Ethereum vs Polkadot | What You Need To Know

Ethereum and Polkadot are two of the most well-known blockchain platforms in the crypto world today. Both are designed for smart contract developers and decentralised applications (DApps), but they have some crucial differences.

Ethereum is older and more established, whereas Polkadot is considered an up-and-coming newcomer as a smart contract platform. Despite its smaller size, Polkadot has attracted a passionate fan base of supporters.

Let's go over exactly what separates Ethereum and Polkadot, the differences between their tokens, and why some experts believe that Polkadot could finally dethrone Ethereum as the top blockchain platform in the world.

What Is Ethereum?

Ethereum is a blockchain platform that supports different decentralised apps across the crypto ecosystem. Launched in 2015, Ethereum is regarded as one of the original cryptocurrencies developed during the early days of blockchain technology.[1]

Since going public, Ethereum has grown to a market cap of US$313.4 billion[1], second in size only to Bitcoin's US$729.1 billion.[2] In contrast to Bitcoin, which is designed to be just a digital currency, Ethereum allows developers to build their own blockchain projects. Because of this, Ethereum has played a crucial role in the rise of DeFi and other blockchain trends.[1]

The Ethereum World Computer

Ethereum's ultimate end goal, according to co-founder Vitalik Buterin, is to create a sort of "world computer."[3] Individual computers participating around the world would effectively come together to power a decentralised internet platform. It couldn't be censored or shut down by any one party.[3]

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We're already in the beginning stages of this. Developers are able to create Dapps, platforms and marketplaces that could eventually replace their more mainstream, centralised alternatives. Examples include decentralised exchanges like Uniswap as an alternative to mainstream exchanges like Coinbase or Binance.[3]

What Is Ether?

Ether (ETH) is the native cryptocurrency used on the Ethereum blockchain. Ether is considered one of the first utility tokens, which is a type of crypto that has additional uses beyond acting as a digital currency.

Since Ethereum is a decentralised platform, transactions are processed and verified by independent parties, called miners. In exchange for this work, transactions on the Ethereum network require fees, also called gas, which gets passed on to miners.[4]

Ether is used to pay for these gas fees when using the Ethereum blockchain. What's more, almost every altcoin built on the Ethereum blockchain (also known as ERC-20 tokens) requires gas fees as well.[4]

When transaction traffic is high, gas fees end up rising as well due to higher demand and vice versa. High congestion and demand also slow down transaction times, which can range from a few minutes to even hours in the most extreme cases.[4]

What Is Polkadot?

Founded by another Ethereum co-founder Gavin Wood, Polkadot is a decentralised network that allows different, unrelated blockchains to interact with each other. For example, it used to be impossible to transfer information from one blockchain, like Ethereum, to another, such as Ripple. While you can buy and sell their respective cryptocurrencies, the actual data inside a blockchain can't easily be transferred onto another platform.[5]

This ability (or lack thereof) to transfer assets or data between blockchains is called interoperability, and it's one problem Polkadot is trying to solve. [6]

How Polkadot Works

Polkadot uses multiple different blockchains simultaneously. The main Polkadot blockchain responsible for governance is known as the relay chain, followed by multiple, parallel blockchains known as parachains.[7]

Each parachain is fully customisable and independent, able to run their own separate consensus algorithms, tokens and utilities. Developers also have the option to use parathreads, which are similar to parachains but more limited in functionality and use a pay-as-you-go model.[7]

Like Ethereum, Polkadot also allows developers to create their own smart contracts and blockchains. However, Polkadot remains considerably smaller than Ethereum. Since its main net went live in 2020, Polkadot's current market cap is around US$15,9 billion, making it the 13th largest cryptocurrency by market valuation.[8]

What Is DOT?

The Polkadot token, also referred to as DOT, is the native utility token for the platform. Besides paying for transaction fees, DOT tokens can be used to vote on platform-wide referendums and governance issues.[9]

What's unique about Polkadot's governance is that participants can choose to "lock" their DOT tokens to increase their voting power, depending on how long they choose to lock their coins.[9]

DOT tokens are also used to earn parachain slots for new blockchain projects, known as parachain bonding. If a group wants to set up their own parachain on the Polkadot platform, they can either buy enough DOT tokens to acquire their bond or crowdfund DOT tokens from other participants on the Polkadot platform through a loan-type system.[10]

Just like any other token, DOT can be bought and sold across major exchanges.

Why Is Polkadot Considered An "Ethereum Killer"?

An Ethereum killer is a label given to a few up-and-coming blockchain platforms that could potentially dethrone Ethereum. The most common of which include Cardano, Solana, EOS and Polkadot. While many projects claim to challenge Ethereum, Polkadot is one of the few that has multiple advantages to its much larger, more established rival.

Blockchain Interoperability

For Ethereum, sharing information and data is easy as long as you're still on the Ethereum blockchain. This includes altcoins built off Ethereum as well. However, Ethereum doesn't allow for cross-blockchain interoperability in the same way that Polkadot does. [11]

Any blockchain can connect with the Polkadot platform and gain the ability to interact with its numerous parachains. As blockchain technology becomes increasingly mainstream, the ability to freely share info between different blockchains will become even more necessary.[12]

For example, a private school might store its academic records on a private blockchain. Using Polkadot, this private blockchain could send grades directly to a college or university's blockchain. [12]

Proof of Work vs Proof of Stake

One way to evaluate a blockchain project is by looking at its consensus mechanism. This is how a blockchain network verifies and validates transactions are legitimate. There are many different consensus mechanisms, but only a few are popular.

Proof Of Work

Ethereum currently uses the older proof of work (PoW) method to verify transactions. Proof of work relies on computing power lent by participating computers in order to verify transactions. In exchange, these participants, called miners, receive cryptocurrency as a reward every time a block and its related transactions are approved onto the blockchain.[13]

This is the oldest consensus mechanism for cryptocurrencies and is still used by many coins, including Bitcoin. However, it's also energy-intensive. Ethereum plans to switch to proof-of-stake eventually for this reason.[14]

Proof Of Stake

In comparison, Polkadot uses proof of stake, which doesn't rely on miners. Instead, it uses validators. These validators "stake" their investments as a form of collateral. In exchange, they earn the right to verify transactions onto the blockchain network, and earn a small transaction fee in the process.Unlike proof of work, proof of stake is much more energy efficient and easier to scale with.[13]

Polkadot Is Forkless, Ethereum Is Not

A fork happens whenever a network's community makes a change to the blockchain. When this happens, the validators who refuse to accept this new change continue using the old blockchain code. The end result is two different cryptocurrencies that split apart from one another.[15]

The problem with forks is that they end up dividing a cryptocurrency's community. Bitcoin, for instance, has a fork called Bitcoin Cash, which is now a separate crypto with its own following. In contrast, Polkadot handles its governance a bit differently. Every referendum or change is voted on by participants. If the majority vote in favour of said change, it's automatically applied across the blockchain.[9]

Individual participants can propose changes, which are added to a queue. While it's in this queue, other token holders can second these proposals. If a proposed change acquires enough support, it becomes a referendum that is voted on. In this way, Polkadot's governance is very democratic.[9]

Why Ethereum Is Still Preferred To Polkadot

Despite the above arguments, Ethereum still remains the dominant smart contract platform for developers. Let's look at three primary reasons why that is.

  1. Unlike Polkadot, which is still relatively young and untested, Ethereum has been through the test of time.
  2. Additionally, Ethereum already is incredibly popular, so it makes sense that blockchain developers will build their projects on a widely used platform.
  3. Lastly, while Ethereum is slower than Polkadot due to its proof of work consensus mechanism, the Ethereum 2.0 update is expected to switch to fully using a proof of stake model. This would drastically increase its available bandwidth, lower gas fees, and improve scalability. [14]

Summary

Both Ethereum and Polkadot are highly promising projects, and both Ether and DOT have the potential to generate returns for investors. Ethereum's main advantage is its current popularity as of this writing (March 2022). However, considering it's already worth hundreds of billions of dollars, it doesn't have the same room to grow that a smaller cryptocurrency does.

In contrast, Polkadot has several advantages over Ethereum, including operability, transaction speed and the lack of forks. Experts predict that Polkadot will see growth in the coming years, especially as blockchains become more popular among mainstream, non-crypto organisations.

However, Polkadot also faces competition from other touted "Ethereum killers" out there. Solana, Cardano and EOS are all tackling similar issues that Polkadot is trying to solve, so there's already some competition between these different platforms.

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Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.

References

1

Retrieved 09 Mar 2022 https://www.fxcm.com/markets/quotes/cryptocurrency/ethusd/

2

Retrieved 09 Mar 2022 https://www.fxcm.com/markets/quotes/cryptocurrency/btcusd/

3

Retrieved 09 Mar 2022 https://cointelegraph.com/news/the-mind-behind-the-world-computer-ethereums-vitalik-buterin

4

Retrieved 09 Mar 2022 https://ethereum.org/en/developers/docs/gas/

5

Retrieved 09 Mar 2022 https://www.coinbase.com/learn/crypto-basics/what-is-polkadot

6

Retrieved 09 Mar 2022 https://polkadot.network/

7

Retrieved 09 Mar 2022 https://polkadot.network/parachains/

8

Retrieved 09 Mar 2022 https://coinmarketcap.com/currencies/polkadot-new/

9

Retrieved 09 Mar 2022 https://wiki.polkadot.network/docs/maintain-guides-democracy

10

Retrieved 09 Mar 2022 https://polkadot.network/blog/obtaining-a-parachain-slot-on-polkadot/

11

Retrieved 09 Mar 2022 https://www.gemini.com/cryptopedia/why-is-interoperability-important-for-blockchain#section-benefits-of-blockchain-interoperability

12

Retrieved 09 Mar 2022 https://polkadot.network/technology/

13

Retrieved 09 Mar 2022 https://www.businessinsider.com/personal-finance/proof-of-stake-vs-proof-of-work

14

Retrieved 09 Mar 2022 https://ethereum.org/en/developers/docs/consensus-mechanisms/pos/

15

Retrieved 01 Jul 2022 https://www.coinbase.com/learn/crypto-basics/what-is-a-fork

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