Parachain

Polkadot: How parachains are changing a blockchain-centric ecosystem

Parity chief marketing officer Peter Ruchatz discusses the ins and outs of Polkadot’s focus on interoperability at Token2049.

Smart contract blockchains have played a pivotal role in creating wide-ranging functionality after the advent of Bitcoin in 2009. Ethereum led the way in this regard, but innovative technology stacks like Polkadot have brought a new paradigm to the sector.

It’s been just less than a year since Polkadot’s Relay Chain went live in December 2021, and the platform’s ecosystem continues to grow as interest in Web3 increases across the world. Polkadot shares an intrinsic link to Ethereum given that its creator Gavin Wood played a role as a co-founder of the preeminent smart contract platform some seven years ago.

Cointelegraph explored the burgeoning Polkadot ecosystem in a wide-ranging conversation with Parity Technologies chief marketing officer Peter Ruchatz during the Token2049 conference in Singapore in September 2022. From inception to its growing use cases, the parachain-pioneering Polkadot ecosystem suggests that blockchain technology will continue to evolve through interoperable systems.

*Parity CMO Peter Ruchatz at the Polkadot exhibit at Token2049 in Singapore.*

As a starting point, Ruchatz agreed that Polkadot and its older proof-of-stake (PoS) siblings Ethereum and Cardano are in a state of harmony, co-existing despite providing similar blockchain-based use cases to decentralized applications (DApps) and projects running on their infrastructure.

Ruchatz highlighted the disruptive nature of the fundamentally new technology that influences various industries, drawing parallels to how Amazon Web Services powers Netflix while the end-user is oblivious to the underlying cloud technology:

“I think we are again at an inflection point and at that early stage in a technology shift, you have many experiments, many emerging platforms and approaches and the shakeout will happen over time. Sometimes you continue having five leading, maybe three leading or hopefully just one leading platform and it gives options and choices.”

There are fundamental differences between the concepts, opportunities and value propositions of Ethereum, Cardano and Polkadot, and Ruchatz believes a major hurdle is articulating and educating people on why each project is useful. In the case of Polkadot, the potential use cases and needs of its parachain functionality are important to consider.

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Polkadot’s Relay Chain is a major attraction to potential users, according to Ruchatz, with the base layer providing a means to create custom blockchains with their own tokenomics or business parameters to suit specific needs.

This is a draw card that he believes differentiates the platform from other general-purpose, “one size fits all” blockchain protocols like Ethereum, Avalanche, Cardano and Solana, which Ruchatz suggested cater more toward building DApps and smart contract functions and services:

“If you truly want to innovate and explore a completely new industry or use case and have the appetite to build something revolutionary, something new and build for the long term, you cannot not build your own blockchain.”

Compounding effects

Polkadot’s signature parachains are separate blockchains that run in parallel while achieving consensus and security through the network’s base Relay Chain. This differs from other smart contract blockchains like Ethereum and Cardano, which need to facilitate all transactions, smart contract and DApp activity on a single chain or through layer solutions.

As Ruchatz explained to Cointelegraph in Singapore, Polkadot provides the foundation, security mechanisms, validations and consensus through the Relay Chain. Developers make use of the ecosystem’s software development kit (SDK) Substrate to develop proprietary blockchains that are able to work in tandem with the wider ecosystem.

Parachains benefit from each other by importing functionality from other parachains that have been built, allowing the use of code from other parachains on a blockchain level:

“Another thing which we now see happening with so many parachains live is a compounding effect, a synergistic effect, because of Polkadot’s architecture with interoperability and upgradability. We’ve upgraded the runtime already many, many times. I think no other system can do it.”

This collaborative ecosystem is a key driver of new users, according to the Parity chief marketing officer, with use cases emerging that have the potential to disrupt centralized products and services currently being used by the wider public around the world:

“A good example is the KILT protocol which is building an authentication service disrupting DocuSign. That alone is a big use case however the edification is something that other parachains don’t need to rebuild anymore.”

Ruchatz also highlighted innovations like NFT 2.0, programmable nonfungible tokens (NFTs) that pull cross-chain composable architecture from multiple chains, as well as blockchain-based music marketplaces competing with the likes of “Napsters or Spotify.” The team at Merklebot has even built a Polkadot-connected DApp to connect and control Boston Dynamics’ Spot mobile robots.

Interoperability and Ethereum

Ethereum’s highly-anticipated move from proof-of-work (PoW) to PoS consensus finally came to fruition in September 2022. With interoperability part of Polkadot’s DNA, Ruchatz said that connecting to Ethereum in certain ways was being looked into by some ecosystem participants:

“We are excited to see Ethereum finally join the proof-of-stake club. They still have a long way to go and have solved just one of their challenges. Nevertheless, this opens up collaboration and interoperability and we have some parachains teams that are exploring that already. We don’t want to be a closed shop.”

Part of the focus on interoperability and parachain functionality is part of a broader philosophical goal of the Polkadot ecosystem to become what Ruchatz described as “unstoppable.” A clear commitment to decentralization and transparency in governance structure has been central to Wood’s goal for Polkadot to achieve “coded democracy,” as Ruchatz explained:

“It goes as far as saying that Parity and the Web3 Foundation should be redundant at one point and become obsolete. We want the community to carry Polkadot forward and make it something that cannot be stopped by any government or central institution because it is truly decentralized.”

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Polkadot had a strong presence at Token2049 in Singapore, with a large staging area showcasing different parachain projects that are building in the ecosystem. The Asia-Pacific region is also home to a number of parachain development teams, with a healthy community acting as ambassadors for the ecosystem.

This was evident at the Polkadot exhibit, as the different parachains teams present had a chance to mingle and share thoughts and ideas with other projects that are interwoven into the parachain-powered ecosystem.

Polkadot ‘cup and handle’ setup sees DOT price 50% higher by September

DOT could witness an increase in demand after Polkadot’s launch of an intercommunication blockchain tool.

Polkadot (DOT) looks ready to extend its ongoing price recovery due to a classic bullish pattern forming on its daily chart.

DOT paints “cup and handle” pattern

Notably, DOT has been forming a “cup and handle” pattern since mid-June, confirmed by its price crashing and recovering in a rounding, U-shaped trajectory (cup), followed by the development of a trading range on the right-hand side (handle).

*DOT/USD daily price chart featuring “cup and handle” breakout setup. Source: TradingView*

Cup and handle patterns are typically bullish continuation setups that form during an uptrend. But in rare cases, they appear at the end of a downtrend, leading to a bullish price reversal. As a result, the possibility of DOT continuing its price recovery seems high.

Thus, from the technical perspective, DOT initially eyes a breakout above its cup and handle’s resistance line near $8.50.

A decisive close above the resistance line, i.e., a breakout move accompanied by a rise in volume, could have DOT eye approximately $12 as its upside target by September, up more than 50% from Aug. ‘s price.

Polkadot price breakdown setup

However, DOT’s road to $12 risks exhaustion due to the presence of key technical resistance levels midway.

For instance, the Polkadot token could run into its 100-day simple moving average (100-day SMA; the purple wave) near $9.50 only to pull back toward $8.50. This outlook takes cues from DOT’s price retreat on July 31 from the same wave resistance (highlighted by a circle sign below).

*DOT/USD daily price chart. Source: TradingView*

Meanwhile, a breakdown below the cup’s curvy support could invalidate the bullish cup and handle setup altogether.

As a result, DOT could risk an extended price correction toward $6.25, which has been serving as support since June 13 against multiple downturns. In other words, DOT could drop by nearly 20% from Aug. 2’s price at most by September.

Polkadot network metrics show stability

Along with the broader market, Polkadot experienced a sharp decline in its market capitalization mainly due to macroeconomic turbulences . As of Aug. 2, the project’s net valuation was $7.92 billion versus its record high of $55.51 billion in November 2021.

In comparison, Polkadot’s network metrics are healthier. For example, it saw 145,000 monthly users in Q2/2022 versus 149,000 monthly users in Q1/2022, according to Messari’s quarterly DOT report in July.

*Polkadot account and transfers. Source: Messari/Subscan*

Similarly, DOT transfers remained almost the same quarter over quarter, averaging 293 million per month in Q2 versus 288 million in Q1. Interestingly, the peak accounts and transfers’ readings in November 2021 were due to inaugural parachain auctions.

Stable network activity underlines a consistently organic demand for DOT tokens. Nonetheless, it remains substantially down from all-time-highs, meaning Polkadot would need to do more to attract new projects for its parachain-enabled network.

XCM launch and grant

Nicholas Garcia, a researcher at Messari, says that Polkadot could gain more adoption with its Cross-Consensus Message Format (XCM). This recently-launched tool allows parachains to relay messages to one another.

“Developing new functionality and use cases will showcase the power of the network and may reignite user interest and activity,” Garcia noted, adding:

“Polkadot must continue onboarding parachains and connecting them with XCM.”

The Web3 Foundation, which oversees grants on Polkadot, approved 415 projects in late July, ranging from development tooling and wallets to smart contracts and user interface development. The move ensures further potential demand for DOT.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.