Ever walk into a room and not speak the language of everyone else in the space? That is what life is like for most blockchains. There’s a language barrier that doesn’t allow blockchains to talk to each other. Polkadot (CRYPTO:DOT) is a new cryptocurrency that might just be able to solve this problem and create an opportunity for savvy investors. Polkadot is a blockchain of blockchains.
Let us look at three reasons why Polkadot is a token to watch right now.
1. Polkadot offers a solution to the interoperability problem
Most blockchains operate independently of each other. These networks are closed-loop for a variety of reasons, with security being the top priority for most decentralized networks.
Polkadot allows for trustless communication between blockchains. That is, trust does not need to be placed in any one third party in order for communication across these systems to be effective.
Think of an investor looking to swap Bitcoin (CRYPTO:BTC) for Ethereum (CRYPTO:ETH). Right now, that investor would have to use some form of exchange to facilitate the process. A centralized service such as Binance would have to be used. Additionally, most decentralized exchanges would require this investor to “wrap” the Bitcoin or Ether before closing the transaction. Polkadot is seeking to solve this problem by creating a trustless way for blockchains to communicate with each other directly. This would allow for direct swaps between investors. In a larger sense, it also allows various specialized blockchain systems to work together and create complex services from simple components.
The ways users could utilize such a service are obvious. Polkadot stands as a potentially disruptive force in the world of decentralized finance (DeFi). By not being forced to use a centralized exchange to swap a cryptocurrency, users can avoid the fees and headaches that come along with this process. For Polkadot investors, this utility creation is a key reason to consider the DOT token and the Polkadot network right now.
2. Polkadot has implemented sharding
Getting stuck in traffic on the way to work can be an incredibly frustrating experience. This analogy rings true for crypto users looking to verify a cryptocurrency transaction.
In a sense, the number of transactions per second that a blockchain can handle could be thought of as toll lanes on a road. If an investor wanted to send many transactions, they would be limited by the number of lanes the road had. This is what sharding solves. It breaks the blockchain up into separate “shards” so that the transactions can be processed separately. In effect, this amounts to building more and more lanes on the road for the cars/transactions to travel down.
The implications of this are important to consider. Currently, Polkadot can handle 1,000 transactions per second (TPS). And when fully operational, Polkadot is expected to be able to handle over 1,000,000 TPS. The cryptocurrency industry has never seen this kind of speed.
What this means for users is a more scalable platform with faster transactions and lower fees. Accordingly, investors considering Polkadot right now are looking at this token as a way of playing a cryptocurrency network that found a solution to a fundamental scalability dilemma other cryptos have had difficulty tackling.
3. Polkadot has innovative partnerships
Polkadot has paired with Chainlink (CRYPTO:LINK) to use its Oracle network. Oracle networks provide a way for real-world data to interact with the blockchain. These data are provided via smart contracts, and able to be integrated into the blockchain. Think of stock price feeds, or other data that may be well-suited to being stored on a permanent, unchangeable ledger. Chainlink provides the ability for users to do so.
Chainlink is set to become the primary Oracle provider for the entire Polkadot network. Major partnerships like this are enticing to investors. Many expect this partnership, in particular, to dramatically increase the adoption of the Polkadot network. The usefulness of Polkadot’s network should, at least in theory, filter through to the price of DOT tokens. At least, those holding DOT certainly hope so.
Additionally, this is not the only partnership Polkdadot has made. Polkadot recently launched on Ankr (CRYPTO:ANKR) StakeFi. This project allows DOT holders to stake their crypto and earn rewards through the Ankr parachain. The ability to stake DOT is key for investors looking to generate passive income and long-term returns from holding DOT. The more projects that support Polkadot, the better for investors.
Polkadot has been called an “Ethereum Killer” because of its potential to upend the blockchain. Of course, there’s some interesting utility provided by the Polkadot network right now worth considering.
However, the impending release of Ethereum 2.0 may lead to a pullback in the price of DOT. As Ethereum gas fees become cheaper and transaction speeds increase, other chains may fall to the wayside. It is possible Polkadot may suffer from this upgrade.
Polkadot also faces stiff competition from other blockchains, as it is not the only Smart Contract provider by any means. Rising stars like Cardano (CRYPTO:ADA) may suppress the price of DOT. Accordingly, invest with caution.
That said, Polkadot offers real-world use cases and solves important pain points that few other blockchains have attempted to tackle. Accordingly, there’s reason to be bullish on this token’s long-term potential for above-average returns.
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.