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What is DOT Token and How Does It Work?    

Sambit Barua by Sambit Barua
September 16, 2021
in Finance
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What to Know

  • What Are the Key DOT Allocations?
    • Functions of DOT Token
      • Governance
      • Operations
      • Parachains Creation
      • Staking DOT?
      • Final Tip

The Polkadot network’s native token is called DOT. The system depends on it for a few things. DOT token is used to vote, table ideas, and bond. It may also be used as a payment mechanism.

In October 2017, the Web 3.0 Foundation collected $145 million in ETH via a token sale. A private sale raised almost $80 million, while a public auction garnered the rest.

Participants have to utilise a KYC system called the PICOPS to verify their identities (participants who couldn’t verify were disqualified). Due to regulatory issues, the transaction was not open to Chinese or American nationals.

What Are the Key DOT Allocations?

The network started with 10 million DOT tokens (old). A community vote later redenominated the original supply, increasing token account balances by 100 times.

Both DOT (old) and new DOT has the same allocations, which are as follows:

  1. 50% for token sale buyers
  2. 5% reserved for 2019 private sale investors
  3. 3.4% for 2020 token sale buyers
  4. 11.6 % kept by the Foundation for future fundraising
  5. 30% of Web 3 Foundation for immediate use in developing the Polkadot network and other Foundation initiatives

The overall supply is not fixed at 1 billion but, rather, decided by an inflationary model.

On Nov. 6, 2017, a vulnerability in the Parity multi-sig wallet exposed over 500,000 ETH, including $98 million from the Polkadot ICO. This money is presently locked, and whether it can be retrieved depends on the Ethereum community. No matter what happens, the Parity team believes it won’t affect their development strategy.

Tokens sold to an unidentified group of private investors were for a total of 500,000 old DOT (now worth 50 million new DOT). Polkadot reported previously that the initiative hoped to raise $60 million at a $1.2 billion value. As of June 2019, the platform had met its goal.

Functions of DOT Token

The duties of a DOT token in the Polkadot network are divided into three categories. They are:

Governance

DOT’s initial function provides holders complete power over the platform. The administrative component of this function includes determining network costs, parachain addition timelines, auction dynamics, and other significant events like platform maintenance and upgrades.

DOT holders will not be granted these functions formally but will be able to engage in governance due to Polkadot’s underlying technology.

Operations

DOT’s next purpose is to help build consensus on Polkadot. DOT holders keep the platform functioning smoothly. The platform intends to be functional and conduct legitimate transactions.

Polkadot will need DOT holders to participate on the platform actively. Holde’s DOT token will be put at risk (bonding or staking) to prevent harmful actions from taking root in the network. Every network action determines how many DOT are needed, how long they should be staked, and how many should be staked.

Parachains Creation

The third function adds additional parachains. To achieve this, DOT will be bonded, and it will be locked throughout the bonding time. DOT can be restored to the account that bonded them after the bond has expired.

Staking DOT?

While validators on Polkadot must maintain the network’s security hardware, anybody may act as a nominator by connecting their DOTs to a dedicated validator. Bonding tokens increase the network’s attack cost and allow staking rewards to be earned.

Polkadot aims for a stake rate of around 75%, which at 10% inflation in the first year would yield a 20% annual staking return. Slashing (loss of money) occurs when the selected validator goes down or misbehaves.

Final Tip

Polkadot is a relatively young ecosystem, and developers are constantly creating new solutions. Although it appears highly promising, certain genuine, practical use cases of the network will take a while to take action. That stated, for now, the future seems to be bright and full of opportunities.

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