Interpretation of Polkadot’s 10 major misunderstandings: inflation is too high, cross-chain is pseudo demand, economic model is not good enough

background

In 2016, after Gavin Wood left Ethereum, he wrote the Polkadot white paper. After a long period of research and development and exploration, the cross-chain project Polkadot finally ushered in its historic moment. In November 2020, Polkadot’s parachain officially opened the auction. The successful launch of the first round of 5 parachains means that With Polkadot completing the start-up phase. After five years, Polkadot finally confirmed the vision outlined in the 2016 white paper.

Unlike the large-scale Ethereum, Polkadot’s development process is relatively slow, and there are indeed many users and teams who have expectations for Polkadot who have the same feeling.

But Gavin Wood’s ability as the man behind Ethereum’s technical realization is unquestionable, and he left Ethereum to realize a new vision of building a truly free and open platform.

Therefore, the long and stable rhythm also caused Polkadot to not maintain a high degree of popularity, and all research and development and preparations took time. Coupled with the fact that most countries are now entering winter, the epidemic continues to affect the global economy. In the context of the downturn in the market, some misunderstandings about Polkadot are inevitable.

Therefore, we have organized according to the most concerned and questioned questions in the community, and hope that through our answers, readers will have a clearer understanding of Polkadot.

Top 10 misconceptions about Polkadot

Polkadot inflation 10% per year

The initial circulation of Polkadot certified DOT is 10 million, and in August 2020, the denomination of DOT was split. Therefore, the initial total issuance of the new version of DOT is 1 billion, and it will be issued every year after that, with no upper limit on the total amount.

Because of the earlier description, many people understand Polkadot’s inflation as 10% annual inflation, but is this really the case? In order to understand this problem, we must first understand how Polkadot is inflationary.

In general, Polkadot generates a portion of DOT through inflation, and allocates these DOTs to specific groups of people to support the participants in maintaining the Polkadot network and ecological construction.

Since Polkadot uses NPoS to nominate proof of stake to reach consensus, there are two roles: nominator and verifier. By staking (Staking) token to become a nominee and then nominate a verifier that they trust, and the verifier runs the node and confirms the area. Blocks to get rewards, this reward comes from the additional issuance of tokens, thus forming inflation.

In addition, the Polkadot treasury is an institution set up by Polkadot to encourage ecological development. It includes DOT generated by inflation, DOT slashed by the system due to misconduct, part of transaction fees, and block auctions in parallel threads. Part of the fees together form a fund pool for ecological construction, and the Staking reward and the Polkadot treasury are the main destinations for the funds after Polkadot inflation.

The complete inflation of Polkadot is mainly composed of the following parts: (i1) Inflation to reward validators and nominators through additional issuance of tokens, (i2) Inflation caused by additional issuance of tokens for the treasury, (i3) Deflation due to misconduct aka Slashing (slashing), (i4) Deflation from transaction fees.
The formula is: inflation rate=i1+i2-i3-i4, and i1, that is, the inflation caused by the need to issue additional tokens to reward validators and nominators, accounts for the largest proportion, which is the main factor of overall inflation.

To understand this consensus more clearly, it is necessary to understand the mechanism of the treasury more clearly. The funds for inflation mainly go to the i1 and i2 parts, but the i2 part of the treasury, in addition to the inflation funds, also includes i3, i4, and the treasury will Part of the unused funds are destroyed (this is also the only burning mechanism of the entire Polkadot), but i3 and i4 are not originally part of the inflation part, so i1+i2 is equivalent to double counting i3 and i4, so it is necessary to reduce it here. Go for i3 and i4.

To sum up, we found that the inflation rate of Polkadot is less than 10, because a part of DOT is burned through the mechanism of the treasury.

According to official data, the current inflation rate of Polkadot is 7.8%.

Polkadot inflation is too high and there is no deflation mechanism

First of all, Polkadot has a destruction mechanism. In the design of the Polkadot treasury, the treasury will destroy a certain percentage at the end of each spending cycle (24 days for Polkadot and 6 days for Kusama) (Polkadot is now 1%, Kusama is 0.2%) of the balance of funds.

Secondly, inflation is not a beast, but a very necessary mechanism in the development process. Appropriate inflation is beneficial to economic development.

Deflation seems to have been verified on Bitcoin to increase its value, but on the other hand, deflation means that money will gradually increase in value, which will make people more reluctant to sell and reluctant to use money, and the circulation rate of money will drop. From the perspective of currency, this will reduce the money flowing into the economy, reduce economic activities, and reduce the vitality of the entire economy, which is not conducive to the development of the economy.

Of course, for Bitcoin, deflation makes it increase in value, and it is closer to a store of value collectibles than currency, and fluctuations in value will inhibit circulation.

However, the logic of Polkadot is different from that of Bitcoin. Bitcoin itself is positioned as a pure digital asset, while Polkadot’s DOT is an important resource in the Polkadot ecosystem, which needs to be circulated and used very much. Therefore, for Polkadot to come To say that deflation is not conducive to its ecological development.

But on the other hand, inflation will make people feel that the money on hand will gradually depreciate. Of course, the situation of inflation should be discussed on a case-by-case basis. Excessive inflation will also collapse the economy. In reality, Zimbabwe, Venezuela, etc. have well explained this problem. In the field of Crypto, excessive inflation will greatly depreciate the value of the token held, and no other economic activity can Above this inflation rate, then naturally no one wants to hold it for a long time.

Appropriate inflation will encourage money to be transferred to more profitable economic activities, and will accelerate the circulation of tokens in the economy, which means that the overall volume of the economy will increase, which is conducive to economic development.

In the Polkadot ecosystem, a more profitable solution has been given in terms of mechanism design. For example, Polkadot’s staking reward exceeds its inflation, followed by tokens similar to those obtained through slot auctions for ecological projects. These It is also possible that token returns can outperform inflation.

Therefore, if some people think that the inflation of Polkadot is high, they can beat the inflation by participating in the mechanism of Polkadot. Therefore, this mechanism is also a disguised incentive for DOT holders to participate in the mechanism of Polkadot. Either supporting Polkadot’s network or supporting Polkadot’s ecological construction is a better design idea.

However, I believe that after seeing this, there will still be friends who think that Polkadot inflation is still high at 7-8%, so let’s take a real example.

my country’s consumer price index CPI in the past 10 years, although the official data is about 3% on average, but our actual perception is definitely not the case, because real estate is excluded from the CPI calculation, and the prices of different commodities and factors The rate of increase is inconsistent.

We might as well use another approximate formula to measure, that is, inflation rate = M2 growth rate – GDP growth rate. In this way, our inflation rate in the past 10 years is about 7%. So, we’ve been living with this inflation rate for so long, do you think it’s an unacceptable inflation? What’s more, Polkadot also has Staking that can outperform inflation, so why not do it?

Of course, some friends will ask a question. DOT will fluctuate. If it falls, even if it can resist inflation through financial management methods such as Staking, the total value will still be lost. What should I do? This is a test of the specific operation. In fact, through position management and some hedging operations, the problems caused by the decline of DOT can be completely hedged. This is not considered the dividend of ecological development.

Finally, Polkadot’s inflation rate can be adjusted. Polkadot is a decentralized public chain with governance functions. In Polkadot’s design, many parameters can be adjusted through governance referendums. For example, the Polkadot treasury will destroy a certain proportion of the balance of funds, and this proportion can be adjusted.

Just as in our reality, countries will issue more currency on the one hand, and on the other hand, they will adjust the currency situation through some monetary policies such as raising and lowering interest rates, raising and lowering the reserve requirement ratio, etc., so that their own economies can develop in a relatively benign state.
Similarly, in the design of Polkadot, there are both additional issuance to stimulate the development of the Polkadot ecological mechanism, as well as a destruction mechanism, and these mechanisms can be regulated through governance, so that Polkadot can develop well, so this is considered A more thoughtful design.

Polkadot is all played by Asians, and there will be little progress once the policy is tightened in some regions

In the feedback from the community, many fans also questioned the users of Polkadot, they believe that only Asians are playing Polkadot. In fact, at this point, it can be verified from a lot of relevant data.

Previously, Gavin Wood made an annual summary of Polkadot for 2021, in which official data showed that so far, about 350 teams have received investment and financing, an increase of 3.5 times compared to last year; and only in In 2021, about 50 people have raised a combined total of over $670 million in early-stage funding (seed and Series A).

Secondly, the number of users of the official Element (chat platform) in the Substrate and Parachain channels has increased from 2,500 to 10,000, an increase of more than three times; and as shown in the Electric Capital report, Polkadot’s developer ecology is leading, with a large number of active personnel, which also means that there are more potential users in the Polkadot ecosystem.

In addition, Twitter is the world’s largest social media platform (mainly overseas users), and Twitter’s data is also one of the important indicators.
At the end of 2020, Polkadot officially had less than 100,000 followers on its platform, but in just one year, the number of followers on the Twitter account had grown to more than 1 million, and even the number of followers on Kusama’s account increased from 30,000. grew to 200,000.

Not only Twitter, but also Reddit, Discord, Youtube, etc. These overseas social media platforms have Polkadot presence, and his followers have maintained a steady growth.
To sum up, these large amounts of data are enough to dispel the rumor that “Polkadot is all played by Asians”.

Polkadot is the same as EOS

Probably in the second half of 2020, because after the Polkadot mainnet went online, the market response was mediocre, and its own performance was unsatisfactory. Therefore, many people questioned whether Polkadot would become the next EOS, even though such intensive doubts have been made. More than a year has passed, but recently this kind of voice has reappeared due to the performance of the market. It may be necessary to reiterate that Polkadot will not be EOS at least for now.

First of all, we need to make it clear that the goal of EOS is to become a standard Layer 1 public chain, and to enrich its development by building an ecosystem under the public chain. On the other hand, Polkadot itself is the concept of Layer 0, which aims to create a multi-chain ecosystem, not to build a certain chain. , such a starting point also prompted its development trajectory to be completely different.

Secondly, the issue of “everyone known” about EOS seems to have become a joke for believers back then. Although the amount of financing was huge, the funds obtained were not used for ecological construction, and even caused the EOS community to freeze through DAO. Fun fact about its official account.
Since Polkadot’s independent online launch, it has contributed a lot to ecological development through the treasury and the Web3 Foundation, such as technical training, Grant, Treasury, Hackathon, Substrate Builders Program, etc. Become the blockchain with the fastest growth in developers in 2021.

Therefore, we judge from these fundamentals, at least the current development of Polkadot and EOS is completely two lines, rather than one-sidedly because market factors mistakenly believe that they are the same product.

There is a problem with Polkadot’s economic model, and DOT is useless in cross-chain scenarios

The origin of this problem is mainly because in the cross-chain process, for example, when Bifrost crosses to Acala, the BNC of the initiator Bifrost will be consumed, and DOT will not be consumed in this process. Many friends here have asked questions, Polkadot The token DOT is not used in these cross-chain scenarios. These scenarios will not generate demand for DOT and it is difficult to capture value. Is this a problem with Polkadot’s economic model?

First of all we need to be clear that it is not. We should look at Polkadot’s economic model from the perspective of the development of things.

First of all, Polkadot is Layer 0, while other public chains such as Ethereum are Layer 1, so it is normal that the value capture method is different. Second, although Ethereum is now the largest blockchain platform, its economic model is not user-friendly, and every operation needs to pay an expensive gas fee to the Ethereum network. This is a model of taxing all users, just like every time we buy a product on Taobao, we have to pay an additional fee to the Taobao platform.

Gavin Wood, the founder of Polkadot, is himself the former CTO of Ethereum, and the one who first realized Ethereum from the vision at the engineering level. The economic model of Ethereum, but such an economic model is unreasonable after him.
So when he designed Polkadot, he abandoned this design thinking that would be limited by the Bitcoin framework, and instead thought about what functions the blockchain needs to function from a lower-level logic to achieve normal operation, and can also avoid Ethereum Problems with the Square Economic Model.

Combined with Polkadot’s goal of building a Layer 0 meta-protocol, which is a larger platform and network, our value judgment on Polkadot should be based on the platform’s thinking. The value of the platform depends not only on its own economic size, but also on the value of its network effect, which is why JD.com is still popular with capital after many years of losses.
Looking at the big platforms in the Internet field, there is no one that charges everywhere and can become a giant. They are all free for the C-side, and then rely on the network effect to charge the B-side.

Polkadot itself is a huge economy. In addition to its own certificate, it also includes the certificate of its parachain, the certificate of ecological applications in its parallel chain, and the assets of other public chains that cross the chain through the transfer bridge. . At the same time, the design of Polkadot, which only charges the B-side such as parachains and is free for the C-side, is the most in line with the law of development of things.

Finally, don’t ignore the demand for DOT when Polkadot is relatively complete, especially in the Polkadot ecosystem, there will be a kind of public interest parachains, which are beneficial to all DOT holders, and their operation is without other tokens. , but use DOT to run parachains that provide public interest-related functions, and they will also be a huge use case for DOT.

The Polkadot we are seeing now is only a very early situation, and it is still far from a relatively complete state of Polkadot.
When Polkadot has connected dozens of parachains and multiple parallel threads, and there are many public interest parachains operating normally, then the Polkadot ecosystem’s demand for DOT will be truly reflected. It would be too hasty to draw conclusions from the card’s initial situation. However, the development of Polkadot is indeed still in its early stages and will take some time.

It doesn’t make sense to implement an Ethereum on Polkadot

It is undeniable that today’s EVM has really held up a lot. Many emerging public chains have rapidly developed their ecosystems through EVM-compatible methods, thus forming a huge EVM ecosystem. Most of the applications in the blockchain field are in EVM. operating in the ecosystem.
In the Polkadot ecosystem, Moonbeam, as one of the best Polkadot ecological projects for the compatibility of Ethereum’s EVM and various tools, is also considered to have implemented Ethereum on Polkadot. Although many public chains are already compatible with EVM, it still makes sense to implement another Ethereum on Polkadot.

The underlying architecture of Polkadot is different from other public chains. Although it seems to be compatible with Ethereum in a new bottle of old wine, the underlying architecture of Polkadot has more advantages, and the resulting performance is far better than that of PoW’s Ethereum. Much higher and lower transfer fees.
In addition, the Ethereum implemented on Polkadot can also gain other features of Polkadot, such as interoperability, scalability, upgrades without hard forks, and more.

Now that Moonbeam has been successfully launched on the Polkadot network, its performance has also greatly benefited users who support its slot auctions. Seeing that Moonbeam has started so smoothly, some friends say that, doesn’t Moonbeam’s success prove Polkadot’s failure? Because the Polkadot ecosystem has gone back and forth and returned to the logic of Ethereum.

In fact, it cannot be said that the logic of returning to Ethereum is not good. We must follow some objective laws when we look at the development of technology.
Ethereum and the larger EVM ecosystem are indeed the best developed at the moment, with rich developers and users and massive funds. Polkadot has newer underlying technologies and more functions. Using EVM in the Polkadot ecosystem is equivalent to using new underlying technologies to be compatible with old technologies. It can avoid some problems with old technologies, and can make developers on EVM, Users and funds are introduced into the Polkadot ecosystem and provide more functions of the Polkadot ecosystem.
Isn’t it one of the common ways for new technologies to be implemented by being compatible with existing markets, and then gradually iterating and developing new technologies?

Polkadot has been online for so long, there is no ecology, and it cannot be done.

Polkadot is the meta-protocol of Layer 0, which is different from the development path of other Layer 1 public chains.

Generally, the Layer 1 public chain only needs some ecological developers to develop some mature DApps or DeFi, which can attract users and funds to enter, thereby activating the entire ecology, and the startup speed is really fast.

Polkadot is Layer 0 and cannot directly carry smart contracts. This requires the construction of Layer 1 parachains that support smart contracts before developing applications on these parachains, and then activating the entire ecosystem. Polkadot has more Layer 1 public chains than other public chains. a construction phase.
Therefore, at the same time, other Layer1 public chains have already started to run applications, and Polkadot has just established Layer1, which does make people feel that Polkadot has no ecology.

But from another perspective, this is equivalent to comparing the early stage of Polkadot with the middle stage of other projects, which is actually not comparable.

However, some Layer 1s of Polkadot have gradually matured, and we believe that the ecological development after Polkadot will be very rapid.

The Polkadot ecosystem is compatible with EVM and attracts many developers and projects in the EVM ecosystem. Moonbeam and its pioneering network Moonriver have expanded dozens of ecological projects within a few months, and it has been verified that this is a feasible path. . And its TVL has overtaken many well-known public chains, so it would be absurd to say that Polkadot has no ecology.

In addition, there are many EVM-compatible parachains in the Polkadot ecosystem. When a project has been successfully deployed on a parachain on Polkadot, since many parallel chains are similar in architecture, the project can often be easily The rapid deployment on another parachain is like quickly opening a chain of stores in multiple cities. The interconnection between parallel chains is also a means of enhancing liquidity for these projects.

Therefore, the Polkadot ecological project is also easy to do. In this case, I believe that there will be dozens of ecological projects in multiple parallel chains like Moonbeam and Moonriver. The rise of the Polkadot ecosystem seems to be imminent.

Also as Layer 0, Cosmos is better than Polkadot

We should look at each project with an inclusive mentality. Cosmos also has its own advantages and characteristics, and is good at solving some problems in specific scenarios. Gavin was indeed inspired by Cosmos at the beginning of designing Polkadot.
But it does not say who can subvert who. Just as the market value of Bitcoin accounts for a smaller and smaller proportion of the total market value of Crypto, the proportion of the Ethereum ecosystem in DeFi lock-up volume is also getting smaller and smaller, and we are entering a multi-public market. In the multi-chain era where a hundred schools of thought contend, multi-chain coexistence and interconnection will be a development trend in the future.

In fact, many parachain projects in the Polkadot ecosystem are also going in the direction of multi-chain development. They choose Polkadot as a base, and then expand horizontally to different public chains.
For example, Astar and Composable Finance of Polkadot are both researching cross-chain virtual machines to cross-chain with many existing public chains. Astar has also initiated a proposal to build an Astar/Shiden&Cosmos cross-chain bridge, Interlay’s Bitcoin anchor currency InterBTC Also deployed on Cosmos.

However, although Cosmos inspired Gavin, Cosmos does not meet Gavin’s vision. In his opinion, Cosmos is not enough to trust.
Cosmos Zone has no other choice except to use the same consensus mechanism Tendenmint. Developers cannot innovate in the consensus mechanism and have to use the Cosmos SDK; Cosmos is also not scalable enough. To achieve scalability, a system needs to It is necessary to support multiple blockchains without adding new nodes or adding additional security. And this is the current Polkadot.

Of course, in the future, many teams will choose Cosmos or Polkadot as the public chain carried by the project according to their own needs, but this does not prevent Cosmos and Polkadot from taking some ways to communicate with each other. So, don’t look at the two projects in an either-or fashion.

Now Cosmos has some first-mover advantages, including star projects like Terra, but Cosmos has fewer developers than Polkadot as a whole. Polkadot started later and has more ambitious goals, so the development speed is slower. Fortunately, Polkadot’s parachain slot auction has now been opened, and Polkadot’s ecological projects can finally get rid of their arms and seek development.
Now is the best time to pay attention to the Polkadot ecology and run some star projects. You may wish to spend more time paying attention to the development of the Polkadot ecology, and you may have unexpected results.

Polkadot ecology is all ecology done by other chains, and there is no innovation

First of all, it is also running on the rails. The efficiency of high-speed rail and green train is completely different. Therefore, as a Polkadot with a newer technical architecture and richer functions, the existing old solutions are used Polkadot such as Polkadot. It is necessary to practice the new technology again.

Secondly, these parachains of the Polkadot ecosystem will also have many mature applications on other public chains, such as AMM, stablecoins, Lending, etc. It is not because these projects are not innovative that the entire ecosystem is not innovative.
For each public chain, some functions are necessary, just like a city, it will always need public infrastructure such as hospitals and schools, so it is also necessary for Polkadot ecological projects, and there are some logic of requirements It is very simple, and the feasibility has been verified on other public chains, and it should be implemented on Polkadot first.

With these foundations, some innovations will happen quietly.
For example, Moonbeam in the Polkadot ecosystem is called Ethereum on Polkadot because of its excellent compatibility with Ethereum. Moonbeam supports the classic NFT standards on EVMs such as ERC721 and ERC1155, but at the same time, Moonbeam is also the technical framework of Polkadot, so some innovative NFT standards such as RMRK can also be implemented on Moonbeam, which is compatible with old technology, and can carry innovative technology.

These projects similar to RMRK belong to an innovative track-distributed blockchain network application. In addition to RMRK, there is also Zenlink, the first native cross-chain DEX project on Polkadot.

Therefore, Polkadot with new technology can solve old problems and new problems, and when new problems are solved, innovative projects will appear, and such innovations have already occurred in the Polkadot ecosystem. Give the Polkadot ecosystem a little bit. Be patient and time and don’t jump to conclusions.

Cross-chain is a pseudo demand

We often see how much USDT and USDC will be destroyed on one chain first, and then how much will be generated on the other chain. Since there is no good cross-chain method, stablecoins such as USDT and USDC rely on this method. The regulation of supply on different public chains also reflects the needs of cross-chains.

Looking at the increase of WBTC on Ethereum, its market value just reached 100 million US dollars a year and a half ago, and now it has a market value of more than 12 billion US dollars. If the increase in Bitcoin during this period is excluded, then the market value of the Ethereum that entered the Ethereum The number of Bitcoin assets has increased by around 25 times in just the past year and a half.
This also proves that the assets of a certain public chain will hope to participate in the economic activities that can add value in the ecology of another chain, which is the real cross-chain demand.

Interpretation of Polkadot's 10 major misunderstandings: inflation is too high, cross-chain is pseudo demand, economic model is not good enough

In the same sentence, don’t think that Polkadot’s cross-chain scene is not used by people because Polkadot is in an early state, and think that the cross-chain scene is a pseudo-demand, so you might as well be more patient.

postscript

In the above 10 major misunderstandings, we will find that some problems are commonplace, and some problems change with the fluctuation of the market. From this perspective, doubt and belief always seem to be separated from time to time, and sometimes crossed. Good reflects everyone’s mood swings, but when we are full of doubts, we need to think calmly and go back to the original point to see the development of things themselves.

Since the launch of the Polkadot mainnet, many people like to compare Polkadot and Ethereum. Of course, there are many fewer now. We might as well look back at the analogy between the two. From the timeline alone, Ethereum is earlier than Polkadot. It was born for 2-3 years, so it is reasonable for the ecological development to lag behind, but if the competition is on a different starting line, the latter is the truth only if it is still not optimistic in the early stage and catches up, so we need to be more patient. .

Finally, the time has come to 2022, and some misunderstandings should disappear. We also need to rethink some logic. Of course, everyone’s experience and thinking logic are different. We try our best to seek common ground while reserving differences.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/interpretation-of-polkadots-10-major-misunderstandings-inflation-is-too-high-cross-chain-is-pseudo-demand-economic-model-is-not-good-enough/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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