Polkadot (CCC:DOT-USD) is an altcoin with a $32 billion market capacity and is ranked as the tenth-largest crypto, according to CoinMarketCap. Recently, Polkadot was able to launch five “parachains” on top of its blockchain network, each with its own focus. As a result, DOT-USD is starting to rebound and could end up moving back to its former heights.
This was after an elaborate crowd loan auction procedure in the last two months. These parachain auctions raised capital through crowed loans and submitted bids to post DOT-USD to operate on Polkadot’s blockchain.
Parachains are a game changer for Polkadot and the world of crypto. Let’s briefly dig into why that’s the case and what it means for DOT-USD’s price.
Parachains and Polkadot
Recently Decrypt magazine reported that the first five parachains went live on the Polkadot blockchain network. These five parachains are the Acala Network, Moonbeam, Parallel Finance, Astar, and Clover. As Decrypt explains it each parachain “is a kind of individual, sovereign blockchain running on top of Polkadot.”
So, in effect Polkadot acts as a “layer zero” substrate blockchain code on top of which the other parachains operate. They lease space on the Polkadot network and post DOT-USD for two years in order to have the ability to run on the blockchain.
I have written before on how this helps DOT-USD. It will tend to have a deflationary effect on the price of the crypto. This is because of the process of posting all the DOT-USD as collateral with Polkadot by the parachains. It will have the effect of, at least temporarily, reducing the supply of tokens available to be traded.
Where This Leaves Polkadot
Polkadot peaked on Nov. 4 at $55 per DOT-USD token. Since then it has been on a slow drift downward.
In fact, it seems to have bottomed out only recently on Dec. 20. That is when it bottomed out at $23.54 per token. Now, as of Dec. 26, it is slowly starting to recover. By mid-afternoon on Dec. 26, the day after Christmas, it was trading at $30.56. So it is already up 30% from its trough price.
I suspect there is ample reason that this rebound could continue. One reason is that Polkadot recently conducted another round of parachain auctions. On Dec. 24., Polkadot tweeted that “auctions 6 – 11 will be conducted over the next 12 weeks.” The tweet also said that a new parachain would begin operating on Polkadot every two weeks, with 12 parachains taking part.
Polkadot will eventually offer support for a total of 100 parachains. Each of the winning blockchain auctions will have the ability to run on the Polkadot blockchain for their application for up to 96 weeks, or almost two years. It’s not clear yet if they can renew or are expected to find another host blockchain after that.
The reason Polkadot’s auction system for parachains is seen as unique is that Polkadot is a true competitor to Ethereum (CCC:ETH-USD). Polkadot’s essential usefulness is its ability to act as a bridge across all other blockchains. It is like how HTML allows sites, browsers, and servers to interact with each other. So, as the number of parachains operating on the Polkadot network increase, its value will continue to rise.
What To Do With DOT-USD
This effect of new parachain operating on the Polkadot network could be quite significant. It’s very possible that the total cumulative effect is another leg up for the cryptocurrency.
You can look for DOT to rebound as the effects of a reduced supply take hold. This could start to happen well before the results of the ongoing Polkadot blockchain spectrum auctions are finalized.
In addition, the flood of year-end selling that has affected many other cryptocurrencies will likely end at the beginning of 2022. The impetus of tax-loss-harvesting will have ended by then, reducing the selling pressure on DOT-USD.
As a result, as more parachains begin operating on the Polkadot network expect to see DOT-USD prices rebound.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
