Since its debut in 2015, Ethereum has played a crucial role in advancing blockchain utility. Specifically, it introduced the concept of programmability, allowing developers to write self-executing code (smart contracts) to the blockchain. In turn, that technology has evolved into decentralized applications (dApps) and decentralized finance (DeFi) products.
Powered by that innovation, Ethereum’s price has skyrocketed 881,500% since hitting a low in October 2015, and it’s currently the largest DeFi ecosystem by a wide margin. For both reasons, Ethereum still looks like a worthwhile investment, but the odds of a repeat performance are virtually nonexistent. So if you’re looking for a cryptocurrency with moonshot potential, you’re better off looking elsewhere.
For instance, Polkadot ( DOT -2.40% ) has an ambitious vision, and an experienced founder backs it. Here’s what you should know.
The foundation of Web 3.0
Polkadot was designed by Gavin Wood, co-founder and former chief technology officer of the Ethereum Foundation. He actually invented Solidity, the programming language used to build smart contracts on Ethereum. Wood also co-founded the Web3 Foundation, a nonprofit group working to build a decentralized version of the internet, known as Web 3.0.
If successful, that technology would allow users to access secure web applications that exist beyond the control of any third party. Just like the internet of today, those dApps could be anything from financial services and productivity tools to video games and social media platforms. But unlike the internet of today, no corporation would be collecting user data in the background. Polkadot is at the heart of that vision.
To that end, the Polkadot blockchain is architected uniquely. At its core is the relay chain, a blockchain that relies on the energy-efficient proof-of-stake consensus. The relay chain is tasked with orchestrating and securing various programmable side chains (called parachains). Polkadot also supports bridges, a special type of parachain designed to communicate with external networks.
That means Polkadot is interoperable with other blockchains, making it possible to exchange data with platforms like Ethereum. That feature is critical because the future of blockchain technology is likely composed of many tailor-made chains, each with a specific use case, all capable of interacting.
The Polkadot ecosystem is growing
In November, Polkadot started auctioning parachain slots to blockchain project developers. Only five auctions have taken place so far, with DeFi platform Acala winning the first and Ethereum-bridge Moonbeam winning the second. On Dec. 17, both parachains are set to connect to the relay chain, marking a pivotal moment in Polkadot’s history, as both Acala and Moonbeam could dramatically accelerate the growth of its dApp ecosystem.
Auctions will continue at regular intervals for some time, with a long-term goal of reaching 100 parachains. At that point, Polkadot’s throughput could reach 1 million transactions per second (TPS), making it far more scalable than virtually every other blockchain platform, though there is at least one exception.
The investment thesis for Polkadot
Polkadot is energy-efficient, highly scalable, and interoperable with other networks, solving several problems that currently impede other blockchains. From that perspective, Polkadot could certainly power Web 3.0, or at least a thriving ecosystem of dApps and DeFi products, and that’s the heart of the investment thesis.
DeFi products and dApps aren’t free. In exchange for securing transactions, validators collect transaction fees from users, and those fees are paid in the native cryptocurrency. In the case of Polkadot, that means DOT tokens. In other words, as more developers, consumers, and investors adopt products on Polkadot, demand for DOT should rise, driving its price higher.
Similarly, owning DOT makes you a stakeholder in the Polkadot ecosystem. That means you can propose and vote on changes and earn rewards by staking DOT tokens. Currently, those rewards would total 13.8% (before commission fees) on an annualized basis. If Polkadot does indeed become the foundation of Web 3.0, owning a piece of that infrastructure makes for a very compelling investment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.