What is the token economics of DOT?

DOT is a dynamic-emission inflationary token with an unlimited supply. It is the native token of the Polkadot ecosystem.

Jan 27, 2023

Token economics (tokenomics) studies the design and implementation of blockchain-based tokens. Understanding token economics is crucial for anyone considering investing in or using a particular token.

This post covers the token economics of DOT, the native token of the Polkadot Ecosystem.

1. A quick introduction to Polkadot & DOT

Polkadot is not a conventional blockchain. It is actually an ecosystem of interconnected blockchain shards called parallelized chains (parachains).

Parachains are application-specific and they connect to and are secured by a single base platform called Relay Chain. They can also connect with external networks via bridges.

Relay Chain is the heart of Polkadot and is responsible for the network’s security, consensus, and cross-chain interoperability. It contains Polkadot's consensus and voting logic.

Parachains are "sovereign blockchains" with their own tokens and are optimized for specific use cases. Parachains need to pay for connecting to the Relay Chain.

Bridges are special blockchains that enable Polkadot shards to connect to external blockchains like Ethereum.

Did you know?

Polkadot was conceptualized by Ethereum co-founder Dr. Gavin Wood. He is also the inventor of the Solidity smart contract programming language.
Polkadot has an interesting history. It raised funds through an ICO in 2017. A hacker "froze" 66% of these funds within a few days of the raise!
Polkadot uses a hybrid consensus model which splits the "finality" gadget from the "block production" mechanism.
BABE (Blind Assignment for Blockchain Extension) is the block production mechanism that runs between the validator nodes. BABE determines the authors of new blocks.
GRANDPA (GHOST-based Recursive ANcestor Deriving Prefix Agreement) is the finality gadget. It is implemented for the Polkadot Relay Chain.

DOT is the native token of the Polkadot network.

Before 21 August 2020, DOT was denominated as in 12 decimal places. After 21 August 2020, DOT is denominated in 10 decimal places.

What I like best about Polkadot

The Polkadot network has a common set of validators for securing multiple blockchains.
Transactions are spread across multiple parallel blockchains.
Each parachain brings unique functionality and use cases to the Polkadot ecosystem.
Polkadot has the lowest carbon footprint among these proof-of-stake blockchains - Algorand, Avalanche, Cardano, Polkadot, Tezos, and Solana.

2. Issuance & Emission of DOT

Token issuance is the creation and distribution of tokens as part of a specific event or offering e.g. airdrop, ICO, reverse ICO, IEO, IDO, DAICO, ETO, STO, and SAFT. Token emission is the ongoing process of creating and releasing new tokens into circulation e.g. through mining or staking.

DOT is a dynamic-emission inflationary token with an unlimited supply.

The fund-raising so far:

Private Dutch Auction ICO (October 2017)
Public Dutch Auction ICO (October 2017)
SAFT (June 2019)
Private Sale (July 2020)

2. Utility

Tokens derive value from the utility of the network that they are used in. In other words, the value of a token is determined by how useful it is within the specific ecosystem in which it is used. This can be based on a variety of factors, such as:

the size and activity of the network,
the demand for the goods & services that can be purchased with the token, and
the perceived value of the network to its users.

As the utility of the network increases, the value of its associated tokens is likely to increase as well.

Use cases of DOT

Governance: DOT holders have complete control over the protocol including managing protocol upgrades and fixes.
Staking: Good validators are rewarded in DOT while malicious entities lose their stake.
Bonding: New parachains are added by bonding tokens and non-useful or outdated parachains are removed by removing bonded tokens.