As DeFi Grows, Investors Look to Polkadot to Be the Next Ethereum

In a cryptocurrency ecosystem where the programmable-money juggernaut has long been Ethereum, Polkadot, a project that has been quietly developing an alternative solution since 2016, is ready to take on the blockchain world.

AccessTimeIconNov 17, 2020 at 11:00 a.m. UTC
Updated Sep 14, 2021 at 10:31 a.m. UTC
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Look no further than the rapid growth this year in the white-hot arena of decentralized finance, or DeFi, and it’s clear why the Ethereum blockchain is dominating so many conversations right now in the digital-asset industry. 

The second-largest blockchain’s native cryptocurrency, ether (ETH), is up 266% this year – twice as much as mooning bitcoin (BTC). 

But a lot of savvy digital-asset investors are hedging their bets, buying tokens associated with upstart blockchains that could potentially grab market share from the Ethereum network, often referred to as a “world computer” due to its versatility and programmability. 

One such token is dot (DOT), of the Polkadot blockchain, whose co-founder Gavin Wood was a co-founder of Ethereum. Wood wrote the original project white paper for Polkadot in 2016, just a year after the Ethereum network launched. 

Since going live in mid-August on exchanges after the Polkadot network performed a 100:1 split, the dot token is up over 44%. Over the same period, Ethereum’s ether has only climbed a bit over 8%. 

DOT (fuschia) versus ETH (blue) since DOT started trading on Kraken Aug. 18.
DOT (fuschia) versus ETH (blue) since DOT started trading on Kraken Aug. 18.

“The market and investor appetite has been really strong for Polkadot’s dot token,” said Keld van Schreven, managing director of the investment firm KR1, which includes Polkadot in its portfolio. An initial valuation from a pre-network launch fundraising was priced around $3, he said. “So to consistently trade above $4 since then has been really encouraging.”

Parachains and Moonbeam

At the heart of Polkadot is the concept of “parachains,” which are blockchains that can run higher transaction throughput than Ethereum because of more sophisticated design. According to Peter Mauric, head of public affairs at Parity Technologies, the term is short for “parallel blockchains.”  

“Parachains can process more transactions than a single blockchain because the transactions are spread across multiple computers, similar to parallel processing,” Mauric told CoinDesk in an email. 

A key player behind the network’s development is Parity Technologies, a for-profit European-headquartered firm building tools for the open-source Polkadot platform. 

Parity also is the company behind Substrate, a set of tools for developers to create blockchain applications with Polkadot, often known as decentralized apps, or dapps. 

“Substrate packages everything the core developers at Parity have learned building, launching and maintaining Ethereum 1.0, Bitcoin, Zcash and now Polkadot,” Mauric told CoinDesk. “The hope is this creates a middle ground, where a high-quality development team can build and launch their own chain without the incredibly large overhead associated with building a blockchain from scratch.”

Polkadot backers say software engineers also utilize Moonbeam, a Boston startup that has built its own parachain to mimic a toolkit that would look familiar to Ethereum developers. 

“The purpose of the Moonbeam parachain is that we're implementing, effectively, the closest we can make it to the Ethereum feature set at its core,” said Derek Yoo, the project’s founder, in a video conference call. Yoo has been actively engaging with Ethereum projects to adopt the technology. “If we’ve done our job well, we’re trying to make something that is low-friction and easy to adopt for an existing Ethereum project.”

Projects bringing use cases to Polkadot include Interlay, which plans to launch a wrapped bitcoin project called “PolkaBTC” in 2021, and cross-chain liquidity provider Equilibrium, which will be the first Polkadot project to be audited by Quantstamp. 

KR1’s van Schreven says he is tracking around 230 projects being built on the platform. 

When talking to Polkadot ecosystem stakeholders, they discourage the term “Ethereum killer” as many like to categorize it, because many see Polkadot as a complement to the overall ecosystem, not a rival.

Progression from or rival to Ethereum?

“We’re still Ethereum supporters,” van Schreven said. “But we see the Polkadot approach as being a kind of the natural progression of the whole ecosystem, really.”

The ability for Polkadot to spin up new blockchains is enticing from an investment perspective, van Schreven says. 

Despite supporting Ethereum, van Schreven thinks Polkadot’s “clean sheet” will allow it to offer brand-new features in scalability, finality and governance that developers will adopt.

Bottlenecks and throughput capacity have proved to be an issue for Ethereum, as evidenced by elevated congestion and transaction fees on the network in recent months.

And Ethereum’s governance seems to be centered more around its leader, Vitalik Buterin, than the rigorous systemized version of governance that Polkadot hopes to achieve, according to Schreven.

All of this could lead to adoption of the network by more developers – partly how Ethereum has achieved its success – and Polkadot’s parachains might take things to the next level. 

“We're going to see a growth of economic activity from all these chains because of this cross-chain aspect of the Polkadot ecosystem,“ van Schreven added. “Obviously, some of that will take away from Ethereum.”


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