When assessing the view from above, Speckle (CCC:DOT-USD) apparently commanded the credibility required to earn the nickname many proponents afford: “ether (CCC:ETH-USD) Killer. “Leveraging advanced scaling and efficiency benefits that the established backbone of blockchain applications could only dream of, Polkadot was on the verge of initiating a paradigm shift.
Now it is struggling to survive.
Obviously, with the widespread impact of cryptocurrency fallout, this isn’t the only one. And while Polkadot is unlikely to be completely wiped out, investors must hope that DOT can maintain the semblance of positive trade. Otherwise, circumstances could become exceptionally ugly for the once promising digital asset.
Swing with a believable narrative
To appreciate Polkadot’s otherwise dramatically positive journey, consider the blockchain phenomenon as an evolution. Initially, Bitcoin (CCC:BTC-USD) proved the viability of a decentralized digital payments network backed by a virtual currency. Previous efforts to create digital coins and tokens have suffered from the double-spending dilemma. Nothing stopped a currency creator from copying and pasting coins, opening the door to infinite inflation.
The beauty of Bitcoin was the underlying decentralized protocol. Public actors who actively intervene in the network controlled the supply mechanism. And, in theory, the distributed nature of this network prevented a single entity from dictating the terms. This allows people to send payments to each other across borders using a trustworthy mechanism. Rather than a centralized authority, the community – governed by consensus – oversaw the work of the machinery.
Ethereum later entered the arena and developed the potential of the blockchain from purely peer-to-peer transactions to facilitating decentralization in other transaction relationships. Dubbed “smart contracts,” Ethereum laid the groundwork for the potential elimination of middlemen in all binding agreements. Thus the only exchange takes place between the direct actors of economic value. Other supervisory actors – bankers, brokers, lawyers, accountants – could be removed. Again, decentralized protocols could theoretically eliminate valuation vampires.
But as Ethereum became more popular, the transaction fees charged within the ETH network (called gas) increased exponentially. As they became bulkier and more expensive, many developers looked for superior alternatives. One of the most popular is polkadot.
Now I can start to bore you with magical blockchain words (as I have in the past and may do again in the future) like “Open Source Sharded Multichain Protocol” and Parachains. For the purposes of this article, Polkadot is a faster and cheaper Ethereum.
So why is it fighting?
Polkadot still has a problem with economic incentives
In previous discussions about so-called Ethereum killers, I have used real estate valuations as an analogy. I’ll keep using this analogy because it’s one of the most intuitive.
If you live in an expensive metropolis like Los Angeles or New York City, you may complain that selling your 1 bedroom apartment could make you spend your days like a Kentucky aristocrat. Or you could buy the state of West Virginia. I’m kidding, but you get the point. Average property prices can vary greatly depending on the location.
For the same reason, I would suggest that the blockchain is no different. Why do people keep getting involved with the Ethereum network when Polkadot is clearly superior? DOT is possibly more efficient, scalable and more secure than ETH. However, it’s like asking why a North Carolina mansion with acres of land is the price of a humble home in Burbank, California.
In Burbank, you are surrounded by the makers of society. The place is full of activity and access. I’m not saying North Carolina doesn’t have its allure. You can hike the trails of the Great Smoky Mountains and stand on the ground where the Wright Brothers took off the first plane. But let’s not kid ourselves. When it comes to economic performance, California is the undisputed winner.
Hence, volatility in the crypto market is a real litmus test for Polkadot. While people like to strengthen their network, they need an economic incentive to keep doing so. Because the underlying DOT coin is more volatile than other virtual currencies, system users may not appreciate such financial problems regardless of Polkadot’s many technological advantages.
The bottom line on Polkadot
While I’m a big proponent of cryptos, I’m also a realist. In fact, I like to consider myself a realist before putting another label on. Unfortunately, what I am seeing is exaggerated speculation in 2021, which will be corrected in the new year.
That doesn’t mean all cryptos will go to zero (although some clearly are). In addition, Polkadot has its place in the broader blockchain discussion. But that isn’t going to rid it of red ink anytime soon. Finally, the negative trade of Polkadot has shown that economic principles trump parachains and sharding.
At the time of publication, Josh Enomoto held long positions in ETH and BTC. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s posting guidelines.
Josh Enomoto, a former senior business analyst at Sony Electronics, has helped broker key contracts with Fortune Global 500 companies. Over the past several years, he has provided unique, critical insights into the investment markets as well as various other industries including law, construction management, and healthcare.