DOT-USD ultimately depends on its economic potential
As new blockchain platforms like Polkadot (CCC:DOT-USD) begin flexing their muscles, those who haven’t participated in the cryptocurrency narrative may be tempted to do so given the sector’s steep correction. But as decentralized projects flourish, the blockchain might also risk starting its own logical fallacy. That is, you must separate the technology from the economics of the underlying innovation.
However, this isn’t to say that Polkadot is like any other decentralized platform that originated in recent years. Instead, it’s a profound innovation, one that represents the rapid evolution of the blockchain space. In the beginning, there was Bitcoin (CCC:BTC-USD), which proved the viability of a peer-to-peer (P2P) network that could send assets of economic value across borders relatively cheaply and efficiently.
But P2P isn’t the only useful application for blockchain technology. And that’s where Ethereum (CCC:ETH-USD) comes in. Leveraging elements of Bitcoin’s architecture, Ethereum’s developers created a decentralized network which essentially replaces the human intermediary (i.e. brokers, attorneys) in contractual relationships. If Bitcoin is a single-lane highway, you might look at Ethereum and its smart contracts as a multilane highway.
However, one visit to Los Angeles or similar metropolitan area and you’ll find that a multilane highway just isn’t enough to move traffic. Therefore, you might look at Polkadot as an expansive network of highways. As Coinmarketcap.com explains, “Polkadot is a sharded multichain network, meaning it can process many transactions on several chains in parallel (“parachains”). This parallel processing power improves scalability.”
From a technical perspective, Polkadot is a thing of beauty. Through parallel action, you can eliminate the congestion that dogs other popular blockchain networks. Further, because DOT-USD is undergirded by a proof-of-stake protocol rather than proof of work (such as Bitcoin), Polkadot is much more environmentally friendly.
Ultimately, though, you must ask yourself: does any of this matter?
The Economics of Polkadot Has to Mean Something
Don’t mistake the above inquiry as a slight against Polkadot. As I mentioned, DOT represents an evolution of the blockchain industry’s broader trajectory. Further, you can make the argument that as such innovations materialize, this lends more credibility to cryptocurrencies.
But it’s also important to separate the incredible tech powering Polkadot with the market potential of DOT. I understand that it’s difficult to do because you would assume that a utilitarian and efficient decentralized platform will eventually do what central bankers fear: disrupt or even outright replace the current financial paradigm.
For this to happen, though, the Polkadot system must incentivize the public contributors that make the network click. While a decentralized trust model is profoundly innovative, decentralization alone won’t spark a viable economy. Indeed, it might even hinder it.
For starters, decentralized platforms may be “trustless” but that doesn’t mean free. They require electricity, computing power, storage capacity and other components. In a mainstream platform, a centralized entity provides said components and enjoys the fruits of its labor. In a decentralized platform, the public provides those components and collectively enjoys the rewards.
But that brings up the second point of concern. Basically, the rewards have to be worth it for network contributors to provide what’s necessary for the network to function. But if the underlying platform is too efficient, that might leave a small profit margin that wouldn’t be attractive. In other words, high efficiency would mean fewer “jobs” for network contributors to work.
Should Polkadot fail to bring in the volume, it presumably wouldn’t bode well for DOT. It’s akin to the philosophical question regarding the tree falling but no one being around to hear it. Like I said, technology alone won’t mean much unless people care to speculate on the underlying crypto coin.
Probably Better to Wait
With the market being the ultimate arbiter, I would wait for a better discount if you were thinking of adding Polkadot to your portfolio. Frankly, the technical posture — by technical, I’m referring now to DOT’s chart pattern — is ugly, as it is for other cryptos.
But once the coin reaches a stabilization point, it might be worth it to take a shot. But in my opinion, that time isn’t now. Personally, I’m aiming for single digits before I consider adding it to my portfolio.
On the date of publication, Josh Enomoto held a LONG position in BTC and ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
Article By Josh Enomoto, InvestorPlace