3 possible reasons why Polkadot plays a minor role in the Layer 1 race

The year 2021 has been something of a “coming of age” for many Layer One (L1) blockchain protocols, as the growth of decentralized finance (DeFi) and non-fungible tokens (NFTs) forced users to look for solutions beyond Ethereum (ETH) ) network, where high fees and network congestion continued to be obstacles for many.

logs like Fantom (FTM), Avalanche (AVAX) and Cosmos (ATOM) saw their tokens soar in value and ecosystems thrive as 2021 drew to a close. Meanwhile popular projects like Polkadot (DOT) They underperformed comparatively, despite the high expectations many had of the fragmented multi-chain protocol.

Graphic with the daily performance of FTM, AVAX, ATOM and DOT. Source: TradingView

Aside from the specific capacity each protocol offers in terms of transactions per second and execution time, here are a few factors that may have played a role in DOT’s lagging performance compared to other Layer 1 competitors.

Interoperability is a key factor

3 possible reasons why Polkadot plays a minor role in the Layer 1 race
3 possible reasons why Polkadot plays a minor role in the Layer 1 race

One of the main topics of 2021 was interoperability between isolated blockchain networks, Being a bridge to Ethereum is the most important connection as most of the projects are currently running on this network.

Protocols like Fantom, Binance Smart Chain, Avalanche and Harmony developed cross-chain bridges and this led to a notable increase in their token price, total locked value and on-chain activity.

Although Polkadot was specifically designed to offer multi-chain support as a “layer-zero” meta-protocol, 2021 saw no major launch of a bridge connecting Polkadot to Ethereum and this left the protocol unloved by crypto traders looking to participate in the DeFi and NFT markets.

Cosmos also didn’t see a major bridge connecting its ecosystem to Ethereum, but there were minor integrations like the addition of Ether as a collateral deposit on Terra that showed cross-chain compatibility was possible.

The late start of parachain auctions

At the end of 2021, all of the above networks saw good activity and interactions between protocols, while the Polkadot projects were still finalizing their preparations for mainnet launch.

This was partly because the parachain auctions for Polkadot didn’t start until November 11th moonbeam (GLMR), an Ethereum-compatible smart contract parachain secured the top spot.

DOT saw its price surge to an all-time high of $55 on November 4th when those interested in contributing to the parachain auctions locked up their tokens, but by the time the auctions officially started their price had already dropped to a low of $23.28 on Jan. 10.

On January 11th Moonbeam has officially entered the Polkadot network and managed to accumulate over a million transactions as users were finally able to transfer ERC-20 tokens to the Polkadot ecosystem.

The price of DOT recovered slightly after the release of Moonbeam but has fallen below $25 again.

The benefits of holding DOT

A third factor that could weigh on DOT’s popularity and price is confusion over what the token is used for and the benefits it offers token holders.

Many of the competing networks use the native token to perform contractual actions such as token transfers or exchanges, while the protocols in the Polkadot ecosystem use their native tokens to pay for gas fees.

In addition to participating in parachain auctions, The main uses of the DOT token include staking to support network operations and security, and for use in governance votes.

While governance skills are important to the overall health of blockchain protocols, average cryptocurrency users haven’t shown much enthusiasm for voting, and are more interested in things like gaming, decentralized finance, and more, the NFTs.

Several Layer 1 solutions are launching incentive programs for developers and liquidity providers, and upcoming DeFi protocols continue to offer lucrative staking opportunities. Currently, the DOT token offers 13.94% APR for staking users, and that may not be enough to sate the appetites of yield farmers looking to get more bang for their buck.

Polkadot’s long-term prospects remain strong and the project has an active and committed community of supporters as well as an experienced development team led by Ethereum co-founder Dr. Gavin Wood.

The release of Moonbeam could mark a turning point for DOT as cross-chain compatibility is already underway and other parachain projects should be rolling out to mainnet soon, but it remains to be seen how long it will take for the network to catch up its Layer 1 competitors who have an advantage in cross-chain interactions and on-chain activity.

The views and opinions expressed herein 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 do your own research when making a decision.

Similar Posts