Frequency and social media app MeWe announced a partnership to bring MeWe’s 20 million users on chain.
  • Composable Finance shared the beta launch of the Centauri IBC bridge, allowing for bridging between Polkadot and Kusama and Cosmos.
  • Aventus Network and Beatport announced a partnership and plans to launch a music NFT marketplace.
  • Energy Web announced it plans to transition to Polkadot and launch a parachain.
  • Binance launched support for deposits and withdrawals for USDT on Polkadot.

Roadmap

Polkadot's roadmap has seen significant progress since its update in September. Key items that have been successfully implemented include the launch of the Collectives parachain, nomination pools, staking dashboard, OpenGov, and XCM V3. Moving forward, the following roadmap items are still to be implemented:

  • System parachains - These parachains benefit the entire Polkadot ecosystem and are allocated Relay Chain access through on-chain governance rather than the traditional parachain slot auction process. A handful of System Chain are already live including Asset Hub, Encointer, Collectives, and Bridge Hubs.
  • Asynchronous backing - This major optimization to parachain consensus aims to decrease parachain block times to six seconds, increase blockspace by a factor of 10, and allow for the reuse of parachain blocks that don't make it onto the Relay Chain. Parity estimates that asynchronous backing will significantly increase the network's transactions per second, potentially reaching between 100,000 and 1,000,000.
  • Parathreads - Parathreads are pay-as-you-go parachains that can be launched and operated without participating in a parachain slot auction. Offering the same level of security as parachain blocks, parathreads provide an alternative entry point for developer teams seeking fast iteration within the Polkadot ecosystem.

Decentralization and Staking Overview

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.

Validators

Throughout Q2, the active validator count for Polkadot remained stable at 297, with no immediate plans for changes. The validator reward model continued to demonstrate its effectiveness in promoting validator stake decentralization. Out of the 297 validators, 97% (289 validators) maintained stake amounts ranging from 1.6 million to 2.2 million DOT.

The even reward distribution of the validator model incentivizes node operators to operate multiple validators. This strategy has been adopted by entities such as Coinbase Cloud with 12 validators, P2P.org with 18 validators, Zug Capital with 14 validators, and Jaco with 9 validators.

Stake

Polkadot concluded Q2 with a staking percentage of approximately 46%, equivalent to 607 million DOT staked out of the total supply. Although slightly below the ideal staking rate, this lower percentage prompts elevated staking rewards to encourage increased staking participation. Polkadot has maintained a consistent staking percentage close to the ideal rate.

Open Gov

OpenGov, the new governance model for Polkadot, has officially launched, marking an important milestone after months of anticipation. Referendums in the OpenGov system undergo a structured life cycle for enactment, including the Lead-in Period for proposal submission, the Decision Period for voting and approval, and the Enactment Period for execution. Open Gov allows multiple referenda to run concurrently, allowing for the faster passage of motions. During the initial six months of OpenGov operating on Kusama, the number of proposals increased more than four-fold compared to the previous year.

In the OpenGov system, the Council and Technical Committee have been replaced by the Fellowship, which acts as a developer DAO and ensures decentralization through community voting and checks and balances. Additionally, the new model introduces flexibility for delegation, allowing users to delegate their voting power based on conviction and the number of tokens committed. These changes reflect Polkadot's commitment to a more community-centered governance approach, facilitating a more democratic and efficient decision-making process.

Closing Summary

Polkadot's second quarter was marked by significant progress as it advanced along its roadmap. The network achieved two crucial milestones with the launches of Open Gov and XCM V3, both of which took place on June 15. These releases, although occurring towards the end of the quarter, hold immense potential to add value to the Polkadot network in the upcoming quarters. Open Gov introduces an advanced governance model, while XCM V3 enhances the messaging format, paving the way for increased functionality and interoperability.

The network's fundamentals remained robust, and parachains experienced heightened levels of activity throughout the quarter. Acala and Moonbeam re-signed their slots, highlighting their continued commitment to the Polkadot ecosystem. Moreover, the migration of Mythical Games to Polkadot further underscores the platform's growing appeal. As the first batch of parachain leases is set to expire in October, the competition for parachain slots is expected to intensify as existing and new parachains vie for limited spots.

Looking ahead, the upcoming implementation of additional system parachains, asynchronous backing, and parathreads will further enhance the network's functionalities, scalability, and interoperability. Boasting one of the largest developer communities in the crypto space, Polkadot has demonstrated its ability to deliver on its roadmap and ship products.

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This report was commissioned by Polkadot via Community Treasury. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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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.

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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.

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