After five years of development, Polkadot (CCC:DOT-USD) launched its first parachains, individual blockchains that run parallel to the Polkadot ecosystem.
This news suggests Polkadot’s utility just got a major boost. While it’s still early days, the potential shown should provide a major headwind for the price of DOT-USD.
Here’s why.
Utility, Utility, Utility
Unlike some crypto pundits, I can’t drone on all day about technical analysis and price movements. I don’t have the patience. As I’ve said plenty of times, fundamentals don’t exist for most cryptocurrencies. We’re all just blindfolded swinging at a pinata.
This is why I focus solely on utility. By doing so, I take a moving target and hold it in place long enough to evaluate its potential. I want nothing to do with it if it doesn’t provide tangible utility.
It’s been a while since I last wrote about Polkadot. July 2021, to be exact.
Here’s how I concluded my commentary:
What I would say is that it’s definitely a cryptocurrency worth getting to know. Maybe once you’ve done that, you’ll feel confident enough about its utility to actually buy some. As is the case with most cryptos, time is NOT of the essence. So take your time to understand Polkadot. I know I will.
At the time, Polkadot was the seventh-largest cryptocurrency by market capitalization. Today, it sits in the 10th spot, despite DOT-USD appreciating by 70% to $28.3 billion. Several cryptos have passed it by over the past six months.
That doesn’t mean you shouldn’t consider buying Polkadot.
What Parachains Could Mean for Polkadot
Dr. Gavin Wood is the founder of Polkadot, the co-founder of Ethereum (CCC:ETH-USD), and the CEO of Parity Technologies, the blockchain infrastructure company behind Polkadot. So it would be an understatement to say he’s jazzed about blockchain’s future.
Here’s what he said in Polkadot’s Dec. 18 press release about the launch of its first parachains:
“No single blockchain design works optimally for every use case. Each chain comes with trade-offs making it good for some applications and not others. The parachain model was created with the belief that the future of Web 3 will involve many different types of blockchains working together,” Wood stated.
“Just as the current version of the internet caters to different needs, blockchains need to be able to provide a variety of services. Parachains solve this.”
Polkadot will ultimately deliver 100 parachain slots. Winners of its first auction include Acala, Moonbeam, Parallel Finance, Astar, and Clover. They will be able to lease a slot on its Relay Chain for 96 weeks.
Enjin.io does an excellent job explaining in plain English why parachains are a game changer for Polkadot. Essentially, parachains solve the “blockchain trilemma” by providing speed, security, and decentralization.
Up until now, it was thought you could only have two out of three of these blockchain benefits.
The Bottom Line
Six months ago, I thought Polkadot showed promise. Today, thanks to the December news, I can see that it’s on the road to bigger things.
Is it enough to get me to buy DOT-USD? No, it’s not, but it’s definitely caught my attention. If any of the first auction winners gain traction in their DeFi (decentralized finance) projects, it will be off to the races for DOT-USD.
InvestorPlace’s Mark Hake discussed the deflationary effect of Polkadot’s parachain auctions in November. The auction winners must put up DOT-USD as collateral to gain one of the 100 slots up for grabs. It ensures the best-funded projects get the parachains. The net result is a reduction in the supply of Polkadot coins, ultimately driving the price higher.
If you already own a crypto or two, I don’t know why you wouldn’t at least consider Polkadot. Its utility is real.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
