Polkadot is a blockchain network that allows other blockchains to communicate with each other. It’s like an international money transfer company that helps send and receive USD from different countries’ currencies.
Suppose you have a Bank of America checking account. Your friend has a Chase Bank account. You can send money from your account to your friend’s Chase Bank account directly using ACH or Zelle transactions. If there were no interbank connection, your only option to give your friend money would have been to take out paper dollars from your account and hand over it to your friend. Then your friend would deposit this money into the Chase account. Without the ACH, Zelle, or other online interbank transactions, it would become very problematic.
However, in the Crypto world, this problem now literally exists. For example, Bitcoin, Dogecoin, Litecoin, etc., all cryptocurrencies exist in their isolated network. If you hold some Bitcoin but want to buy some Litecoin using your Bitcoin, you have no direct options. Bitcoin network and Litecoin network are entirely isolated; they have no connections.
It’s like having two computers in two rooms but not connected via the internet or through LAN cable. If you want to send a file from one computer to another, you have no options unless you use a flash drive to transfer it. Similarly, Bitcoin, Litecoin, Dogecoin, Ethereum, etc., all cryptos are isolated. They don’t interact with each other.
Polkadot blockchain network wants to solve this problem. Polkadot intends to connect all these blockchains by providing them a backbone network. So, Bitcoin, Litecoin, Dogecoin, etc., are isolated blockchains, and the Polkadot network inter-connects them all.
The digital currency that the Polkadot network uses is DOT. However, we have seen people use Polkadot and DOT interchangeably.
The Polkadot network does not have a cap on its DOT crypto supply and does not have a fixed inflation rate. However, the inflation varies between 6% to 10%; 10% is the maximum inflation for Polkadot. There were 1.1 billion DOT produced, but around 950 million DOTs are in circulation. The rest of the DOT crypto has been burned or deleted from the network permanently.
To check the latest Polkadot inflation rate, follow these steps:
- Visit the official Polkadot Wallet App staking page https://polkadot.js.org/apps/#/staking
- Under the “Staking Overview” tab, you can see the current inflation rate. As of writing this article, the inflation was 8.3%.
Please, don’t freak out, and let us explain why this inflation and no hard cap are a non-issue for Polkadot.
The inflation system of Polkadot is entirely different from other cryptocurrencies. For other cryptos, for example, Dogecoin, all the newly created coins and transaction fees directly go to miners (entities that process all the transactions, secures the network with their powerful computers).
In the case of Polkadot, the newly created DOTs and all transaction fees are collected into a Polkadot Treasury Account (https://polkadot.js.org/apps/#/treasury). Later, the Treasury automatically sends a portion of the transaction fees and new coins (minted coins) to the miners (validators). The rest of the fund stays in the Treasury. Therefore, though the Polkadot network has 8 to 10% inflation, not all the DOT coins are released into the network; thus, the actual inflation is far lower.
Here are the Polkadot Treasury Accounts:
Validators (miners) are the backbone of Polkadot’s Relay Chain network. These validators create new crypto blocks and secure the network.
In Bitcoin, Dogecoin, Litecoin, etc., anyone with a powerful computer can become a miner (Validator). If one entity becomes too powerful in the network, they can take over the crypto network with a 51% attack strategy. If they attack, there’s no punishment for them.
However, in the Polkadot, not everyone can become a validator. There is a maximum of 1000 slots for validators. Therefore, there is high competition to become a miner in the Polkadot network. In an auction system, the validators have to compete for those slots. Validators have to put a certain amount of DOTs (money) as collateral while working for the network.
Here’s an example. During the early 2021s, a minimum of 1.6 million DOTs was required to become a validator. At $40/DOT, it was $64 million in collateral. Within a few years, the price of DOT would exceed $100. During that time, a validator needs around $150 to 200 million dollars.
For other crypto networks, if a miner or Validator maliciously attacks the blockchain network, there’s no consequence for that. However, if a validator behaves maliciously in the Polkadot crypto network, their collateral money would be slashed by the Polkadot network.
As you can see, the amount of collateral money is astounding. However, in the Polkadot, DOT holders can nominate validators (up to 16) with their DOT holdings. The process is straightforward (simple explanation).
A user creates a Polkadot Stash Account and transfers DOTs into it. During the validator voting period, you ask the network to count your DOT as your validator collateral. After voting ends, validators with the highest collateral amount become active in the network, and your Stash Account is put into freeze for 28 days. During that time, you can’t withdraw your DOTs from that Stash Account. It’s called staking.
Because you are putting your DOT on the line for 28 days to elect a Validator, you get rewards (from new coins and transaction fees) in DOTs from the Polkadot network through your Validator.
More than 60% of DOTs are currently locked by staking, and only 30% of DOTs are liquid in the Polkadot network. You can check the latest real-time statistics here: https://polkadot.subscan.io/. Therefore, though Polkadot does not have a cap on its DOT supply, still, the network is not flooded with newly minted coins.
Moreover, due to various reasons, the Polkadot Treasury regularly burns (deletes) DOT coins from the blockchain network. Thus it also creates a deflationary pressure.
Any Parachain who wants to use the Polkadot must put DOT as collateral for up to 2 years (in 6-month increment). It also increases the number of locked coins.
If we give a one-liner answer, “Polkadot is not capped and has 10% inflation,” to the question “Is Polkadot Capped?” it would be incomplete. As you can see from the above discussion, though Polkadot is not capped, it’s a non-issue, and this inflation is necessary for the network. If there’s no inflation, there’s no way we can replace all the lost coins. For example, it’s estimated that around 20% of Bitcoin is lost forever.
In short, Inflation in Polkadot is not a bad thing.