MIX Capital: Polkadot Project Research Report

Author: MIX Capital

1. Basic Information

1.1 Track

Polkadot belongs to the infrastructure Layer1/Layer0 track and is a heterogeneous public chain designed to solve Ethereum's scalability issues. However, Ethereum is currently also developing in this direction, so the prospects of Polkadot are becoming closely related to the development of Ethereum.

1.2 Logic and Goals

Polkadot's founder, Gavin Wood, is the one who has given meaning to the widely used term "Web3," aiming to lead the blockchain industry to create a new form of the internet. From a Layer0 perspective, Polkadot integrates the security of all Layer1s and is committed to solving Ethereum's scalability issues through parachains, with its core operation as a public chain still focused on attracting a developer ecosystem.

1.3 Founding Team

Peter Czaban

Founder of Polkadot and Technical Director of the Web3 Foundation, where he is dedicated to supporting the development of next-generation distributed technologies. He obtained a Master's degree in Engineering from the University of Oxford, focusing on Bayesian machine learning. He has worked in defense, finance, and data analysis, focusing on mesh networks, distributed knowledge bases, quantitative pricing models, machine learning, and business development.

Gavin Wood

Co-founder of Polkadot and also a co-founder of Ethereum. Wood left the Ethereum Foundation in January 2016 and co-founded Parity Tech with former colleague Jutta Steiner, focusing on developing clients for the Ethereum network. He also created the Web3 Foundation, a non-profit organization dedicated to promoting the development of decentralized internet infrastructure and technology, with Polkadot being its first project.

Robert Habermeier

Co-founder of Polkadot, he first encountered Bitcoin and blockchain in 2011 and joined Parity in 2015 as a core developer for Ethereum. In 2016, he began collaborating with Gavin Wood and Peter Czaban to design the basic expansion architecture of Polkadot.

1.4 Investment & Background

The financing information of Polkadot has not been fully disclosed. According to Rootdata, it has raised a total of $183.30 million, with the latest round of financing valuation being unclear.

There are two organizations associated with Polkadot: the development team Parity Technology and the funding and operation team Web3 Foundation. The Web3 Foundation has funded over 600 projects.

In October 2023, the Polkadot developer team Parity Tech announced it would lay off most of its employees. According to Parity employees, the company faced layoffs due to cash depletion, following extensive hiring over the past 12 months, which led to financial difficulties. The Web3 Foundation is also expected to lay off about 40% of its staff.

2. Operational Status

2.1 Social Media Data

Aside from Discord, other social media accounts have not been very active recently. Although there is a large fan base on X, the interaction data is not ideal, indicating that there has not been much operational work on social media.

2.2 Access Data

The daily visitor count for the Polkadot website is around 15,000, with the main traffic coming from Russia, the United States, and Portugal. In terms of data, this is a moderate situation, consistent with the project's market position and status.

2.3 User Activity

As of December 27, 2023, the average daily trading volume of Polkadot in the last month is around 15 million DOT, equivalent to $130 million.
During the surge of inscriptions, the Polkadot network experienced its highest trading volume ever, with the number of transactions reaching 6.9 million on December 22, 2023, compared to only about 10,000 transactions on a regular day. Currently, Polkadot's overall performance can reach up to 80 transactions per second.

During the inscription surge, the daily active users on Polkadot peaked at around 7,000 to 8,000, with new addresses around 2,000 to 3,000; this shows a significant gap compared to Cosmos, which has around 20,000 daily active users and 20,000 to 50,000 new addresses daily.

2.4 Fees & Revenue

As a public chain project, the protocol fees for Polkadot are still almost zero, similar to Cosmos. However, compared to Ethereum's nearly $10 million in daily fees, it pales in comparison. The market also does not apply traditional financial valuation methods like P/E or P/S to public chains; the rise in token prices is largely a result of market makers, retail investors, narratives, market sentiment, and VC involvement.

2.5 Code Development

According to statistics from Electric Capital, most projects saw a sharp decline in the number of developers in Q4. Currently, Polkadot ranks second among all developers in terms of both full-time and total (full-time plus part-time) developers. (This is mainly due to statistical criteria, as developers of parachains and applications on parachains are also included in the statistics.)

In fact, the progress of code development for Polkadot has shown a significant decline since September 2023. The likely reason is the internal turmoil and layoffs at Parity Tech in Q4, leading to a sharp drop in the number of developers.

2.6 Development Plans

On December 25, 2023, Gavin Wood published an outlook for the coming year, outlining a series of important developments and busy work that Polkadot will face in the new year. Three upcoming key infrastructures are: Agile Coretime (on-demand parachains), ETH Snowbridge, and Kusama Bridge. Additionally, a new technology called "Elastic Scaling" is expected to be implemented in 2024.

Agile Coretime

Coretime is a new concept in Polkadot 2.0, representing the time required for validation and consensus in Polkadot, which is the most scarce resource in the Polkadot network.

Agile Coretime aims to address the criticism of Polkadot's parachain auction model. The introduction of Coretime will abandon the leasing period and slot model, replacing it with the purchase of chain usage time. This procurement is divided into bulk purchasing and on-demand purchasing, with bulk purchasing occurring monthly and on-demand purchasing being similar to pay-as-you-go. In other words, previously, the procurement was for the position of the chain, but now it is for the usage time. This usage time can be resold by the purchaser or used interchangeably among multiple chains.
In the Polkadot 1.0 version, Polkadot is centered around the relay chain, connecting up to 100 parachains, which is a heterogeneous architecture different from Ethereum's single-chain architecture. The advantage is that parachains can share security and XCM communication capabilities.
However, this auction model for parachains can deter small and medium developers, as in the latest auction, obtaining the usage rights for a parachain slot requires nearly $300,000 worth of staked DOT tokens, with only a 24-month leasing period. This significantly increases the development costs for small and medium developers and hinders ecological innovation.
The upcoming 2024 slot auction is only scheduled until April 13, and if Agile Coretime goes live, it will cancel the remaining slot auctions. This may indicate that Agile Coretime could be integrated before this date.

Snowbridge

Polkadot is preparing to build a cross-chain bridge that connects with Ethereum. Snowbridge aims to create a trustless bridge to achieve interoperability (mutual fund flow) between Polkadot and Ethereum. The design principles of Snowbridge are trustlessness, universality, and determinism. Its goal is to achieve interoperability between Ethereum and Polkadot that rivals the interoperability of Polkadot's parachains, expected to launch in Q1 2024.
The launch of Snowbridge indicates that Gavin has considered drawing resources such as funds, users, and developers from the Ethereum ecosystem and is preparing for an "attack" on Ethereum.

Kusama Bridge

This technology connects Polkadot with its sister network Kusama. This allows for the linking of liquidity on the Kusama network and Polkadot, as well as information sharing and communication between the two chains, although performance details are unknown.

Elastic Scaling

The goal is to achieve asynchronous support, allowing collectors to use older relay chain parent blocks to submit parachain blocks, thereby improving the efficiency and scalability of the Polkadot network.

3. Token Data

3.1 Token Overview

The initial issuance of DOT was 10 million tokens, but Polkadot underwent a token split in August 2020, so the initial total issuance of the new DOT token is 1 billion tokens, with no upper limit on annual inflation thereafter.
Inflation Situation
The above is the inflation situation we found for Polkadot, with the current annual inflation rate at 7.6%, composed of the following parts:

• Inflation caused by the issuance of tokens to reward validators and nominators;
• Inflation caused by the issuance of tokens for the treasury;
• Deflation caused by misconduct, known as Slashing;
• Deflation caused by transaction fees;

Among these, the inflation caused by issuing tokens to reward validators and nominators accounts for the largest proportion and is the main factor of overall inflation.

3.2 Staking & Returns

Currently, approximately 53.82% of the tokens have been staked, with staking rewards at 14.93%. After excluding the inflation rate, the final net yield is about 6.84%. Data shows that when the amount of DOT staked shows a downward trend, the token price tends to rise, indicating that there is no direct correlation between staking rate and token price.

3.3 On-chain Data

The number of on-chain DOT holding addresses has been continuously increasing, but specific data on retail accumulation is currently unavailable. In just one month, as the market trend improved, the daily trading volume of DOT saw a significant rebound, indicating a growing interest in DOT in the market, suggesting that Polkadot still has the opportunity to become a focal point of market sentiment in the next market cycle.

4. Ecological Development

In the Polkadot ecosystem, Astar, Moonbeam, and Acala firmly occupy the top three positions in parachain TVL (as shown in the TVL data). Astar is a DEX and also the largest DEX on Polkadot, Moonbeam is a lending platform and the largest lending service on Polkadot, and Acala is an LSD and the largest LSD on Polkadot.

4.1 Astar

Astar Network is a blockchain project that provides a platform for decentralized applications (DApps) and decentralized finance (DeFi) services. As part of the Polkadot ecosystem, Astar aims to provide a multi-chain smart contract platform that supports various blockchain virtual machines, including Ethereum's EVM (Ethereum Virtual Machine) and WASM (WebAssembly).

Astar is the No.1 public chain in the Polkadot ecosystem, primarily focusing on DeFi products. Through its position in the Polkadot ecosystem, combined with the compatibility of EVM and WASM, as well as its unique incentive mechanism, it aims to become an important platform for building and deploying efficient, interoperable decentralized applications and financial services. Although it has seen some recovery under the dual influence of market trends and inscription narratives, its performance remains unsatisfactory.

In the Polkadot ecosystem, a DeFi-centric ecosystem has formed, with ArthSwap being the highest TVL DeFi application on Astar and also the best-performing DEX in the entire Polkadot ecosystem, but it is limited to the Polkadot ecosystem.

4.2 Moonbeam

Moonbeam is an important project in the Polkadot ecosystem, focusing on compatibility as a smart contract parachain. Moonbeam aims to provide full compatibility with Ethereum, allowing developers to easily build or migrate applications on the Polkadot network using existing Ethereum tools and DApp code.

Moonbeam's goal is to lower the entry barrier to the Polkadot ecosystem, especially for teams already familiar with Ethereum development, providing a convenient migration and development path. Given the convenience of EVM, Moonbeam is likely to surpass Astar in the future and become the largest parachain, with the growth potential of Moonbeam tokens possibly exceeding that of DOT.

Within the Moonbeam ecosystem, there are Polkadot's NFT trading market Tofu and gaming trading market Seascape. Currently, the highest trading volume NFT is ASTR on the TofuNFT market (according to Dotinsight statistics), but its trading volume is still only around $1,000 daily. Overall, the NFT market on Polkadot is sluggish, with few retail participants and insufficient liquidity.

4.3 Acala

Acala is a key project in the Polkadot ecosystem, designed as Polkadot's decentralized finance hub and stablecoin platform, aiming to provide various financial services, including stablecoins, decentralized exchanges (DEX), and financial applications, with the LSD protocol currently being the main focus in Acala. In the ecosystem of parachains, each parachain has its own specialized DeFi protocol, and Acala is the largest LSD on Polkadot.

Acala aims to become the decentralized finance hub in the Polkadot ecosystem, promoting the development of the entire ecosystem by providing stable currency and a rich array of financial services.

Due to the XCM information exchange protocol, the information exchange between chains has become cheap and convenient, making it easy for all liquidity to flow to one project, creating a siphoning effect. In contrast, Ethereum still has significant barriers between chains, leading to each chain having its own ecological development.

5. Potential Estimation

5.1 Competitive Factors

5.2 Core Competitiveness

In the crypto industry, as a leading Layer0 heterogeneous blockchain, Polkadot competes with Cosmos and also has varying degrees of competition with Layer1 public chains like Ethereum. Its advantages are as follows:

• Shared security model: Polkadot's parachains share the security of the Polkadot relay chain, meaning parachains do not need to worry about their own security as they benefit from the security of the entire network;

• Cross-chain message passing (XCMP): Polkadot's XCMP allows for trust-minimized communication between parachains, facilitating efficient cross-chain interactions;

• Upgradability: Polkadot supports on-chain governance and code upgrades without hard forks, allowing the network to evolve and upgrade smoothly;

• Standardized development framework: Polkadot's Substrate framework provides a standardized and highly modular approach for developing parachains, facilitating rapid development and deployment;

Polkadot's core competitiveness lies in its unique interoperability, shared security model, high scalability, and on-chain governance, making it a powerful platform that attracts developers and project builders, especially for those seeking innovation and building cross-chain applications.

However, compared to COSMOS and Ethereum, Polkadot is a relatively new project with a smaller ecosystem, fewer developers and applications, and its ecosystem and technology have not undergone as much market testing as COSMOS; the dependence of parachains on the relay chain also limits their independence and flexibility.

At the same time, it lacks strong support from VCs. For example, Delphi Digital announced an "All In Cosmos" strategy, and Jump Crypto has widely invested in projects like Celestia, Injective, Sei, and Luna. Strong support from top VC resources greatly benefits project development, while Polkadot lacks this resource, resulting in user activity being far lower than that of Cosmos.

6. Conclusion

In the competitive industry, Polkadot still maintains a high level of market attention after experiencing periodic turmoil. The main reason is that Polkadot, as one of the representatives of heterogeneous chains, shares the role of competing with Ethereum alongside Cosmos, especially before the progress and situation of Layer2 become clear.

In the new market cycle, based on the concepts of heterogeneous chains and parachains, the value of DOT will still be fully speculated. However, the project's architectural design leads to slower ecological development compared to Cosmos, and there is insufficient support from top VCs.

Currently, Parity Tech has recognized its existing issues and is making improvements to the auction model, enhancing cross-chain collaboration between Ethereum and Polkadot, and improving the XCM parachain communication mechanism in its 2024 roadmap. Meanwhile, Polkadot still has the second-largest developer community, and we can have greater expectations for DOT's market performance in the new market cycle.