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Messari Polkadot Q1 Report: Parachain popularity drops after auction, developer activity high

Messari

2022-05-07 17:05

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Original title: "State of Polkadot Q1 2022"

Original author: Nicholas Garcia

Original source: Messari

Original translation: KIKO, PolkaWorld

Key points

After five years of research and development, the Polkadot parachain is now live.

At the end of Q1 2022, 13 parachains won parachain slots, binding 127.8 million DOTs (11% of the total supply; valued at $2.9 billion).

From now until February 2023, 28 more parachain slot auctions are planned (bringing the total to 41).

Polkadot price and user account count hit all-time highs at the time of the first parachain slot auction; however, both metrics have been steadily declining since then.

Polkadot has an evenly distributed validator set, with 99% of validators holding between 1.8 and 2.6 million DOTs.

Polkadot developer activity remains the most active in crypto.

The next major milestones are the cross-consensus message format XCM, the implementation of parathreads, and performance upgrades.

About Polkadot

Polkadot is a nominated proof-of-stake (NPoS) blockchain network designed to support a variety of interconnected, application-specific Layer 1 chains, or parachains. Each chain built in Polkadot uses Substrate, a blockchain development framework from Parity Technologies, which allows developers to choose specific components that best suit their specialized application chains. Polkadot refers to an entire ecosystem, namely all parallel chains connected to a single base platform "relay chain". The base platform does not support application functions, but contains all validators and is responsible for protecting, managing and connecting parallel chains.

After about five years of research and development, the first parachains went live on December 17, 2021. As of the end of Q1 2022, 13 parachains had won parachain slots, with 127.8 million DOTs (11% of the total supply, valued at $2.9 billion) bonded. As the first edition of the Polkadot Quarterly Report, this report will highlight the important developments since the launch of parachains and assess the network's first quarter performance. A full appendix of quarterly events and data is provided at the end of the report.

Price History

The concept of parachains was first introduced in the Polkadot whitepaper in 2016. In October 2021, at the Substrate Sub0 conference, co-founder Robert Habermeier announced that the relay chain is ready to support parachains. Over the next three weeks, the price of Polkadot’s native token DOT rose 57% to an all-time high of $55.08 ($56.5 billion market cap) on November 5, 2021, the day after the community approved the first parachain slot auction on November 11, 2021. However, from November 2021 to Q1 2022, the valuation of Polkadot and the broader crypto market declined. As of Q1 2022, DOT was $22.5 ($23.3 billion market cap), down 60% from its all-time high.

During Q1 2022, Polkadot’s valuation changes were consistent with those of other ecosystems. LUNA saw the biggest gain at +18%, FTM saw the biggest loss at -38%, and Polkadot saw the third biggest loss at -19%.

Network Usage

Polkadot user accounts, both new and active, followed a similar path to price. In November, the average user account count was up 131% from the beginning of the year and hit multiple all-time highs. However, active users and new user accounts have declined in each month since November. While the decline in user accounts is a general macro theme, there are also some internal reasons.

The decline in active accounts is likely due to users locking up their DOTs for a two-year lease to support their preferred parachain in the parachain auction. DOTs locked in Crowdloan are unusable and therefore cannot be used in Polkadot. To combat this liquidity constraint, parachains Acala and Parallel Finance introduced liquidity staking.

The decrease in new accounts may be related to the fact that the first batch of parachains is more popular than the second batch. The first batch of parachains (1-5) has 342% more DOTs bonded than the second batch of parachains (6-11).

In contrast, the number of addresses holding DOTs has increased every month in 2021 and the first quarter of 2022. This increase in data shows the strong interest in the Polkadot ecosystem despite the decline in valuation.

Staking and Decentralization

Polkadot uses the Nominated Proof of Stake (NPoS) consensus mechanism. The Nominated Proof of Stake consensus is different from the Delegated Proof of Stake (DPos) consensus because nominators, i.e. DOT owners, stake their Tokens with validators and may be subject to slashing penalties.

Validators are paid every 24 hours based on paid actions they complete, called era points. Every 4 hours, a subset of validators is randomly assigned to validate all parachains and a coefficient is multiplied on the era points earned. Era points combined with random parachain validation ensure that validators receive nearly identical rewards. Because validators receive nearly equal rewards and distribute these rewards proportionally to their nominators, nominators are incentivized to stake with low-stake validators to receive higher rewards. The validator-nomineator reward model is designed to decentralize Polkadot's validator set. At the end of Q1 2022, 294 of 297 validators (99%) held 1.8-2.6 million DOTs, confirming that the game theory of nominee staking is valid.

Polkadot uses an inflation Token model, so there is no cap on the number of DOTs. Inflation rewards are distributed to validators for securing the Polkadot network, and the rest goes to the treasury. The inflation rate is related to Polkadot's ideal staking rate, but it averages about 10% per year. In the first quarter of 2022, DOT's staking rate was relatively stable, accounting for 53.8% to 58.6% of the total DOT Token staking.

A single entity can run multiple validators. According to Subscan, in Q1 2022, 7 entities were running multiple validators, accounting for 20% of the total DOT staked. Other entities may also be running multiple validators, but Subscan has not yet identified them.

Running multiple validators can gain greater expected value due to evenly distributed rewards. Therefore, Polkadot validators self-stake a minimum of one DOT and nominate their DOTs to up to 16 validators to maximize the expected value of their staking rewards. Of the total DOT staked, approximately 99.7% comes from nominators and 0.3% comes from validator self-stake.

Parallelchain Auction

The first parachain slot auction began on November 11, 2021. At the end of Q1 2022, 13 parachains that won slots had 127.8 million DOTs bound (11% of total supply, valued at $2.9 billion). Polkadot plans to conduct 28 new parachain auctions by February 2023 (bringing the total to 41).

Of the top 13 parachains, 7 are DeFi chains, 3 are smart contract platforms, and 3 are Web3 infrastructure chains. For an in-depth look at the top 13 parachains, check out the Polkadot Ecosystem Overview.

Polkadot vs. Kusama

Another unique component of the Polkadot ecosystem is the canary network, Kusama. Kusama is a sovereign blockchain with a nearly identical codebase and architecture to Polkadot; however, Kusama has a faster governance mechanism with voting taking only 7 days compared to Polkadot’s 28-day voting. All new code releases are proposed, approved, tested, and implemented on Kusama before migrating to Polkadot. As a result, Polkadot and Kusama are closely correlated. Over the past five quarters, the market capitalization of the two networks has closely tracked each other with a correlation coefficient of 0.797.

In contrast, there is little correlation between the user activity of the two networks. Over the past five quarters, the correlation coefficient of user accounts for both networks is weak, at only 0.42. After the first Polkadot parachain (Auction), user accounts for both networks have been trending downward.

Similar to the Kusama-Polkadot relationship, parachain project teams can launch a Kusama parachain to test new features under real economic conditions. Of the first 13 Polkadot parachains, 11 have a Kusama parachain. On average, Polkadot parachains have 10 times more USD value locked than Kusama parachains. The only exception is the Polkadot parachain Phala Network, whose Kusama parachain Khala Network has locked up a higher USD value.

Developer Overview

Polkadot had the second-largest developer community in 2021, according to the annual Electric Capital Developer Report. Polkadot started the year with 840 developers and ended the year with 1,400 developers, a net gain of 560 developers (+67%). In comparison, Ethereum has the most developers, with 3,920, and Cosmos is third with about 950.

Developer activity was consistent in 2021 and Q1 2022, with more than 10,000 developer activity events in 14 of 15 months (93%). The exception was October 2021, when developers shifted their focus to supporting the first parachain auctions. Average monthly developer activity fell 10% in Q1 2022 as developers prioritized enabling previously deployed features over developing new ones. Overall, Polkadot has the strongest developer activity in the crypto space. (Note: Developer activity is based on public GitHub repositories)

Ecosystem Challenges

In Q4 2021, new users flocked to Polkadot to participate in the first novel parachain slot auction. However, by Q1 2022, the excitement around the ecosystem steadily declined.

To spark excitement, Polkadot needs a spark, perhaps driven by parachains or protocols built on top of parachains. Protocols need to develop new primitives leveraging cross-chain architecture and XCM communication. Developing new features and use cases will demonstrate the power of the network and organically attract users.

In addition, users in the network often complain about the complexity of the Polkadot JS wallet. As of the end of Q1 2022, multiple projects are developing Polkadot ecosystem wallets, including Talisman, SubWallet, Nova, and Polka Wallet.

Finally, there is a knowledge gap around Polkadot. The uniqueness of its architecture leads to some common questions and frequent comparisons to other open economy ecosystems. There is a growing marketing and education effort underway to help users combat common misconceptions, and Polkadot could benefit from this.

The Road Ahead

Polkadot’s launch process began with the Relay Chain genesis block in May 2020 and concluded with the launch of parachains in December 2021. In the first quarter of 2022, Polkadot implemented a number of post-launch developments and optimizations that are expected to continue into 2022.

Arguably, the biggest area of focus has been the construction of Polkadot’s Cross-Consensus Message Format (XCM). XCM is a communication language that allows parachains to exchange messages with other parachains, similar to inter-chain communication (IBC) on Cosmos. Polkadot's canary network Kusama has been testing a light client version of XCM, called HRMP. XCM is expected to be implemented on Polkadot in the second quarter of 2022. *Update, Polkadot co-founder Robert Habermeier tweeted on April 17, 2022 that XCM will be launched on Polkadot during the next runtime upgrade. (Note: XCM was launched on Polkadot on May 4, see "Polkado launches XCM, entering the era of parachain cross-chain communication!")

Another key area of focus is the launch of parathreads. Parathreads are pay-as-you-go parachains. Instead of always connecting to the Relay Chain like a parachain, a parathread pays for the security and interoperability of the Relay Chain as needed. Parathreads are useful for projects that do not wish to acquire a full parachain slot or for existing parachains that no longer need a dedicated parachain slot.

Finally, developers will continue to optimize the performance of the network. One of the major performance upgrades will come from Asynchronous Backing. It will allow parachains to build blocks simultaneously with the Relay Chain and reduce block times from 12 seconds to 6 seconds. Other protocol updates are also in development.

Summary

The big story of 2021 was the launch of parachains. The launch of parachains brought all-time highs in prices, user accounts, and parachain slot auction contributions. Unfortunately, the frenzy was short-lived, and by Q1 2022, each of these metrics experienced month-over-month declines.

During the same period, the underlying KPIs remained stable. Polkadot maintained a healthy validator distribution in terms of total collateral, developer activity remains the most active in the crypto ecosystem, and users continue to hoard tokens, showing a certain interest in the ecosystem.

Q2 2022 was characterized by more parachain launches and the launch of XCM. To gain more market share, Polkadot needs parachains, or protocols built on parachains, that develop unique use cases using XCM and cross-chain architecture. Since parachains were only launched 4 months ago, they are still in their early stages.