What is Polkadot?
Polkadot was founded in late 2016 and did their ICO (initial coin offering) 2017. The project was founded by Gawin Wood, co-founder and CTO of Ethereum with the vision of building a sharded version of Ethereum. By sharded version he meant that he believed in a split version of the base chain, which splits the chains in multiple shards, this makes it much more scalable.
How does it work?
The best way to describe Polkadot is to use the term “internet of blockchains”. Polkadot or “DOT” in short is a smart contract platform that enables you to build applications on top of it, so called “dapps” or decentralized applications. Polkadot, the currency, has two main functions, it acts as a governance token (best described as a share in a company), but with a more decentralized voting structure). You can also stake the token in order to help contribute to the consensus within the network and validate transactions.
In its essence, Polkadot is very similar to Ethereum from an outside perspective since it also provides a smart contract platform, but there are, however, key differences between Ethereum and Polkadot that differentiates them in design.
What does “Internet of blockchains” mean? Well, the internet is the medium that connects all of our online presence and enables information/data, and communication facilities. It is a global network of computers that connects all websites/applications that are built on top of it.
A public blockchain sovereign state that lives by itself, even if it uses the internet to communicate, it is not dependent on the internet to run. One blockchain does not necessarily talk to another blockchain, for instance, the Bitcoin blockchain is not linked or interoptible with the Ethereum blockchain. This is what Polkadot aims to contribute with, a platform that enables interoperability between blockchains. Via the Polkadot platform, applications that are built on top of the Bitcoin blockchain, can talk with applications that are built on top of the Ethereum network without a third party intermediary. It links the blockchains together, like the internet does with computers.
In all public blockchains there is a mechanism to obtain consensus within the network, this is called the consensus algorithm. The two most common consensus algorithms are proof of work (POW) and proof of stake (POS). The Polkadot network is using the same consensus algorithm as Ethereum does, namely POS. However, there are some changes to the structure of the POS system that Polkadot uses compared with the one that Ethereum uses.
Polkadot utilizes a consensus algorithm that is called nominated proof of stake or NPOS in short. POS and NPOS are very similar but the validation process differs. In a regular POS system you get to validate transactions if you operate a node in the system, if you own 1 percent of the nodes you are eligible to validate 1 percent of the transaction etc. In a NPOS system you elect so-called nominators that you trust will validate the transaction in a correct manner, you trust this nominator so much that you put your stake at risk for this nominator. You can describe NPOs like representative democracy, the population electing parties that they trust will make the right decisions. One key difference to take away from this metaphor is that in a NPOS system all the actions and transactions happen on-chain, which makes it open for everyone to verify, which makes it impossible to corrupt. Another safety measure of NPOS is that if you elect a bad actor as a nominator, you can lose your staked money.