Polkadot 2.0 Rebirth: An Overview

Key Insights

• Polkadot 2.0 addresses high entry barriers and resource inefficiencies with Agile Coretime, Elastic Scaling, and Asynchronous Backing. The current slot auction model, where parachains rent blockspace for up to two years, will be replaced with more flexible on-demand and bulk models for purchasing blockspace.
• After much debate, the community has decided to burn coretime revenues, introducing a second burning mechanism to the token. However, because already purchased slots will only run out within the next two years, revenues burned could be very low initially, and inflation will only increase gradually.
• The Polkadot ecosystem, with 50 parachains, saw 7 million unique user accounts and 39 million transactions in Q2 alone. Over the past year, active accounts grew by 35.29% and transactions by 55.85%.
• Since the introduction of OpenGov in June 2023, the number of Treasury referenda has surged by 2042%. In April 2024, the monthly number of referenda peaked at 149. With OpenGov, the last centralized decision-making bodies were removed, and even Treasury spend is decided via on-chain referenda.
• In December of 2023, the Web3 Foundation launched the Decentralized Futures Program, committing $20 million USD and 5 million DOT tokens to support Polkadot-focused individuals and teams. The program aims to foster the development of new, self-sustaining projects within the ecosystem.

Primer

Polkadot (DOT) features a modular architecture with pooled security, community-focused governance, and native interoperability. Its core components include the Polkadot SDK, Polkadot Chain, and Polkadot DAO. With the Polkadot SDK, developers can access modules and libraries to build custom blockchain projects. The Polkadot Chain already supports over 500 applications, backed by $6 billion in shared economic security, on-demand computing space, and inter-application communication. All of this is supported by an on-chain DAO, which ensures transparent, decentralized decision-making and upgrades.

At the heart of this architecture is the Polkadot Chain (aka Relay Chain), which employs a Nominated Proof-of-Stake (NPoS) consensus mechanism and has its state machine compiled to WebAssembly (Wasm). With the feature completion of Polkadot 1.0 in July 2023, the community is now preparing for the next iteration, which it has officially dubbed “Polkadot 2.0.”

Polkadot 2.0 introduces a flexible, on-demand blockspace model, eventually replacing the previous slot auction system. Key features include Async Backing, Elastic Scaling, and Agile Coretime, facilitating faster transaction processing and lowering entry barriers for new projects. The upgrade opens opportunities for innovative projects and use cases while supporting greater decentralization, evidenced by a 2042% increase in treasury referenda since the transition from Gov V1 to OpenGov. This report will explore these technical upgrades, their impact on tokenomics, and the current ecosystem, including upcoming parachain projects.

Technical Upgrades

Polkadot 2.0 introduces a dynamic and flexible economic model for managing computational resources through three technical upgrades:

• Agile Coretime,
• Elastic Scaling, and
• Asynchronous Backing.

These enhancements enable Polkadot to function similarly to Amazon Web Services (AWS) or Azure, where storage and computing capabilities are purchased, allocated, and scheduled to scale dynamically based on business needs, these upgrades offer comparable benefits to blockchain projects. High-demand projects will be able to execute more transactions in the same amount of time, increasing their revenue, while early-stage projects will only pay for coretime as needed. This combination of technological advancements provides flexible, scalable resources that adapt to the demands of various onchain projects, enhancing their performance and efficiency. Collectively, these features position Polkadot as a Web3 cloud computer, capable of seamlessly adapting to varying demands.

Polkadot 1.0's security and operational framework for parachains relies on a leasing model. This system requires parachains to secure slots through competitive auctions, committing substantial DOT collateral for up to two years. While this model ensures security and operational continuity, it presents significant barriers to entry for smaller projects and often leads to suboptimal resource utilization. For example, the uniform twelve-second block production interval across all parachains could lead to resource wastage during low activity periods by producing underutilized blocks, and cause congestion during peak times by limiting transaction processing capacity.

Agile Coretime

Agile Coretime addresses these inefficiencies by enabling the dynamic allocation of computational resources, aligning resource availability more closely with actual network demand. This adaptive approach ensures that resources are not only more efficiently used but also more accessible to a broader range of projects. It enables scale and agility, making it cost-effective for new developers to build on Polkadot, without compromising security or decentralization.

Agile Coretime Architectural Components

Agile Coretime unlocks efficiency by leveraging several key components:

• Core: A core represents a virtual computational unit on the Polkadot Chain, dedicated to processing transactions and executing smart contracts for assigned parachains.
• Coretime: Coretime is the duration during which a parachain has access to a core on the Polkadot Chain, crucial for processing transactions and executing blockchain functions. This component is vital for ensuring that parachains have the computational resources needed for smooth and uninterrupted operations.
• Coretime Chain: The Coretime Chain, a specialized system parachain within Polkadot, manages the allocation and administration of coretime. It oversees all related transactions, from initial purchases to renewals and redistribution, employing advanced algorithms to schedule computational tasks efficiently across the network’s available cores.
• Polkadot Chain (aka Relay Chain): The Polkadot Chain serves as the central hub of the Polkadot network, handling security, consensus, and cross-chain interoperability. It plays an essential role in the Agile Coretime framework by hosting the dynamically allocated cores that perform consensus, validation, and execution tasks for the parachains. The Polkadot Chain's functionality is critical for managing the overall core allocation architecture, ensuring that coretime is distributed both efficiently and equitably among parachains.

Purchasing Coretime

Agile Coretime offers two primary methods for purchasing coretime through the Coretime Chain or via secondary markets:

On-demand Coretime Purchasing

This method allows projects to acquire blockspace on an as-needed basis, ideal for accommodating new projects with low or irregular demands, such as development testing or fluctuating application activity. The pricing for on-demand coretime is dynamic, responding in real-time to changes in demand and network resource availability to ensure cost-effectiveness and resource efficiency.

Bulk Coretime Purchasing

Designed for projects with consistent computational needs, bulk coretime provides stable and predictable resource allocation. It is purchased for set periods, up to 28 days in advance, and represented as non-fungible tokens (NFTs), facilitating operational reliability and economic predictability. Transactions occur within scheduled sales windows on the Coretime Chain, where resources can be secured at a fixed price or through a Dutch auction during the Price Discovery phase. Renewal prices are capped to ensure cost predictability. Renewal periods enable parachains to extend their allocations, maintaining resource continuity before returning to the market.

Elastic Scaling

Elastic Scaling, building upon Agile Coretime, addresses the limitations of the single-core model and improves the management of computational resources on Polkadot. By enabling parachains to utilize multiple cores within the same Polkadot Chain block, Elastic Scaling increases network throughput and handles higher transaction loads efficiently. While Agile Coretime facilitates dynamic resource allocation to align with network demand, Elastic Scaling optimizes this process through concurrent processing capabilities. This ensures that projects can scale seamlessly as demand grows, preventing bottlenecks and enhancing performance.

Multiple Core Utilization

Elastic Scaling enables parachains to leverage multiple cores within a single Polkadot Chain block, increasing transaction processing capabilities. Each core functions as a virtual server, independently processing and validating blocks from various parachains. By distributing computational tasks across multiple cores, Elastic Scaling ensures the network can manage higher transaction volumes without bottlenecks.

Parablock Validation and Inclusion

The simultaneous processing of multiple parablocks, which are the blocks produced by Polkadot's parachains, enhances network throughput by validating and checking the alignment of state roots during inclusion in the Polkadot Chain. The Polkadot Chain receives a sequence of parachain blocks across multiple cores and treats these blocks as unrelated during backing, availability, and approval processes. This approach allows for parallel processing.

Collator Infrastructure and Throughput

The overall throughput of a parachain depends on its collator infrastructure's capacity to produce multiple parablocks within required timeframes. Collators must increase their production rate to match the Polkadot Chain's enhanced processing capabilities. This necessitates improvements in the technical specifications of collators, ensuring they can generate and submit multiple blocks efficiently.

Phased Implementation

The initial implementation phase focuses on parachains with a trusted or permissioned collator set, allowing multiple cores' use without altering the candidate receipt process. This phase establishes the foundation for subsequent enhancements, ensuring system stability and reliability.

In later phases, enabling the use of untrusted or permissionless collator sets will involve modifications to the Cumulus framework. This framework provides the necessary infrastructure for parachains to operate on the Polkadot network.

The final phase will achieve full integration with Cumulus, allowing parachains to continuously access multiple cores and fully utilize Elastic Scaling benefits.

Technical Considerations and Challenges

The Polkadot Chain must efficiently manage the increased complexity of processing multiple blocks concurrently, ensuring validation, availability, and approval within the required timeframes. Implementing Elastic Scaling involves technical considerations and challenges, including collators enhancing their infrastructure to meet higher production demands. The phased implementation approach helps mitigate potential risks by gradually introducing changes and allowing for extensive testing and optimization. This ensures the network can adapt to the new system without compromising integrity or performance.

Asynchronous Backing

Asynchronous Backing optimizes the process of block generation and validation by enhancing the efficiency and throughput of parablocks. It reduces block time by half, from twelve to six seconds, enabling parallel transaction validation and block production, delivering up to 10x higher throughput for Polkadot’s parachain consensus protocol and allowing for the storage of four times more data within each block. This results in faster and more efficient transactions, lower fees, and the ability to support more complex and data-intensive applications, attracting more users and developers to the network.

Parablock Generation and Backing

Collators on the parachain side generate parablocks, which are then sent to validators on the Polkadot Chain for backing. Backing is the process by which these parablocks are verified by a subset of validators or backing groups. This verification is essential for ensuring the initial censorship resistance of parablocks. However, backed parablocks are not guaranteed to be valid, as they need further validation. Once backed, these parablocks are sent to other validators for inclusion in the Polkadot Chain. Candidate receipts, rather than the full parablocks, are included in relay blocks to simplify the process.

By breaking down the complex task of block validation into distinct steps (generation, backing, and inclusion), the network ensures that blocks are consistently checked for censorship resistance and validity. This layered verification process minimizes the risk of invalid transactions entering the Polkadot Chain, thus maintaining the network's integrity and reliability. Moreover, using candidate receipts instead of full parablocks reduces the data load on the Polkadot Chain, optimizing storage and processing capabilities, which is crucial for scaling the network to handle a higher volume of transactions.

Asynchronous Backing Mechanism

Asynchronous backing decouples parablock generation from the strict timing constraints of synchronous backing. It allows parablocks to be included every six seconds, doubling the throughput or halving the latency compared to synchronous backing. This process permits collators to utilize up to two seconds of execution time per parablock, significantly increasing the data that can be included in each block. Collators can submit parablocks in advance using additional context from the unincluded segment, improving overall block production efficiency.

Pipelining and Multiple Core Utilization

Asynchronous backing introduces pipelining, enabling collators to generate multiple parablocks concurrently. Parablocks can be backed and included within the same Polkadot Chain block, allowing for parallel processing. This approach enhances network throughput by validating and checking the alignment of state roots during inclusion in the Polkadot Chain. Multiple cores can be utilized within a single Polkadot Chain block, increasing Polkadot’s transaction processing capabilities.

State of Polkadot Tokenomics

DOT Introduction

The DOT token functions as Polkadot's native token and is utilized for the following purposes on the network:

1. Governance
2. Staking or nominating to secure the network
3. Bonding to connect a parachain to the Polkadot ecosystem
4. Paying transaction fees

There are over 1.3 million onchain wallets, representing DOT holders who have full decision-making power over Polkadot. Through OpenGov, the world’s most advanced governance platform, any DOT holder can submit and vote on proposals that determine the platform's direction, including setting network fees, adding or removing parachains, and addressing events like upgrades and fixes, which are automatically executed onchain once approved. OpenGov is the only governance system that has fully autonomous enactments, a fully decentralized group of decision-makers, and the ENTIRETY of decisions running onchain. This includes decisions about marketing, product, developments, and upgrades—even the DAO Treasury runs onchain.

DOT holders can also choose to stake with Polkadot’s Nominated Proof of Stake (NPoS) to secure the network. In NPoS, DOT stakers or nominators can earn rewards by backing validators they trust and putting their DOT tokens at risk. Validators then assume the role of producing new blocks, validating parachain blocks, and guaranteeing finality. In the event a validator misbehaves in the network, both the validator and their nominators get slashed and lose a percentage of their staked DOT. Staking with Polkadot requires a minimum of just 1 DOT, making it accessible for a wide range of participants to contribute to network security.

As discussed above, parachains must lock up or bond their bidded amount of DOT during their slot lease to secure slots. DOT tokens are reserved and later returned once the lease expires and the parachain is removed. Chains pay for the parachain slot by forfeiting the opportunity to earn staking rewards. This mechanism will be phased out with the introduction of Agile Coretime.

Lastly, DOT is used to pay network fees on the Polkadot Chain. The inclusion fee is a mandatory charge for processing a transaction. It consists of three parts:

• Base Fee: The minimum amount a user pays for a transaction, covering basic overhead costs, like signature verification.
• Weight Fee: A fee proportional to the execution time (input, output, and computation) that a transaction consumes.
• Length Fee: A per-byte length fee for the transaction size.

These fees are combined to form the total inclusion fee, which is then adjusted based on network congestion to form the final inclusion fee. Of the inclusion fees paid, 20% are given to the block author and 80% to the treasury. Tips are also an optional transaction fee that users can include. They are separate from the inclusion fee and serve as an incentive for block authors to prioritize a transaction. The entire tip is given directly to the block author.

DOT has an uncapped maximum supply, with a current circulation of 1.4 billion DOT as of writing June 2024. 38.3% (560.9 million) of the supply is circulating while 59% of tokens are staked (863.1 million) and another 2.7% (26.5 million DOT) are vesting or are locked in crowdloans and nomination pools. Crowdloans, which will be eventually retired with the introduction of Agile Coretime, are a mechanism for parachains to source DOT from the community to bid on a parachain slot. Nomination pools are a staking feature that allows nominators to pool their DOT tokens together to nominate validators and receive rewards. DOT tokens locked in these mechanisms cannot participate in governance.

Inflation Model

To incentivize network participation and provide funds for the treasury, rewards are provided through a 10% annual inflation rate on the total DOT supply. This inflation rate can be updated through onchain governance. The inflation rate is allocated between the treasury and validators and nominators. The percentages assigned to each change are based on the proportion of DOT staked, as shown in the graph below.

There is a dynamic ideal staking rate the network tries to maintain. When the current staking rate equals the ideal rate, all inflation rewards go to the validators and nominators. When the current staking rate is less than or greater than the ideal rate, there is a “staking inefficiency,” and a proportion of funds are redirected to the treasury. When the current rate is less than the ideal rate, the rate of return to stakers increases faster and incentivizes network participants to stake. When the current rate is more than the ideal rate, the rate of return to stakers decreases faster and disincentivizes network participants to stake.

Currently, the ideal staking rate depends on the number of active parachains, excluding system parachains, and can vary between 55% and 75%. It is determined by 0.75—minimum of (auctioned_slots, 60) / 300, where auctioned_slots is the number of filled slots that have been leased out, excluding the three system parachains: Asset Hub, Bridge Hub, and Collectives.

New Burning Mechanism

Since the introduction of Agile Coretime, there has been debate across the Polkadot community on how coretime revenues should be spent. In July 2023, a Request for Comments (RFC) was initiated to burn all coretime revenues. This RFC has since passed with 100% majority voting in support.

This RFC stipulated that treasury inflows should not depend on fluctuating coretime sales and that a steady inflow of funds to the treasury is a fundamental assumption in burning coretime revenues. A related forum post outlined a change to the inflation model where the treasury receives at least 20% of the annual inflation when the ideal staking rate is achieved (80% of the 10% inflation goes to NPoS participants) shown above. This proposal would lower staking rewards from 16.67% to 13.33% at the ideal staking rate (assuming the ideal staking rate is 60%).

Additionally, there have been discussions to reduce the total maximum inflation from 10% to 8%. If passed alongside the minimum inflation to the treasury, staking rewards would fall to 10.67% at the ideal staking rate (assuming the ideal staking rate is 60%).

Burning coretime revenues will be the second burning mechanism introduced to Polkadot. The treasury, which is funded through transaction fees, staking inefficiencies, and slashing, burns 1% of its available funds every spend period (every month) and uses the remaining funds for treasury proposals and bounties approved by governance.

However, revenues burned by coretime are expected to be small at first. This is because the network must still honor the current lease periods (the last lease will expire almost two years from now, in May 2026). It is expected that once coretime is introduced and auctions stop, the number of cores that will need to be paid for will gradually increase as roughly seven slots unlock every 84 days (~3 months), as shown above.

Ecosystem Development Overview

Current Parachain Ecosystem

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Parachains

At the end of Q2, the total transaction volume averaged 16.5 million monthly, increasing by 12% QoQ. Compared against Q1, the top four parachains by transaction volume were Nodle (7 million up 1,556%), Phala (3.8 million down 13%), Neuroweb (1.9 million down 4%), and Moonbeam (582,000 down 78%).

A notable development is Frequency, a parachain specializing in SocialFi infrastructure. It is the first to build on the open-source protocol DSNP, increasing its transactions from 86,500 at the end of Q1 to 5 million by the end of Q2. Frequency attributes this spike to migrating social media users' social graphs onto the DSNP blockchain. These users are primarily from Frequency’s partner social network, MeWe.

Along with steady transaction growth, the network recorded 1.1 million active accounts and 21 million unique accounts. Over the past year, the Polkadot ecosystem has seen a 35% increase in active accounts and a 56% increase in the number of transactions.

Moonbeam, which had 248,000 active accounts in Q1, decreased to 51,000 accounts by the end of Q2, reflecting a 79% QoQ decline. Nodle remained relatively stable, with 66,000 active accounts in Q1, slightly decreasing to 62,000 (-5% QoQ). Astar saw a decline, with active accounts dropping from 24,000 in Q1 to 15,000 (-39% QoQ) by the end of Q2.

Upcoming Projects

In addition to the ecosystem projects mentioned above, six new initiatives are set to launch on Polkadot. They target key industries such as blockchain gaming entertainment, decentralized infrastructure, cloud computing, multichain account management, enterprise integration, and decentralized fundraising.

Mythical

Mythical is a game technology company that enables developers to integrate blockchain-based play-to-earn economies into their games. In 2023, Mythical Games announced it is migrating from Ethereum to Polkadot and launched the Mythos ecosystem DAO. It aims to simplify and democratize Web3 gaming, allowing players and creators to participate through its blockchain ecosystem and DAO. Mythical Games, the initial contributor and supporter of Mythos, uses MYTH as its native utility token on the Mythical Chain and marketplace, with a total fixed supply of 1M tokens. It supports flagship titles like NFL Rivals and Nitro Nation World Tour, and recently announced a partnership with Pudgy Penguins for the development of a new game on Mythical.

Peaq

Peaq is a Layer-1 blockchain designed to support entrepreneurs and developers in creating applications for Decentralized Physical Infrastructure Networks. It includes over 25 projects, with more than 500,000 connected devices that can be deployed on land, sea, sky, or space. It scales to 10,000 transactions per second (TPS), aiming to exceed 100,000 TPS post their V1 upgrade, with transaction costs around $0.00025. Peaq accommodates both EVM and WASM smart contracts and provides functionalities such as machine IDs, role-based access control, and data verification through its JavaScript SDK. It integrates with Polkadot, bridges to Ethereum, and connects with over 30 blockchains.

Acurast

Acurast is a Layer-1 blockchain connecting Web2, Web3, and IoT projects via a decentralized serverless cloud. It features a global compute layer powered by over 5,000 onboarded mobile devices. Consumers who need computational resources can outsource tasks to processors—individuals offering their devices' computational power. Acurast extends existing Web2 apps into the Web3 space, similar to Amazon Lambdas or Google Cloud Functions, allowing them to interact with its serverless cloud.

InvArch

InVarch aims to address chain abstraction with its Multichain Account Abstraction Hub, designed for decentralized operations and financial management across all blockchains. It provides individuals, organizations, and DAOs with a single account to manage assets and execute transactions on any network. Key features include gasless transactions for DAOs, dynamic multisig accounts, and Git-compatible NFT primitives. The VARCH token is the network's utility token for governance, deploying multi-sig and DAO accounts, DAO staking, and smart contract deployment on the InvArch EVM. It has a genesis supply of 1 billion tokens, with a 10% annual inflation rate allocated to the network, its community, and development funding.

Mandala

Mandala is an upcoming Layer-1 that aims to integrate government and enterprise applications with public and retail use, beginning in Indonesia. It aims to provide features like decentralized identity verification, cross-chain communication, scalability, governance, interoperability, and privacy protection. The chain is built on Polkadot's Substrate framework, which uses the Rust programming language. The Kepeng Coin (KPG) is the native token of the network and is used for governance and staking to secure the network.

Polimec

Polimec is designed to enable project funding in a decentralized, transparent, and regulatory-compliant way. All users on the chain undergo a KYC/AML process in order to use the platform. Issuers that need to raise capital for their project will complete a funding application, which includes information about the whitepaper, team, usage of funds, and funding round specifications. Evaluators can then perform due diligence on the project and bond Polimec tokens, PLMC, to the project. If enough PLMC tokens are bonded, then the funding round can begin, where all participants get access to fund the project. Participants that supported the project will then get a portion of the project’s mainnet token at launch.

Expanded Decentralization Efforts

Polkadot's original governance framework, Governance V1, included the Council, Technical Committee, and Referendum Chamber. However, it lacked direct community control and thorough technical review, as decision-making was primarily managed by the Council and Technical Committee.

To address these issues, Polkadot transitioned to OpenGov in 2023, prioritizing the community in decision-making. OpenGov introduced a structured referendum process that allows multiple referenda to run concurrently. It also converted the Council and Technical Committee into the Fellowship, a developer DAO. This shift allowed DOT token holders to be responsible for the entirety of governance decisions, including Treasury spend.

Since introducing OpenGov in June 2023, the number of approved Treasury referenda has increased by 2042%. As of July 2024, 557 referenda have been approved under OpenGov compared to 26 under Gov V1. The number of monthly voters peaked at 1,747 in March 2024, while the number of referenda hit its highest value at 149 in April 2024.

Since December 2023, The Web3 Foundation has supported individuals and teams as they launch new self-sustaining initiatives aimed at growing the Polkadot ecosystem. The goal of the Decentralized Futures Program, which distributes $20 million USD and 5 million DOT tokens, is to kickstart teams & initiatives driving Polkadot’s success. The Foundation also provides grants for open-source software development and research related to Substrate, Polkadot, Kusama, and Ink!, with all grants tracked on GitHub.

Closing Summary

In summary, Polkadot (DOT) has addressed its historical challenges of high entry barriers for smaller projects due to the auction format for parachain slots and substantial DOT locking. Larger projects often outbid smaller ones, securing slots and prioritizing their inclusion. The fixed 12-second block production time also led to inefficient resource use, causing empty blocks during low traffic and congestion during high traffic. To solve these issues, Polkadot 2.0 introduces Agile Coretime, Elastic Scaling, and Asynchronous Backing. These updates cut block time to six seconds, enable on-demand and bulk coretime purchases, efficient multi-core usage, and level the playing field for all parachains.

DOT, Polkadot's native token, is used for governance, staking, bonding parachains (which will be depreciated), and paying transaction fees, supported by a 10% annual inflation rate. With the Agile Coretime upgrade coming soon, there have been many community discussions about what to do with coretime sale revenues. A recent RFC was taken to burn all revenues, which introduces a secondary deflationary mechanism to DOT. However, because it will take up to two years to fully depreciate the slot auction mechanism, revenues burned could be very low at first.

Post conversion from Governance V1 to OpenGov, the number of referenda has surged by 2042%. Also, The Web3 Foundation has launched a new Decentralized Futures Program, already supporting 18 projects to grow the Polkadot ecosystem. With the goal of kickstarting self-sustaining projects to drive Polkadot’s growth, they plan to distribute $20 million USD and 5 million DOT tokens to individuals and teams building new initiatives on the network. Mythical, Peaq, and Acurast are among the six new projects Polkadot has announced, targeting various sectors, including blockchain gaming, decentralized infrastructure, and cloud computing.

Polkadot's technological advancements, updated tokenomics, and community-driven governance are set to improve scalability, reduce costs, increase network speed, and encourage the growth of decentralized applications on the network.