Polkadot Q2 2023 Report: Achieved Two Key Milestones with Significant Increase in Network Activity

Key Insights

• OpenGov officially launched. Polkadot's new decentralized governance model OpenGov introduces parallel voting, community-centric governance bodies, and a more flexible delegation mechanism, making the decision-making process more efficient and transparent.

• XCM V3 officially released. This new version of the message format introduces advanced programming capabilities, bridging capabilities with external networks, cross-chain locking, improved fee payment mechanisms, and support for NFTs.

• The U.S. Securities and Exchange Commission (SEC) has not classified Polkadot's native token DOT as a security. The Web3 Foundation stated that after three years of dialogue with the SEC, DOT is no longer considered a security.

• Acala and Moonbeam have re-leased the parachain slots, with the initial leases for the first batch of parachains expiring in October. As new projects join and existing projects renew, the competition for parachain slots will become more intense.

Preliminary Understanding of Polkadot

Polkadot is a nominated proof-of-stake (NPoS) blockchain network designed to support various interconnected Layer 1 chains tailored for specific applications, known as parachains. Each chain built into Polkadot uses the blockchain development framework Substrate developed by Parity Technologies, allowing developers to choose the components that best suit their specific application chains. Polkadot refers to the entire ecosystem consisting of all the parachains connected to the "relay chain". The relay chain does not support application functionality but instead hosts all the validators, responsible for the security, governance, and connectivity of the parachains.

Key Indicators

In the second quarter, the crypto industry witnessed significant developments and events, the largest of which was the lawsuit by the U.S. Securities and Exchange Commission (SEC) against a certain trading platform. These lawsuits allege that certain underlying layer tokens are securities; however, it is noteworthy that Polkadot's native token DOT is conspicuously absent from the SEC's list. Subsequently, the Web3 Foundation released a statement indicating that after extensive discussions with the SEC, DOT has undergone transformation and is no longer considered a security.

Throughout the second quarter, Polkadot focused on network development and expansion, demonstrating consistency in key network infrastructure such as staking, treasury usage, and parachain activities. Important milestones achieved during this period include the launch of OpenGov, which introduced an advanced governance model, and the introduction of XCM V3 on the Polkadot mainnet. XCM V3 has proven that the use cases for XCM have increased, and further growth is expected in the future. Additionally, parachains continued to renew slot leases, leading to a surge in DOT locked.

Overview of Finance and Network

Note: The financial and network overview only pertains to the Polkadot relay chain and does not include parachains unless specifically stated otherwise.

market value and revenue

The market capitalization of Polkadot decreased by 16% quarter-on-quarter, falling from $7.47 billion to $6.24 billion. In contrast, the overall market capitalization of the crypto market increased by 2% quarter-on-quarter, with BTC rising by 7% and ETH rising by 6%. The growth of BTC, ETH, and the entire crypto market was primarily driven by the emergence of spot BTC ETF applications.

As of the end of the quarter, Polkadot ranks as the 12th largest cryptocurrency project in terms of market capitalization, and is the fourth largest layer protocol, following Ethereum, Cardano, and Solana.

The financial structure of Polkadot is based on a weighted fee model, where transaction fees are determined and charged prior to execution, distinguishing it from the gas fee model. The fee calculation includes three components: a weight fee reflecting computational resources, a length fee based on transaction size, and an optional tip to incentivize block validators. These fees arise from various activities such as token transfers, staking, validator elections, governance voting, and parachain slot auctions. It is important to note that transaction fees do not apply to parachain transactions, meaning that when transactions occur between parachains, no transaction fees similar to those for transfers or smart contract executions are required.

In the second quarter, Polkadot's revenue reached $81,000, a decrease of 32% compared to the previous quarter. It is worth noting that due to the structural design of the network, Polkadot's revenue is generally lower compared to its competitors. Therefore, when evaluating the protocol, alternative assessment models such as the security demand model and the partial sum framework should be considered alongside traditional revenue metrics.

DOT token

The native token DOT of Polkadot has three main uses: governance, staking, and parachain binding. DOT adopts an inflationary monetary policy and does not have a maximum supply. The monetary policy of DOT is determined by its compliance with the ideal staking rate, which considers the need to prevent possible security compromises while maintaining sufficient support for the liquidity of the native token. If the amount staked is below the ideal rate, the staking rewards for nominators will increase, thus encouraging more staking. Conversely, if the rate exceeds the ideal, staking rewards will decrease.

As of the end of the second quarter, the staking rate of Polkadot is 46%. This indicates that the amount of DOT staked is below the ideal staking rate, triggering an increase in staking rewards. At the current staking rate, DOT stakers can earn an annualized staking yield of 16%, providing a 9% actual return.

Treasury

The funds in the Polkadot treasury come from block rewards, validator slashes, transaction fees, and staking efficiency. The treasury funds are stored in a system account and allocated over a 24-day spending period, with any unused funds being burned at a rate of 1%. It is worth noting that all treasury expenditures are executed automatically on-chain, ensuring transparency and accountability.

In the second quarter, the Polkadot treasury supported various initiatives, including wallet upgrades and integrations, client upgrades, and community events such as meetups and hackathons. The introduction of OpenGov on June 15 marked an important milestone, fundamentally changing the way the treasury is managed, allowing proposals with different requirements to proceed in parallel. The implementation of OpenGov is expected to drive increased treasury utilization, bringing substantial benefits to the Polkadot community. By the end of the quarter, the Polkadot treasury held approximately 46.5 million DOT (worth $240 million).

account

The Polkadot relay chain has several main functions, including providing security, governance, and connecting parachains. Therefore, its end users typically conduct transactions and use the network through parachains. However, the relay chain does support some end user functionalities, including token transfers, staking, validator elections, governance voting, and participation in parachain slot auctions.

With the launch of OpenGov in June, account activity on the Polkadot relay chain has increased. This surge can be attributed to the rise in governance activities, as the relay chain plays a crucial role in facilitating the governance process. In the second quarter, the average daily active accounts on the relay chain were 5,800, a month-on-month decrease of 16%. By the end of June, there were 3.9 million unique accounts (public key addresses) in the Polkadot ecosystem, an increase of 200,000 from the previous month, and an increase of 600,000 year-to-date.

It must be emphasized that the activities of the relay chain do not represent the activities of the entire network. To fully understand network activity, one must consider the activities on the parachains as well as XCM activities.

Developer Activity

Polkadot has one of the largest developer bases in the crypto industry, as highlighted by the Electric Capital Developer Report, with over 750 full-time developers and a total of 2000 developers. The platform provides comprehensive support for developers through its open-source technology stack, including various categories such as user interfaces, tools, APIs and languages, smart contracts, chains and modules, network maintenance tools, consensus, and networking.

To further develop its developer community, Polkadot has made significant investments in initiatives such as the Polkadot Blockchain Academy, which is planning its third cohort at the University of California, Berkeley. The academy aims to provide engineers with Web3 technology skills. Additionally, the Polkadot Developer Hero Program has been launched to promote collaboration and recognize outstanding developers. The specific launch date for the Polkadot Developer Hero Program has not yet been announced.

Ecological Overview

Cross-consensus Messaging Format XCM

The Cross-Consensus Message Format (XCM) is a standardized messaging format and language that allows for seamless communication between parachains and other consensus-based systems. XCM plays a key role in facilitating interoperability and complex cross-consensus interactions. It allows blockchains to exchange messages, execute operations, transfer assets, and more.

The XCM V3 released on June 15 has garnered significant attention. This new messaging format introduces advanced programming capabilities, bridging capabilities with external networks, cross-chain locking, an improved fee payment mechanism, and support for non-fungible tokens (NFTs).

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Parallel Chain Account

When examining the daily active users of parallel chains, Moonbeam and Nodle are clearly leading. Moonbeam's activity increased after the release of Uniswap V3 in June, indicating that the network continues to receive attention. Nodle ranks second as a decentralized wireless network operator focused on IoT devices.

Astar ranks third among the parachains, followed closely by Acala and Unique Network. Astar recently unveiled details about Astar 2.0, an upcoming upgrade aimed at improving various aspects of the network, with the core development team announcing a $3.5 million investment from Sony. Similarly, Acala launched the Acala Exodus program, which also focuses on enhancing token economics, staking mechanisms, and introducing new infrastructure and features. The last of the top five is Unique Network, which has 777 daily active users and operates as a parachain optimized for NFTs.

In the second quarter, the entire Polkadot network