10,000 Word Strategic Report How can Polkadot overcome its growth dilemma? Where does the future lie?

10,000 Word Strategic Analysis Overcoming Polkadot's Growth Dilemma and the Future Ahead

Source: Polkadot Ecological Research Institute

Introduction

Hello to all friends who are concerned about Polkadot, we are the Polkadot Ecological Research Institute. We are a team that focuses on researching the development opportunities and prospects of Polkadot and the Polkadot ecosystem, and we have received support from the Polkadot treasury six times in a row.

As a team that has been studying Polkadot for nearly five years, we have heard more and more voices of disappointment in the community recently. Many people can’t see any hope and have even left the Polkadot ecosystem, and we don’t want to see that. However, with the recent launch of OpenGov on Polkadot, we see that governance power is increasingly being transferred to the community, and we can become a force that drives the development of Polkadot. Therefore, we have decided to change from a passive research role to an active participation role. This article is a strategic growth plan for Polkadot that we have launched, and many of the viewpoints are the results of our research over the years.

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This article will directly address the market, not just the technology and ideals. We are facing the most real problems and proposing improvement ideas and suggestions. Of course, we also see that many teams are actively proposing solutions to some of the current issues with Polkadot on official forums and in the community. However, these solutions often target a single problem and do not comprehensively solve the issues from a global perspective, or unify multiple issues under a strategic thinking system.

We welcome everyone to point out any shortcomings in this article, and we also welcome everyone to provide valuable advice. Please feel free to suggest practical modifications, as our only hope is to make Polkadot better. Let’s work together towards that goal.

The Current Situation of Polkadot

In the past six months, Polkadot has made significant progress and successfully achieved two important milestones in its Roadmap. Among them, the launch of OpenGov introduced an advanced governance model, providing community members with a broader participation and decision-making power. The release of XCM V3 has improved message transmission formats, enhanced the functionality and interoperability of Polkadot, and laid a solid foundation for future development.

The infrastructure construction of the Polkadot network is still strong, and the level of developer activity has significantly increased. It currently ranks first among public chains in terms of developer activity and has risen to second place in terms of total number of developers. This marks a continuous growth in the number of developers attracted by Polkadot and their contributions to its technical ecosystem.

However, despite the remarkable progress, Polkadot still faces some challenges. The price of the DOT token is unstable and experiences significant fluctuations, which may bring some uncertainties to investors and ecosystem builders. At the same time, user activity has declined, the development of ecological projects is sluggish, and there are also some urgent issues to be addressed in treasury governance.

Overall, Polkadot has been facing challenges along its continuous path of innovation.

1. Technical Updates

Polkadot has been dedicated to constantly improving its technology and functionality. In the first half of this year, Polkadot achieved two important technical updates with the release of OpenGov and XCM V3 on June 15th. Currently, Polkadot has announced the completion of its 1.0 version and at Polkadot Decoded 2023 in late June, Dr. Gavin proposed the vision for Polkadot 2.0.

OpenGov: A new governance model introduced by Polkadot that achieves decentralization through community voting and checks and balances of power. It adopts a structured implementation lifecycle, where the Technical Fellowship replaces the old Technical Committee and serves as a Developer DAO.

XCM V3: The latest version of the cross-consensus messaging format XCM, which has already been launched on Kusama through governance initiation. The release of XCM V3 brings innovative design and supports functionalities such as external network bridging, NFT transfers, and asset locking.

With the complete delivery of Polkadot 1.0, Polkadot will enter a new stage of development. Polkadot 2.0 represents a multi-chain computer that shifts from a chain-centric to an application-centric approach and introduces several new concepts and technologies.

Accord: A voluntary agreement across multiple chains, where the chain voluntarily complies with the agreement and ensures its faithful execution. In the process of implementing Accord, Polkadot introduces two key technologies: SPREE and Project CAPI.

SPREE Technology: A runtime logic fragment based on relay chains, which acts as a secure tunnel to enable safe transmission of information and value between different parachains.

Project CAPI: A middleware project aimed at driving the development of Polkadot-based decentralized applications (DApps). It provides developers with a lightweight client solution that allows them to create cross-chain applications with a user-friendly interface.

In the vision of Polkadot 2.0, Polkadot reaffirms its commitment to building a resilient application platform. Polkadot will focus on constructing a ZK primitives library, with the first library nearing completion, providing privacy protection for the on-chain fellowship. Polkadot will also invest in the updates of technologies such as Hermit Relay, Smoldot lightweight client, Sassafras consensus, and Internode Mixnet.

In addition, parallel thread, systemic parachains, asynchronous support, and other technologies developed by LianGuairity are also actively supported and yet to be realized.

2. On-chain Progress

As of the time of writing this article, according to Messari’s report on Polkadot’s second quarter of 2023, the on-chain progress of Polkadot has experienced ups and downs. Here is a brief overview of Polkadot’s on-chain situation in the second quarter:

Development Activity:

• The participation of developers in Polkadot and Kusama has maintained a positive upward trend, reaching peaks of 613.71 and 600.29 active developers on May 28th and June 16th respectively.
• The number of core active developers reached a peak of 181 on March 22nd and has remained relatively stable.
• Polkadot has the highest number of protocol and ecosystem submissions and the most active developers, ranking first in both categories.

Source: dotinsights

User Activity and Financial Situation:

• In the second quarter, Polkadot’s daily active accounts decreased from 6,290 in the first quarter to the current 5,810.

• In the second quarter, Polkadot’s revenue decreased from over $120,000 to nearly $81,000.

Source: Messari

Total Value Locked (TVL) of Parachains:

• Moonbeam, Astar, LianGuairallel, Acala, Moonriver, and Karura lead in the Polkadot ecosystem’s DeFi-focused parachains.

• The total TVL of parachains experienced a rise and then a decline in the second quarter, dropping from a peak of $236.12 million on April 14 to $146.77 million on June 30.

Source: dotinsights

DOT Staking Rate and Return:

• In the second quarter of 2023, the staking rate of DOT was 46%, below the ideal staking rate.

• The current return rate is approximately 9%, but it fluctuates with the staking rate.

Source: Messari

For more details, please refer to:

Dotinsights Polkadot Q2:

https://dotinsights.subwallet.app/polkadot-report-q2-2023-en/

tokenterminal: https://tokenterminal.com/terminal/projects/polkadot

Polkadot Q2 Slump: Will Q3 Bring More Disappointment For Investors?

3 Developer Situation

According to data released by Electric Capital, Polkadot has a large developer base in the industry in the first half of 2023. As of September 17, Polkadot currently has 645 full-time developers, ranking second in terms of the number of full-time developers. The total number of developers is 1,923, rising from the third position to the second, and maintaining a relatively stable proportion compared to last year, with full-time developers accounting for approximately 33.54% of the total. These data indicate that Polkadot’s developer community is continuously expanding and plays a crucial role in the development of the Polkadot ecosystem.

Source: Electric Capital

4 Ecosystem Situation

The Polkadot ecosystem is a rapidly evolving and diverse blockchain ecosystem aimed at providing cross-chain interoperability and innovative solutions.

According to PolkaProject statistics, there are currently 580 Polkadot-related ecosystem applications, including DeFi, infrastructure, NFT, browsers, wallets, forums, etc., developed on Substrate.

On June 15th, the launch of XCM V3 caused widespread attention, providing advanced programmability, bridging capabilities with external networks, cross-chain locking, improved fee payment mechanisms, and support for non-fungible tokens (NFTs). In terms of Total Value Locked (TVL) of parachains, Moonbeam and Nodle are the two projects with the most active accounts. Moonbeam has been the leader in TVL, and the TVL of parachains like Acala, Astar, and LianGuairallel also remain at high levels.

The auction of slots is the process of allocating access rights to the relay chain, and the winner will obtain the permission to run parallel chains. In addition, the Polkadot ecosystem is attracting more and more attention and cooperation, with significant progress made by projects such as Mythical Games, Kilt, Frequency, Composable Finance, Aventus Network, and others.

Overall, the Polkadot ecosystem is growing and developing continuously, with the roadmap progressing smoothly and key projects successfully implemented.

5 Market Situation

As of the current date (October 11th), the market cap of Polkadot is approximately $3.375 billion, ranking 14th in the crypto market. It has been on a downward trend in the past few months, with prices relatively stable from early May to mid-June. Overall, the price of DOT has dropped by 31.87% in recent months.

Source: CoinMarketCap

Both Polkadot and Cosmos are committed to solving the problem of cross-chain communication but have taken different technical approaches. Compared to Cosmos, the price of ATOM is in a relatively lower state, with a year-to-date decline of approximately 27.42% (except for a brief recovery in June). However, overall, the market performance of Cosmos has declined, with a current market cap of approximately $2.598 billion.

Source: CoinMarketCap

The migration of stablecoins to Layer 2 solutions has become a highlight of 2023, such as Optimism. OP is one of the best-performing crypto projects in 2023, with a year-to-date increase of up to 227%. The current market cap of Optimism is approximately $1 billion.

Source: CoinMarketCap

Arbitrum (ARB) is another highly anticipated Layer 2 solution, with a trading volume exceeding $1.7 billion and a current market cap of $1 billion.

Source: CoinMarketCap

6 Social Media Situation

The official media of Polkadot currently includes the Polkadot official website, Kusama network, Polkadot Twitter, Web3 Foundation Twitter, Reddit, YouTube, and other channels. The official website provides detailed information about the Polkadot project, including technical documents, news updates, community governance, ecosystem construction, and more; Twitter, Reddit, Medium, and other social media platforms are used to release the latest Polkadot updates and important events, facilitate community interaction, and expand influence; YouTube provides video resources such as speeches, technical sharing, and community activities by the Polkadot team to help users better understand the Polkadot ecosystem.

In addition, there are platforms for discussing technology and the future of Polkadot, such as the Polkadot forum and Polkadot GitHub, as well as the Polkadot Support Knowledgebase, which provides tutorial support and assistance for Polkadot. Overall, the official social media presence of Polkadot is rich, providing users with various forms of participation and communication, which is essential for strengthening community consensus and expanding influence.

7 Treasury Governance Situation

OpenGov is a new governance system introduced by Polkadot and launched on the Kusama network in November 2022. It has significant advantages in improving governance efficiency and promoting community participation. However, OpenGov also faces some challenges, such as uneven voting rates and excessive treasury expenditures.

Efficient governance handling: Compared to the original governance system, Gov1, OpenGov improves the operation efficiency of the governance system. Referenda can be processed in parallel, with a large number of referenda, greatly enhancing governance efficiency.

Source: https://kusama.subsquare.io/referenda

Currently, OpenGov governance faces several issues:

Significant voting rate disparities: There are significant differences in voting rates among referenda on different tracks, especially those related to treasury expenditures. This may result in some treasury funds being spent without sufficient community attention, and some of the expenses may not be reasonable.

Decrease in treasury balance: OpenGov revolutionizes the way treasury funds are spent, and coupled with the fact that treasury expenditures are equivalent to a certain amount of USD-denominated DOTs, it is subject to the decrease in DOT price, resulting in the need to spend more DOTs from the treasury. This significantly increases the speed of treasury expenditures, leading to a gradual decrease in the treasury balance. It is predicted that if the current spending rate is maintained, the treasury funds may be exhausted by November 2023.

Relatively low approval rates: In OpenGov, the proportion of votes in favor and abstentions to the total token supply is relatively low, resulting in low approval rates. The average for Polkadot is 1.44% and for Kusama is 3.33%, with the treasury tracks having the lowest approval rate.

Improving the governance system, maintaining the development of the Polkadot ecosystem, addressing low voting rates, ensuring the sustainability of treasury funds, and increasing interest and participation in OpenGov are crucial.

Issues Faced by Polkadot

Based on the above situation, community feedback, and our observations, the following issues faced by Polkadot have been summarized.

1 Economic Model Issues

Many users and the community provide feedback on the economic model of Polkadot, including high inflation rate, relatively few use cases for DOT tokens, and concerns about token value.

Polkadot DOT adopts an inflationary monetary policy, with the current inflation rate at around 7.38% (according to Subscan.io’s data), which is considered high. Polkadot adopts a mechanism based on Nominated Proof of Stake, where validators and nominators participate in network validation and receive corresponding rewards. These rewards are distributed in the form of tokens, thus causing a certain level of inflation. The original intention of Polkadot’s design is to maintain moderate inflation to incentivize participants and ensure network security. However, some observers believe that a high inflation rate may have a negative impact on the value of DOT tokens.

In contrast, some other public chain projects have lower inflation rates. For example, Ethereum’s inflation rate has gradually decreased over time since the Merge phase, and is currently around -0.21% (according to data from https://ultrasound.money/), indicating deflation. Similarly, Bitcoin’s inflation rate is also decreasing and is currently around 1.7%. With the upcoming halving of BTC next year, this proportion will be even lower.

Ethereum, as one of the largest smart contract platforms, has a wide range of use cases including DeFi, NFT, and decentralized applications, providing more practical uses and demands for Ethereum tokens.

On the other hand, Polkadot currently has relatively limited use cases for its DOT tokens, mainly including governance, staking, and parachain binding. However, compared to some other public chain projects, the use cases for DOT tokens are relatively limited, which may raise doubts among some users and investors about their practical uses and long-term value.

2 Operations Issues

① Poor on-chain data performance

Polkadot’s on-chain data has been relatively weak in the past 6 months. According to Chainalytics Labs’ statistics on mainstream public chain activity in May this year, looking at user activity, developer activity, financial condition, and social activity, Polkadot lags significantly behind BNB and Solana in all aspects except for developer participation. It even ranks the lowest in terms of user activity and overall ranking.

Source: Chainalytics Lab

Polkadot’s transaction volume and active address count are lower than other mainstream public chains. In the DeFi field, the number of Polkadot’s DeFi projects and the total value locked are relatively low, indicating weakness compared to other public chains.

In summary, Polkadot currently faces some challenges, especially in terms of user activity and financial performance, but it is worth noting that developer participation remains strong.

② Poor social media data performance

Currently, Polkadot’s official social media platforms do not have a prominent performance. The discussion activity and topic engagement on official social media platforms like Polkadot Twitter and Polkadot Discord are relatively low.

On Polkadot Twitter, the official account @Polkadot currently has about 1.4 million followers. Despite the high number of followers, the average tweet views are below 50,000, and interactions and comments are even below 50. Although the Twitter account maintains a high frequency of posting news about the Polkadot ecosystem, technical progress, and important events, the level of interaction and discussion is relatively limited compared to other large projects.

Similarly, except for Polkadot’s official Twitter, the number of fans on other social media platforms is relatively low. For example, Kusama, Polkadot’s canary network, only has 250,000 subscribers on its official Twitter, and the Web3 Foundation has 130,000 subscribers. Additionally, the social media platforms are quite scattered, which prevents them from attracting a sufficient number of users to participate in discussions and interactions.

Observations show that the discussions and level of engagement in the Polkadot community are also quite low. The Reddit community, for instance, exhibits relatively low activity, with an average of fewer than 5 discussions per day in the past month. Though there are some in-depth technical discussions, compared to other public chain projects such as Solana’s performance on Reddit, Polkadot’s discussion activity is still much lower.

③ Lack of Data Display

Currently, there are primarily two problems. Firstly, social media data performance is poor, unable to attract enough attention and participation. Secondly, there is a lack of comprehensive websites showcasing the overall situation of the Polkadot ecosystem.

While Polkassembly mentions in their Roadmap that they will release an ecological overview, there is still a lack of a detailed and comprehensive website showcasing the overall situation of the Polkadot ecosystem. This makes it difficult for users and industry professionals to gain a comprehensive understanding of the Polkadot ecosystem.

For instance, the Polkadot ecosystem lacks data display websites similar to L2beat in Layer 2 or websites like DeFillama that provide a detailed display of the development of different parallel chain ecosystem projects. After all, people who are interested in the Polkadot ecosystem do not have a comprehensive and unified place to understand the true situation of Polkadot, making it difficult to conduct research.

In order to better understand industry development trends and compare with other ecosystems, the Polkadot community can exchange data with other projects, further improving data analysis and visualization capabilities. They can launch an ecological overview website (the previous one ceased updates), providing in-depth analysis and a comprehensive overview of the Polkadot ecosystem. This would help increase community attention and awareness, and provide more resources and support for ecosystem development.

3. User Barrier

Polkadot’s current high level of specialization is not user-friendly for new users. There are certain challenges in terms of difficulty in usage and learning curve with regards to the Polkadot user barrier.

Using Polkadot’s features and tools may pose a higher level of operational difficulty for general users. For example, interacting and managing using tools like Polkadot.js, creating and managing wallets, making transfers, participating in governance, all require certain technical knowledge and familiarity with the tool’s workflow. This can be challenging for non-technical users, as it requires a significant amount of time and effort to learn and understand.

Additionally, Polkadot’s ecosystem is relatively complex. To fully comprehend the workings and technical details of Polkadot, users need to learn basic blockchain concepts, consensus algorithms, cross-chain communication, and other related knowledge. Furthermore, Polkadot’s technical documentation and tutorials may be too specialized, making it difficult for regular users to comprehend. Polkadot’s technical documentation and tutorials are typically targeted towards developers and technical professionals, containing numerous technical terms and complex concepts. This undoubtedly increases the learning costs for ordinary users when trying to learn and understand Polkadot-related knowledge.

From the perspective of user perception and promotion, there is a disconnect in communication and feedback between Polkadot and its users. On one hand, as an actively evolving blockchain project, the latest developments such as new concepts, technologies, and community activities are not communicated timely to users. This may lead to a lack of understanding, especially among new users, about Polkadot’s new technologies and project developments, making it difficult for them to actively participate in ecosystem building and feel involved.

On the other hand, Polkadot’s promotional materials are often too technical and specialized, making it challenging for ordinary users to comprehend. This results in a lack of understanding and awareness about new technologies and concepts. For instance, even though OpenGov governance mechanism has been launched for nearly three months, the majority of users are still unaware of the specifics of OpenGov, such as how to participate and its significance.

4 Governance Issue

Polkadot’s treasury governance mechanism is considered one of the most advanced projects in the blockchain industry. However, due to its forward-thinking nature, it currently faces several challenges, including low voter participation, game theory attacks, and non-representativeness (whales).

Although Polkadot adopts a decentralized governance model called OpenGov, allowing community members to participate in the decision-making process, in reality, few voters actively engage in voting and proposing. This may lead to centralization of the decision-making process and lack of wide community participation. In referendums related to treasury spending, the voter turnout is low, raising doubts about the rationality of treasury fund allocation. Currently, low voter participation is a significant challenge.

Game theory attacks are also a pressing issue. Due to the incentivized nature of Polkadot’s treasury mechanism, individual holders can attempt to influence voting outcomes to benefit themselves by exploiting system rules, bribery, and other means. This may result in distorted and unfair decision-making, impacting governance outcomes.

Another challenge faced by Polkadot’s treasury governance is non-representativeness, where a few whale holders with a significant number of tokens may have an outsized influence on decisions. This could lead to decisions that favor the interests of a minority rather than the whole community, weakening the democracy and fairness of governance.

Polkadot SWOT Analysis

Combining the current situation and the aforementioned issues, we attempt to understand the overall development status of Polkadot by adopting the classic strategic analysis SWOT.

Strengths:

• Technological innovation: Polkadot has made significant progress in terms of technology, including the introduction of the new OpenGov governance model and XCM V3 messaging format. Meanwhile, Gavin has proposed Polkadot 2.0, introducing even more new technologies. These technological innovations will further enhance Polkadot’s functionality and efficiency, providing a unique competitive advantage.

• Strong developer community: Polkadot boasts a large and active developer community, with increased developer activity and a rise to the second position in total developer numbers. This provides solid support for the ecosystem development of Polkadot.

• Diverse multi-chain ecosystem: Thanks to the high flexibility of the Substrate framework in customization, Polkadot has various types of parachains, making its ecosystem more diverse compared to other multi-chain ecosystems.

Weaknesses:

• Token price below expectations: The price of DOT fluctuates greatly, which may lead to a decrease in user activity and unclear financial conditions.

• High user barriers: For new users, there is a certain threshold in using and understanding Polkadot’s technology and functionality, which may limit the growth and adoption of Polkadot by users.

• Immature DeFi ecosystem: The Polkadot ecosystem lacks a mature DeFi ecosystem like Ethereum, both in terms of insufficient subcategories of DeFi projects and relatively low TVL overall.

Opportunities:

• Increasing user engagement: By utilizing the OpenGov governance mechanism and improving user engagement, Polkadot can further strengthen decentralization and community involvement, enhancing decision transparency.

• Innovative concepts and technologies: Polkadot presents a new prospect for 2.0 development, introducing various innovative concepts and technologies that provide opportunities for Polkadot’s future development.

• Abundant dormant funds in the Polkadot ecosystem: As an NPoS public chain, Polkadot has a substantial amount of Staking funds deposited within it, which can be utilized by certain DeFi projects and reinvested into the ecosystem. Additionally, Polkadot’s unique Treasury mechanism can continuously provide development funds for Polkadot’s operations.

Threats:

• Challenges in Treasury governance: Polkadot’s Treasury governance faces challenges such as low voter participation, game theory attacks, and non-representative challenges, which may lead to centralization of decision-making, a lack of widespread community involvement, and unfair decision outcomes.

• Competition from rivals: Polkadot faces pressure from multiple aspects in a fiercely competitive market. Compared to Ethereum, leading multi-chain ecosystems, and Layer2 cross-chain protocols, Polkadot is at a disadvantage in terms of user count, community activity, and ecosystem application scenarios. New projects or users may be more easily attracted to projects with stronger network effects.

• Pessimistic market conditions: Despite the rapid development of the Web3 industry in recent years, it is still in a period of industry downturn. Polkadot also faces challenges in this regard.

In summary, Polkadot has advantages in technological innovation and developer foundations, but it also faces weaknesses and threats such as price fluctuations, technical barriers, Treasury governance challenges, and an unfavorable market environment. However, through the introduction of innovative concepts and technologies, as well as increased user engagement and effective use of dormant funds, Polkadot has the opportunity to further develop and solidify its position in the Web3 industry.

Macro analysis of the current state of Polkadot from two perspectives.

In addition to looking at the current state of Polkadot, we should also consider the overall situation of the Crypto industry to get a clear understanding of Polkadot’s position and infer its future development direction, etc. We will analyze it from two perspectives.

1 Final Perspective

When formulating strategies, we always start by thinking about the ultimate form of the industry. If there is a clear final form, we can work backwards to determine how to develop in the present. There are various opinions in the market about the public chain layer where Polkadot operates. However, recently, with the underperformance of many public chains and the increasing popularity of Layer2, more and more people are discussing whether Ethereum will dominate the future.

On the other hand, Layer2 projects are also capturing value by issuing their own tokens and building their own multi-chain networks, indirectly eroding Ethereum’s dominance. DYDX completely migrated to Cosmos, and its value performance reached new highs, making the future public chain landscape even more uncertain.

However, if we take a higher-dimensional perspective to see what kind of pattern the public chains will eventually form, perhaps our thinking will be clearer.

First, different public chains represent different technology communities, each with its own resources for support. Even if the current development is not good, it does not mean they will disappear. Instead, they are more likely to be influenced by market cycles.

Secondly, indeed, some public chains have their own unique characteristics, and there are also many application chains and decentralized infrastructure public chains gradually developing. Ethereum indeed cannot fulfill all blockchain use cases. The future will definitely be multi-chain.

Furthermore, in addition to the multi-chain ecosystems represented by Polkadot and Cosmos, Layer2 projects are also gradually building their own multi-chain ecosystems.

In addition, more and more cross-chain protocols such as Layerzero, Celer Network, Wormhole, Circle’s CCTP, Chainlink’s CCIP are emerging like mushrooms after rain, connecting different public chains/Layer2.

Therefore, in the end, we can roughly outline a (medium to long-term) final form like this.

Different public chains/Layer2 can be seen as individual points, and different cross-chain methods can be seen as lines. The multi-chain ecosystem composed of Polkadot, Cosmos, Ethereum plus various Layer2 can be seen as a whole composed of many points and lines.

In the future, all the points will be connected by various lines, and this kind of map can be called a full-chain map, which is also the final form of public chains, Layer2, etc.

Based on this final form, we need to consider what role Polkadot plays in it.

We can find that different points (chains) and lines (cross-chain solutions) have different attribute values in terms of security, decentralization, performance, fees, etc., and different attributes will determine the preferences of different users.

By observing Polkadot, we can see that thanks to its unique relay chain + parallel chain architecture, the parallel chains can enjoy the same level of security as public chains, and the security level between each parallel chain is the same. At the same time, the security of cross-chain within Polkadot’s parallel chains is higher than other types of cross-chain solutions.

Therefore, we can conclude that Polkadot is the multi-chain ecosystem with the highest internal security coefficient in the entire chain network, and the security between its parallel chains is the same.

Blockchain is good at solving multi-party collaboration between untrusted entities, but previously such collaborations required multiple parties to maintain the ledger on the same chain (as in the case of consortium chains) or to participate in the same application on the same chain in order to achieve trust.

With the development over the years, we can find that crypto applications tend to have their own chains, as chains can independently control security and even develop their own ecosystem. However, at this stage, there is a lack of trust solutions between chains, especially the need for chains to have the same level of security. After all, different levels of security will always involve certain risks for the party with higher security, which increases the obstacles to cooperation. If everyone has the same level of security, many collaborations can be easily realized without considering security issues.

Currently, it seems that only Polkadot can solve such problems, because its parallel chains have equal security, and this level of security is comparable to that of a public chain like Polkadot, and the inter-chain communication has high security. Dr. Gavin’s Accord proposal in Polkadot 2.0 is even more suitable for solving this problem. This is a very important solution for physical enterprises or organizations that want to achieve fair trust on the network because everyone hopes to collaborate on an equal level of security.

In other words, there are indeed some scenarios that can only be solved by Polkadot, which also fits the trend of traditional industries entering the blockchain world. This means that Polkadot will definitely have a place in the entire chain network.

So, now that we have drawn the possible future of public chains and the role Polkadot plays in it, our strategy should revolve around how Polkadot needs to develop to transition into that future role.

2 From a Cyclical Perspective

Cycles have always been an eternal topic of discussion, as the development of anything is inseparable from cycles. For public chains like Polkadot, we need to study two cycles: one is the macroeconomic cycle, and the other is viewing the development of public chains as an industry, which also has its own development cycle. We need to understand which stage Polkadot is currently in to formulate a more accurate development plan.

Macroeconomic Environment Cycle

The development of any industry relies on the capital entering that industry. If we compare the industry to a container, the capital entering the industry is like the water entering the container, and the change in water level determines the height of the entire industry. In 2020, due to the economic downturn caused by the pandemic, the United States had to adopt an exaggerated quantitative easing approach to counter the economic impact of the pandemic. Traditional institutions and companies, represented by Grayscale and MicroStrategy, began to invest heavily in the crypto industry. The external influx of significant capital rapidly expanded the crypto market and directly triggered the previous bull market.

But quantitative easing is a double-edged sword. It subsequently brought terrible inflation, and in order to restrain inflation, the Federal Reserve started a long process of raising interest rates. This also caused the traditional financial assets previously invested in the crypto market to leave, resulting in a drop in the prices of crypto assets and a decrease in liquidity as funds started to withdraw. Thus, the bear market began.

During this process, we can see that the same incentive mechanism or gameplay is more optimistic in a bull market environment. Funds will further participate in the incentive mechanism or gameplay. Conversely, in a bear market environment, fund sentiment becomes more panicked, and funds tend to cash out after participating in the incentive mechanism or choose not to participate in many games.

This means that the same incentive scheme will have the opposite effect when the market is not good. However, at the right time, it can yield great results. Therefore, we cannot blindly provide incentives, but instead take different measures in different market cycles.

Public Chain Development Cycle

In 2021, emerging public chains such as Solana, Polygon, and Avalanche have experienced varying degrees of growth. By observing the early development of these public chains, we can outline a set of common growth logic for public chains. Then, by examining Polkadot’s current stage, we can clearly understand why Polkadot is in its current state and what measures it can take to develop rapidly.

In the following sections, we will focus on the aspects of Polkadot’s development cycle that are worth learning from.

What innovations have occurred in public chain development in recent years?

1. Eco-Empowerment + Public Chain Incentives

Public chains can empower projects within their ecosystems in various ways, and these projects can generate demand for public chain tokens in their business models, thereby achieving a reverse eco-empowerment of the public chain. Public chains such as Polygon, Avalanche, and Fantom have collaborated with mature DeFi projects to launch incentive programs, attracting users to participate in DeFi and obtain corresponding incentives.

Such gameplay originated from Polygon. On April 14, 2021, Polygon announced liquidity mining rewards for the lending protocol Aave, providing 1% of the total supply of reserved MATIC (approximately $40 million). As a result, Polygon’s locked amount quickly soared. The successful implementation of the incentive scheme encouraged Polygon to take further risks, subsequently providing liquidity mining rewards for renowned DeFi projects like Sushiswap and Curve. In just over a month, Polygon’s locked amount skyrocketed to over $5 billion, a 30-fold increase.

Following Polygon’s explosive growth, on August 18, 2021, the Avalanche Foundation announced the launch of the $180 million liquidity mining rewards program called Avalanche Rush, encouraging more applications and assets to join the flourishing Avalanche DeFi ecosystem. With Polygon’s growth as a precedent, Avalanche’s activities quickly gained funding and its TVL (Total Value Locked) climbed steadily, similar to Polygon.

Avalanche’s performance once again validated the effectiveness of public chain incentive programs, at least in the given environment. Subsequently, on August 30, 2021, the Fantom team announced the allocation of 370 million FTM tokens to better adjust incentives between users, builders, and the network, achieving similar results.

2. Exchange Empowerment + Ecosystem Empowerment

Besides the aforementioned public chains, BNBChain (previously known as BSC, subsequently referred to as BNBChain) and Solana also experienced explosive growth in their ecosystems in 2021. Although the development of their ecosystems is inseparable from DeFi and attracted a significant inflow of funds, their ecosystem explosions were primarily supported by a special external force, which is exchange empowerment.

Exchanges themselves come with massive user bases, rich capital flows, and to some extent, the endorsement of trust from institutions. Being centralized institutions, they can freely create various marketing or promotional methods to empower an ecosystem. Furthermore, exchanges are upstream institutions in the crypto ecosystem, well-versed in empowering projects at the secondary market level and investing in ecosystems at the primary market level. For instance, in the entire crypto market, Coinbase and Binance, the two major exchanges, are among the top investors in early-stage projects.

For empowering a public chain, exchanges can invest in projects or applications on that public chain in the primary market, then list these projects on their exchanges, and through a series of market activities, guide their own large user base and capital to power these projects. After a successful exit from the secondary market, they can reinvest the new funds into other projects on that public chain.

Such strategies tend to perform well in favorable market conditions: projects empowered on a public chain tend to have better market performance, thereby attracting more users and funds to the exchange. These users and funds will pay more attention to new projects that receive empowerment. The exchange also has a higher probability of attracting more teams to the public chain empowered by the exchange, building new projects or deploying existing projects on this public chain through cross-chain deployment. Ultimately, this achieves a win-win cycle for the exchange and the public chain ecosystem.

This strategy was initially implemented by BNBChain and gained momentum in 2021, leading the development of other public chains apart from Ethereum. FTX Exchange also discovered this strategy, and in this strategy, the public chain does not have to be a self-issued public chain by the exchange, but can be any public chain as long as the exchange is willing to support it.

As a result, the story that follows is FTX’s full support for the Solana ecosystem, and together they form a flywheel effect under this strategy. Even without replicating mature Ethereum projects to Solana through EVM compatibility, Solana has still achieved considerable success.

3 Wrong Empowerment Cases

However, not all ecosystem applications that perform well can empower the public chain in return. During this period, there were some public chains lagging behind, such as Flow. Flow is a temporary NFT project – a public chain launched by the team behind Crypto Kitties, Dapper Labs, and they also launched a well-known NFT project NBA Top Shot based on Flow, which gained millions of users and reached hundreds of millions in monthly revenue at one point.

Although there are excellent applications on the Flow chain, Flow’s performance is not satisfactory at all, and we can identify some potential influencing factors.

First, the well-known projects on the Flow chain, such as NBA Top Shot, are mostly projects officially launched by Dapper Labs. These projects are more of a blockchain version of mature business models in traditional fields, attracting mostly traditional Web2 users who use email, credit cards, and other traditional Web2 login and payment methods. Therefore, these users attracted are not truly knowledgeable about and engaged in Web3; they only stay within the application and do not interact with other projects like genuine Web3 users.

Second, these projects’ business models do not directly use the FLOW token, resulting in very little demand for the FLOW token. Therefore, such projects, even with a large number of users and considerable revenue, and even using the Flow chain, do not empower FLOW holders and are unlikely to empower other projects on the Flow chain. They only allow the operating team of the project to earn good revenue through the business model.

Third, Flow chain did not develop a comprehensive DeFi system, so it did not experience the same kind of ecosystem development as other public chains where DeFi acts as a catalyst and cooperates with the public chain.

The growth logic of a public chain

1 Value-adding logic of public chains: the transformation of the nature of public chain tokens

After examining the experiences of successful and failed public chains, it is easy to identify that the public chains that successfully developed robust ecosystems collaborated with DeFi. And a significant change occurred. If we consider a public chain as a Web3 computer, the original role of the public chain token was simply to provide a resource that anyone using this computer had to pay, i.e., gas fees.

During the rise of DeFi, public chain tokens have taken on a new role as the most trustworthy Web3 native assets on these chains, widely used in DeFi as underlying assets for endorsement. This process marks an important transformation, similar to how gold evolved from being a raw material in the manufacturing industry to becoming a financial asset, thereby greatly increasing its value.

With this transformation, we can better understand that the rise of public chains is inseparable from the development of DeFi. This is because as the most trustworthy assets on the chain, these public chain tokens will be in high demand with the development of DeFi and will be extensively locked in these applications.

This created a massive demand, enough to propel the initial development of public chains. This is also why BNB’s market value has entered the top ten, as it has transformed from a platform token on exchanges to a public chain token in high demand by the DeFi ecosystem. On the other hand, one of the reasons for FLOW’s poor performance is because its DeFi ecosystem failed to develop and FLOW was not widely locked in DeFi.

2. Viewing token appreciation from a different perspective

If DeFi can bring significant demand for public chain tokens, does this effect apply to all types of applications? Not exactly. This brings us to the question of how to judge the logic of token appreciation.

First, we need to review the relationship between stocks and listed companies. The business performance of a listed company may to some extent be reflected in the stock price, but the stock price does not significantly affect the company’s business operations. This is why Luckin Coffee was able to make a comeback despite its stock price decline.

Similarly, if we consider Web3 projects as companies, the projects’ own business operations and token prices will also have a certain relationship. Of course, Crypto projects are different from listed companies in many ways.

First, Web3 projects have various business models. Some projects may have good business operations and make a lot of money, but this money may have little or no direct impact on the tokens, as seen in the case of Uniswap. Uniswap mainly earns revenue from transaction fees, and the team and LPs behind Uniswap have made a lot of money through this business model. However, this revenue has no relation to UNI token holders, and there is no mandatory use of UNI in Uniswap’s business model (governance demand is weak).

Second, if a Web3 project has many scenarios where the token is used in its operations, then when the project operates well, it will create more demand for the project’s token, thereby influencing its price. However, Web3 projects have an illogical aspect in that once the operations are linked to the token, it not only allows the operations to affect the token price but also creates situations where the token price can affect normal operations.

For example, in a market with good conditions, due to positive outlook, the sentiment of investors is more aggressive. Many DeFi or blockchain gaming projects offer incentives to attract users to participate and invest more funds. Conversely, when the market conditions are poor, investors become more conservative. Faced with the same incentives or mechanisms, users either choose not to participate or contribute less funds. And once they receive incentives, they quickly sell off to take profits.

As a result, the normal operation of projects is also affected by market conditions, which in turn are influenced by the macro performance of traditional finance.

In addition, as mentioned earlier, if a Web3 project has many scenarios where tokens are needed, does this automatically drive up the token price?

Actually, it’s not always the case. It depends on the specific situation. Let’s take the most common scenario of using tokens for payments. For example, a project has a core functionality that requires the use of its tokens for payment. However, in such cases, it often happens that A buys tokens and then trades them to B, who can then sell the tokens to generate revenue.

Essentially, in this process, the amount of tokens the buyer buys will be given to the seller. In terms of transactions, the supply and demand of buyers and sellers are balanced. In this case, even if there is an increasing demand for payments, it does not drive up the token price, because the buyers and sellers are balanced.

Therefore, not all uses of tokens in operations can give value to the tokens. It only happens when the process ensures that buyers receive more tokens than sellers. In such cases, the better the operations, the more the token value tends to increase.

In summary, if you want the token to appreciate, the first prerequisite is that the project’s operations must involve scenarios where tokens are used. Secondly, there are two ways to increase the token price: on the operational level, find ways to improve project operations to increase the demand for tokens and thereby boost the price. On the market level, focus on expectations and enhance future development prospects for the project.

Lastly, you need to wait for the improvement of the macro performance of traditional finance. Only then can you achieve perfect timing and conditions. This way, projects can gain maximum growth momentum in both operations and transactions.

3. What kind of blockchain ecosystem can better promote its development?

In the previous section, we described a general approach to increasing the value of tokens, which can also be applied to public blockchains. Many people mistakenly believe that the utility of gas fees for transactions on a public chain will drive up its value. They assume that as long as there are enough applications on the public chain, there will be a significant demand for gas fees, leading to an increase in value.

But in fact, the logic of gas fees is the same as the payment logic mentioned above. Users need to purchase public chain tokens to pay for gas fees to use certain functions. However, these paid gas fees ultimately flow to the miners. The gas fees received by the miners as sellers are equal to the quantity purchased by the users as buyers. This does not mean that there will be an increase in logic just because it is used more.

However, now Ethereum has introduced EIP-1559, which has redefined the allocation of gas fees. A portion of the gas fees will be burned and destroyed, so the quantity as buyers is now higher than that as sellers. Today, Ethereum can indeed be said that as more and more applications are developed on it and as people pay more gas fees, the amount of Ethereum burned also increases, resulting in a greater quantity as buyers compared to sellers. This makes Ethereum more valuable due to the development of its ecosystem.

However, the difference between buyers and sellers brought about by gas fees is relatively slow and imperceptible. What truly brings a more intuitive effect is the extensive use of public chain tokens as underlying collateral assets in DeFi and their lock-up. This demand, along with the difference between buyers and sellers, is much larger and has a more direct effect.

The business models of DeFi projects are often mature, so they tend to have lock-ups. Following this train of thought, let’s look at what types of ecosystem projects, other than DeFi, can have similar effects. In fact, other types of projects such as NFTs, Web3 applications, and blockchain games have diverse business models with no fixed pattern, so they require specific analysis based on the individual case.

For example, most PFP-type NFTs are minted or directly sold using public chain tokens, and their revenue goes to the NFT teams. This situation is similar to a transaction, and it doesn’t have a strong empowering effect on public chain tokens. A few NFT projects, such as NounsDAO, invest their funds into the treasury and govern them in a DAO format. This way, a large number of public chain tokens are locked up, and these types of projects have a better empowering effect on public chain tokens.

The situation with blockchain games is even more unique. Their economic model design is the most complex and doesn’t have a particularly fixed design method. It usually involves multiple tokens in a project or a combination of NFTs and tokens. However, the economic model mostly forms an internal loop where the gameplay is integrated with their own NFTs and tokens, forming a complete closed-loop system. There is usually little connection between the economic model and public chain tokens. Public chain tokens are often used to purchase or mint NFTs or tokens in blockchain games, and this logic still reflects the use of public chain tokens in transactions. Therefore, the empowering effect of this type of project on public chain tokens is very limited.

So, DeFi with lock-up nature in its business model will be the most important application category in the development of public chains. A public chain with a rich DeFi project can attract and retain a large amount of capital, and verify its ability to handle a large amount of capital. This not only verifies the business model and the stability of the product in extreme scenarios such as liquidation, but also validates the security of smart contract languages.

On the other hand, DeFi can empower other projects on the chain, just like traditional finance empowers entities. It can bring more composability and higher asset utilization to other projects’ assets, and also provide more leverage funding for the entire public chain. DeFi is like an important financial infrastructure for a public chain, similar to banks and financial institutions in a city. Therefore, given limited resources and time, prioritizing the development of DeFi is the first goal of a public chain.

4. Why didn’t Polkadot develop during the last bull market?

Based on the previous discussions, we can gradually piece together a clear logic about why Polkadot did not perform well in the last bull market.

First, the bad timing caused Polkadot, which was just getting started, to stumble. As we mentioned earlier, the current crypto industry is heavily influenced by traditional finance. Most public chains that emerged in 2021 started to rise with the help of a large amount of funds flowing from outside the crypto industry, combined with DeFi.

Polkadot itself does not support smart contracts, and it was not until December 2021 that the first batch of parachain slots were successfully auctioned. It was not until early 2022 that parachains supporting smart contracts gradually went online in the Polkadot ecosystem. Polkadot was half a year late, but then a series of events led the entire market into the prelude of a bear market.

The outbreak of the Russo-Ukrainian War in February 2022 stimulated the return of the US dollar. Then in March 2022, the Federal Reserve began its interest rate hike cycle, setting the stage for setbacks in the development of the entire industry. The most impactful blow came in May 2022 with a series of black swan events triggered by Luna, causing a large amount of capital to leave the crypto industry and leading to a bear market.

Polkadot encountered a bear market at a time when it should have vigorously developed. Some parachains were implementing incentive measures similar to Avalanche at this time, but the effect was greatly reduced because the sentiment of the entire crypto market had become conservative. The funds participating in the incentives decreased, and even if they did receive incentives, they tended to sell off their assets. Many Polkadot DeFi projects that we have communicated with also feedback that some incentive measures organized during the bear market phase had the opposite effect. Therefore, going against the trend is very difficult, and the development of Polkadot needs to go with the flow.

Secondly, DOT has not undergone a transformation in the nature of public chain tokens, and its financial value has not been fully realized. Although the market’s expectation of Polkadot once drove its price to a relatively high position before the slot auction was launched, at that time Polkadot’s ecosystem had not yet developed, and it was unable to convert such advantages into actual ecosystem, nor was it able to shape a mature DeFi with DOT as the core asset. However, fortune favors the prepared mind, and this point is not only the current shortcoming but also a key factor for Polkadot to rise again in the future.

Ethereum’s current status cannot be separated from its rich DeFi ecosystem. Among the top five projects ranked by TVL on Ethereum, Lido, which is related to LSD, is far ahead, and the stETH derivative product generated by Lido is widely used in other DeFi applications. For example, the ETH/stETH pool on Curve is also one of the largest pools on Curve, and there are more than 600,000 stETH in Aave. It can be said that LSD is the most important DeFi category on Ethereum.

In contrast, Polkadot itself has a rich set of Staking assets. If a project could capture half of the LSD market on Polkadot, based on the current Staking ratio of around 50%, its TVL could reach an astonishing 681 million DOT, which is a TVL worth 2.72 billion USD, making it the 7th largest TVL project in the Crypto industry.

Once a project achieves this goal, it also means bringing 2.72 billion USD of new funds to the Polkadot ecosystem, which can in turn boost the development of other DeFi projects. Therefore, the Polkadot ecosystem still has tremendous potential, and developing LSD projects and incentivizing more Staking derivatives of DOT to be used in other DeFi applications at the right time are key to Polkadot’s future resurgence.

In this process, timing is the most important factor. It is crucial to develop in sync with cycles, which means allocating resources in a way that maximizes utility. The second important factor is when to take what kind of incentives, but currently, the timing is not right, so this article temporarily does not discuss it.

How can Polkadot break through the current market?

1. Overall approach: Consolidating the power of governance

In order to make Polkadot more resilient, it needs to become more decentralized, which also gives it some advantages when facing regulatory uncertainty. For example, when the U.S. SEC strengthened its oversight of exchanges such as Coinbase and Binance.US, many coins from various public chains were delisted, but DOT was not among them, which is also one of DOT’s advantages. Therefore, we must fully understand the Polkadot team’s desire for decentralized operations of Polkadot.

On the other hand, with the launch of OpenGov on Polkadot, we have seen some opportunities for change. OpenGov allows many DOT holders to participate in governance in a more open manner, decentralizing power and giving Polkadot’s on-chain governance greater freedom and possibility. Although some negative incidents have occurred on OpenGov, on-chain governance is still in the early stages of exploration, and a certain level of chaos is acceptable. However, further, we should also see the other side of the coin, which allows non-official roles to actively drive the operation of Polkadot.

So, we can see decentralized governance as an unofficial force driving the development of Polkadot, and managing Polkadot well relies on the collaboration of official and decentralized governance.

One of Polkadot’s core advantages is its treasury, which ensures a continuous stream of funds for ecosystem development. However, the use of treasury funds in the past has been relatively broad, without clear goals or only vague objectives, such as supporting hackathons and some tools. Basically, it is up to the voters to judge which proposals are beneficial for Polkadot’s development, and then support them, hoping they will achieve the desired results.

But this approach tends to be more luck-based, and it is difficult for individual proposals without clear goals to form effective cooperation. Therefore, the governance of Polkadot’s treasury must also have a strategic development plan. Only by ensuring that all treasury funds are clearly aligned with the development plan can the governance of Polkadot be promoted and evolved.

So, in order for Polkadot to improve, we need to promote the synergistic development of official and decentralized governance. The official roadmap and management style for Polkadot are provided by the official team, and the treasury governance should also have its own roadmap and management style. The official team sets the upper limit for Polkadot, and treasury governance sets the lower limit.

2. Emphasize the balance between price and development

Firstly, we need to respect the consensus reached between the Web3 Foundation and the SEC: Polkadot’s native digital asset (DOT) has undergone a transformation from being a security to being software. Therefore, it is impossible to discuss issues related to the DOT price at the official level, as it may touch upon sensitive areas for the SEC and subject DOT to regulation. Therefore, we need to understand the challenges faced by the official team.

But as non-official individuals, how we understand the value of DOT can be a different matter. So, we need to clarify that as participants in decentralized governance within the Polkadot ecosystem, we are not influenced by the SEC and we must value the worth of DOT.

Because DOT is not just an asset, it is also an important indicator of people’s confidence in the Polkadot ecosystem. And as mentioned earlier, the impact of price on operations has been explained in detail. If we focus only on operations without considering the perspective of supporting the price, it is highly likely that we will take wrong actions at the wrong time, resulting in less-than-desirable outcomes. Therefore, the strategies and solutions outlined in our strategic report will be aimed at enabling Polkadot’s growth.

Many projects have worked hard but their efforts are not aligned with growth logic, and they overlook the connection between project management and price. The end result is that the project team works hard, but the project’s price does not rise and the project fails to take off. Technical prowess does not directly correlate with the success of a token, and there are numerous cases that highlight this fact. Anyone who delves deeper into the cryptocurrency industry can deeply appreciate this.

3 Strategic Positioning and Goals

Polkadot’s positioning should not be seen solely as a multi-core computer, but should be positioned from the perspective of the entire chain. It is a multi-core computer from the perspective of the entire chain.

To achieve this positioning, a goal needs to be achieved: to attract genuine users and funds to Polkadot, thereby creating a network effect. However, this implies that the value of DOT needs to increase. Growth can solve most problems, so our strategic goal is only one, which is to make Polkadot grow. The most crucial element here is that the token price needs to rise and the market value needs to be attractive enough to attract more people to join and participate. Otherwise, if the market value is not good, not only existing users will be lost, but people outside will also be unwilling to build and participate on Polkadot.

I have had in-depth communication with dozens of startup teams or teams that have been deeply involved in Polkadot. Many startup teams carefully consider where to deploy, and one important indicator is which platform has more users, more funds, and is more likely to lead to project success.

Therefore, despite the abundant support Polkadot offers to startup teams, many teams still choose Ethereum and Layer 2, which have more users, funds, and a larger ecosystem, as these are the network effects of the Ethereum ecosystem.

At the same time, many teams that originally deployed on Polkadot are also considering entering Layer 2. Because Polkadot has not formed a mature ecosystem, the current price has discouraged many users and made them leave Polkadot. Therefore, the teams that have built on Polkadot are also seeking other ecosystems that can bring growth.

Therefore, Polkadot has only one goal – growth.

As for how to achieve growth, we need to divide it into two categories of tasks. One is to maintain stability, to ensure that Polkadot can develop steadily, in order to retain existing users, assets, and applications on Polkadot. The other is to create a more attractive future for Polkadot.

As the Polkadot Ecological Research Institute, we hope to provide some suggestions and work together with organizations and individuals who want to help Polkadot achieve better development, in order to build a stable and promising future for Polkadot.

Solutions or Approaches

In response to some common problems or areas for improvement in Polkadot, we have proposed several solutions or approaches. We welcome discussions.

The current treasury governance system in Polkadot basically allows anyone to propose, and DOT holders can only vote for or against these proposals. However, this situation is like spending money to seek development, but what it develops into is more of a matter of chance. It is very likely that money is spent without achieving the desired effect, or there may be awkward situations of reinventing the wheel or a lack of collaboration.

It is difficult for things to succeed by chance. Only with good strategic planning and concentrating all resources and efforts around a goal can we have a better chance of achieving the desired results.

Therefore, we need to develop a strategic development outline for “How should Polkadot’s treasury be governed?” The governance process of Polkadot’s treasury can be decentralized, but there needs to be a strategic central idea for governance. Governance should not passively wait for proposals from people, but rather there should be a proactive strategic development outline to better promote governance for development.

1. Polkadot’s “governance framework”

So how should we do it? We hope that the governance of the treasury ultimately leads to the better development of Polkadot. In fact, this goal is consistent with the goals of the project. In the same way that operating a project requires different departments, we can also build a similar system based on the governance of the treasury. For example, there can be a dedicated technology department for research and development, as well as a dedicated marketing department for promotion.

However, I would like to consider this governance as a logic of governing a country, because it is not only about dividing tasks into departments, but I will also build a new role identity called “citizen” within the Polkadot ecosystem.

Why do we need citizens? There was an incident in China where, from 1991 to 1993, Hainan experienced a “gold rush” due to reform and opening up, causing real estate prices in Hainan to skyrocket. A lot of speculative money rushed in, but when the control policies were implemented, property prices in Hainan plummeted, causing many investors to flee and leaving behind a large number of abandoned projects and bad debts, ultimately affecting the local residents.

A similar situation is happening in the crypto industry as well. Many new projects create hype through airdrops, attracting a large number of opportunistic investors. However, once the airdrop ends, these investors immediately sell their tokens. After they leave, only chaos remains, casting a shadow over the initial development of the project and leaving genuine supporters frustrated.

So, how does a country curb speculators and incentivize genuine builders? The country does this through a household registration system, where only those with a local household registration can buy properties. The benefits of property value appreciation are reserved for those who are willing to settle and contribute to the development of the city, and there are also more welfare policies exclusively for local residents.

Similarly, we should also grant a “citizen” identity to DOT holders who actively participate in the Polkadot ecosystem, differentiating them from those who merely speculate on DOT without contributing to its development. Citizens will have a corresponding credit system and rights.

And this framework, similar to national governance, is an important reference proposed by the author for the decentralized governance of the Polkadot treasury.

This framework will treat the governance of the Polkadot treasury as government governance of a country and will establish different government departments, including: technology department, propaganda department, investment department, governance department, and activity department.

Each department will evaluate proposals related to them separately (this requires new proposals to be submitted to the corresponding department and apply for funding), and each department does not have a leader, but there needs to be a set of evaluation criteria. This criterion is based on the strategic goals that governance aims to achieve, and each department will also have a corresponding share of the treasury funds. (Feel free to add)

• Technology Department: Guide technical experts and members of the Technical Fellowship to develop more technical products, tools, projects, etc. that Polkadot needs. (Including support for technical training)

• Propaganda Department: Organize and manage media and communities funded by the treasury, and set some mainline tasks for propaganda, so that everyone can participate in promoting and spreading Polkadot more widely. (Including support for media and communities)

• Investment Department: Attract more outstanding projects to emerge or migrate to Polkadot by strategic investment and establishing a fund similar to a government industrial fund.

• Governance Department: Upgrade and iterate policies related to governance, and guide users to actively participate in Polkadot governance.

• Activity Department: Mainly support official hackathons or events needed by the ecosystem.

This way, it can ensure that treasury funds are used for the development of Polkadot in various aspects, and also ensure that the use of treasury funds is planned and can be controlled, avoiding situations where too much funds are used or the distribution of funds is unbalanced due to the lack of a treasury fund usage plan.

2. 10 Strategic Goals of the Polkadot Treasury Governance

So how should these departments execute specific strategic goals? As we emphasized in the previous text, we want to build a stable and promising future for Polkadot in order to make it more attractive. Therefore, our strategic goals are also formulated around the directions of “stability” and “growth potential”. The specific strategic goals are as follows:

① Introduce policies to support the development of LSDFi projects and other DeFi projects in the Polkadot ecosystem (lending, AMM, decentralized stablecoins, etc.).

② Launch a public chain incentive program when the timing is right.

The growth of DOT’s price is not unknown. In the previous text, we explained in detail the process in which many emerging public chains quickly developed using similar methods during 2021, and more than one public chain has validated this approach. So, by taking the same measures during favorable macro conditions, we can replicate the prosperity of these public chains. This is a deterministic opportunity and a goal that allows Polkadot to develop “stably”.

To achieve this, support from DeFi projects on Polkadot that can use DOT as asset endorsement is necessary. However, since Polkadot’s relay chain itself does not support smart contracts, in order for DOT to be used in DeFi, it must enter various DeFi through the issuance of derivative assets corresponding to DOT, which is why LSDFi projects are encouraged.

③ Introduce policies to encourage the development of RWA, Web2.5, and DePIN.

Some may say that the second goal simply means waiting for a bull market to implement it effectively. But what if the bull market is delayed? How will Polkadot continue to develop?

As we mentioned earlier, the influx of a large amount of external capital into the crypto field gave rise to the bull market in 2021. Similarly, as long as it can attract more capital from the outside into the ecosystem, it will bring growth. The two best ways to do this are RWA and Web2.5.

RWA can attract a large number of traditional assets or traditional financial products into the crypto field. As seen from the example of introducing the US Treasury yield by MakerDAO, it can effectively increase the yield of some projects or products on the chain.

In addition, the on-chain functionality of RWA is also quite practical for traditional purposes. For example, on-chain funds are permissionless and can reach global funding, and the participation and exit of these funds are very convenient.

At the same time, RWA can further utilize other DeFi to form more high-yield products, and this process is open and transparent, avoiding the bundling of bad products with high-quality products like in the previous subprime crisis, forming a black box and avoiding similar problems.

In the traditional financial field, interactions between different entities are cumbersome, but using blockchain technology can solve the problem of mutual trust and greatly reduce trust costs (such as reducing processing time and transaction costs). The Bank for International Settlements (BIS) has collaborated with the central banks of France, Singapore, and Switzerland to release a new report exploring how central bank digital currencies (CBDCs) and automated market maker (AMM) technology are changing foreign exchange trading.

Therefore, the development of RWA is not only needed in the crypto field, but the traditional field also needs the on-chain functionality of RWA, which means it goes both ways. Since the development of RWA is an inevitable trend, it also indicates that a large amount of capital will enter the crypto field through this means. Polkadot also needs to prepare in advance for this trend, capture the influx of capital into the ecosystem, and achieve growth.

The logic of Web2.5 is similar. Web2.5 refers to projects where traditional enterprises utilize Web3 technology. Even in a bear market, we can still see many traditional enterprises exploring Web3 marketing methods using blockchain technology. This is because fundamentally, such projects are closely integrated with business and are not heavily influenced by market conditions, but Web2.5 will still bring in a large amount of capital into the crypto field.

However, whether it’s RWA or Web2.5, we need to pay attention to how to design mechanisms that empower projects and the underlying public chains, without repeating the mistakes of Flow.

DePIN projects, on the other hand, can bring more decentralized storage, computing, network transmission, and other network resources to the crypto industry, expanding the hardware capabilities of the crypto industry. This can pave the way for more innovative projects beyond DeFi, blockchain gaming, NFT, and more.

Many DePIN projects require the construction of an additional resource network. In order to incentivize participants who provide resources to the network, a consensus mechanism is often needed to determine how they should be rewarded. This usually requires the project to design a special consensus mechanism to meet the requirements. The Substrate framework behind Polkadot, for example, can support project teams in adopting their own consensus mechanisms, which is a functionality that other Layer2 launch tools such as Cosmos SDK and OP Stack do not possess.

Therefore, if we carefully observe the composition of the ecological projects in different multi-chain ecosystems, we will find that Polkadot has the richest variety of ecosystem projects among all the multi-chain ecosystems, and Polkadot also has the most DePIN projects, such as decentralized computing network Phala and decentralized storage CESS. So, DePIN is not only an advantage for Polkadot, but also an important track for the future development potential of the crypto industry. Polkadot should further support DePIN and leverage its own advantages to a greater extent.

This objective is to build a promising future for Polkadot.

④Continuously build public goods.

A company has multiple departments, but among them, there must be some departments that are responsible for making money, while the remaining departments are responsible for spending money. It is not possible to make every department profitable, and the same applies to project operations.

The teams supported by Polkadot’s treasury function in the same way. They play a very important role, but they do not have the ability to independently generate revenue and achieve a balanced profit and loss. It is extremely difficult to require these teams to be self-sufficient. However, if these projects are not supported, it will affect the basic operations. Therefore, those necessary and important matters should be classified as public goods.

This includes data websites, tool projects, communities and media organizations in different languages, and technical training organizations. They all provide necessary support for the basic operations of Polkadot. The treasury of Polkadot should also provide long-term support for such projects to ensure the continuous improvement of Polkadot’s basic operations.

This objective is to provide a stable foundation for the continuous operation of Polkadot.

⑤Establish a citizen system.

Not only do we need to establish how to obtain and exit citizenship, but we also need to provide corresponding rights and credit systems for citizens. These rights can include the ability for citizens with a certain credit rating to freely navigate the Polkadot ecosystem with 0 gas fees or to have priority access to certain reward opportunities, and so on.

⑥ Design the long-term plan for Polkadot.

Continuously incentivize projects and citizens who are willing to stay in the Polkadot ecosystem, and motivate them to participate in governance, promote Polkadot-related communication and discussions, and engage in projects within the Polkadot ecosystem.

⑦ Make Polkadot more open and become a technological evergreen tree.

Polkadot needs to be more open to accepting and investing in new technologies. By investing and implementing incentive policies, existing new technologies in the crypto industry can be incorporated into the Polkadot ecosystem, even if they originated in other blockchains. These new technologies should either be absorbed into the Polkadot ecosystem or linked with Polkadot to ensure that the technology on Polkadot remains up-to-date. For example, ZK technology, account abstraction, etc.

Polkadot doesn’t need to reinvent the wheel, it just needs to collaborate with the best wheel makers, explore, and promote these technologies within the Polkadot ecosystem. Ultimately, Polkadot should possess what other chains don’t have in terms of technology and what other chains have, Polkadot should also have. Polkadot should be able to accommodate future emerging technologies as well.

⑧ Make Polkadot the core of the entire blockchain space.

As a multi-chain ecosystem network with the highest internal security in the entire blockchain space, Polkadot ensures that its parallel chains enjoy the same level of security. This unique advantage allows us to consider the Polkadot ecosystem as the safest neutral zone in the entire blockchain space, where any organization can engage in fair on-chain interactions on Polkadot. Therefore, if a project on one chain wants to interact fairly with a project on another chain at the same level of security, they can choose to migrate to Polkadot for interaction.

Of course, some may argue that such scenarios are very rare. However, we can see that more and more traditional enterprises are venturing into Web3. These enterprises may prefer to build their own application chains or migrate some DApps/DeFis to their independent application chains. Thus, application chains are undoubtedly the future trend. When two different application chains want to interact fairly or even form an alliance to collaborate within a governance framework on one chain, it is necessary to ensure consistent security between them. Such fairness and collaboration are common requirements in traditional business. Therefore, Polkadot will certainly become the ecosystem that these application chains want to participate in.

To achieve this goal, the most important first step is to establish connections for Polkadot, raise the banner of the entire ecosystem, and link almost all cross-chain technologies (such as Layerzero, Circle’s CCIP, Chainlink’s CCTP, etc.) with the Polkadot ecosystem, making it easy for other ecosystems to connect with Polkadot.

And launch policies to encourage Polkadot ecological projects to develop outside the Polkadot ecology and encourage other ecological projects to come to the Polkadot ecology (it can be understood as encouraging import and export), while creating zero-gas fee transactions within Polkadot, zero fees for XCM, etc. Ultimately, achieving Polkadot’s connectivity and zero fees in the entire chain landscape, making other projects not worry about cost and channeling issues when transferring to Polkadot for collaboration, thereby promoting Polkadot to become the largest secure and fair trading center in the entire chain landscape.

⑨ Mobilize all ecological participants to promote and publicize Polkadot together.

Currently, the promotion of Polkadot mainly relies on the official channels, and each ecological project is fighting on its own, without forming a united front. Therefore, it is necessary to design a way to unite investors, public chains, ecological projects, and users to promote and empower together, thereby creating a win-win situation.

⑩ Establish a feedback iteration mechanism.

During the development process of Polkadot, there must be many unreasonable aspects, but often feedback cannot be obtained in a timely manner, and some problems persist for a long time. This way is not conducive to the rapid iteration of Polkadot. Therefore, there needs to be a comprehensive feedback and iteration mechanism that allows all participants to provide their opinions on certain aspects, and finally summarize the problems that Polkadot urgently needs to solve at a certain stage. Consider regularly posting a summary thread on the Polkadot Forum, and after a period of time, conduct voting on the collected opinions to identify the most important issues for users in the current stage, and then propose targeted solution to solve them.

Furthermore, make Polkadot’s forums and discussion areas related to Polkadot governance, such as polkassembly, more widely spread on social media, and encourage more people to participate in the feedback.

There are many areas of Polkadot’s governance that can be improved. For example, the feedback during the governance process needs further optimization, such as saying no to some obvious behaviors, establishing preliminary rules (or on-chain laws), and conducting secondary voting on some behaviors. For potential bribery in elections or interference in governance, audits can be proposed (along with the establishment of monitoring rewards, where anyone who raises concerns can choose and mark their behavior, similar to a reporting mechanism, and rewards will be given if the report is successful) to prevent malicious disruption of elections or whale manipulation.

Of course, there are many governance issues, but we should not let many problems persist until the perfect solution is found. We should first propose some urgent solutions and solve some obvious and tricky problems. For example, there can be secondary voting for projects with more opposition, and measures to judge malicious opposition (which can be extended).

Attention:

Regarding these strategic goals, some can be executed concretely, some can be further discussed, and some are just initial ideas that still require time to explore specific solutions. Some of these ideas we have in mind, but due to space limitations, we will not elaborate on them here. Additionally, there are some issues that still require further research. In the future, we will develop a series of Roadmaps for Polkadot treasury governance based on these strategic goals to accelerate the decentralization of Polkadot governance and promote its development.

3 Three areas for improvement:

① Improving inflation: dynamically adjusting inflation

According to data from subscan.io, Polkadot’s inflation rate is approximately 7.38%. In August 2023, we conducted a survey on Polkadot, with respondents mostly being loyal users who have been involved with Polkadot for over 2 years and hold an average of more than 10,000 DOTs. Only around 11% of users believe that the current inflation rate of Polkadot is reasonable. This indicates that inflation is indeed a commonly concerned issue within the community.

(Model of inflation when ideal Staking annual yield is 10%)

• x-axis: DOT staking ratio

• y-axis: Annual inflation percentage

• Blue line: Annual inflation rate of NPoS, representing the total amount of DOTs minted for validators and nominators.

• Green line: Annual reward rate for stakers.

b. Secondly, Polkadot will abandon the slot auction mechanism in its future development and instead allocate block space through the sale of parachain time. However, there is still no clear conclusion on how to handle DOTs involved in the purchase and sale of parachain time. In the author’s opinion, these DOTs should still be aggregated in the treasury, similar to slashed funds and a portion of fees, and then a proportion of 1% of the total treasury should be burned every 24 days. This can help reduce parameter adjustments.

c. Why make these adjustments? Developed countries generally consider 2% to be a moderate inflation rate, and the Federal Reserve also hopes to control inflation between 2% and 3%. This proportion is suitable for stimulating the economy to some extent. Furthermore, by adjusting the yield in this way, more space can be given to project development. This means that projects with lower returns are more likely to thrive. It is also important to provide space for traditional funds to enter Polkadot. For example, if the returns of certain Real World Asset (RWA) projects are lower than the Staking yield, it will hinder the development of RWA projects on Polkadot.

d. Of course, this adjustment method is not the final ratio that the author believes. The author hopes to control the inflation rate within ±2%. On one hand, if the inflation is within 2%, DOT holders will not sell their tokens due to excessive inflation as it is within their acceptable range. On the other hand, the logic of public chain tokens is not exactly the same as traditional fiat currencies. When public chain tokens have a certain degree of deflation, they will be more valuable in terms of transactions, attracting more buyers. However, excessive deflation, such as more than 2%, is not conducive to the development of applications other than DeFi.

So, how do we adjust the inflation rate to ±2%? Currently, all burns in Polkadot are done in the Treasury. The current parameter is to burn 1% of the Treasury’s total supply every 24 days. We can change this fixed value of 1% to a flexible burn parameter, let’s call it “b”.

The adjustment rule starts from the first burn after a certain period and record the total number of DOTs after this burn as M1. One period consists of 15 Treasury burns (15 times 24 days is approximately one year). The Nth burn is denoted as An (n=1,2,…,15), and the total number of DOTs before the Nth burn is Kn (n=1,2,…,15). So, when the Nth burn is about to start, calculate the value of (Kn-M1)×15÷n. If this value is denoted as H, then if H>2%, b=b0; if -2%≤H≤2%, b=b1; if H≤-2%, b=b2. The relationship between b0, b1, and b2 should be b0>b1>b2.

In simple terms, this formula aims to calculate the approximate annual inflation rate based on the current total supply of DOTs before each burn. If the inflation rate is greater than 2%, then burn more tokens during this burn. If the inflation rate is already within ±2%, then burn fewer tokens. If the inflation rate is less than -2%, then burn even fewer tokens.

Through this dynamic adjustment of the burn parameter, we can ensure that the annual inflation rate is controlled within ±2%. As for the value of parameter b, since the DOT obtained from the parachain auction will be collected in the Treasury, which will affect the burn amount, the specific value of parameter b should be calculated after the parachain auction goes live.

② Improve Operations and Lower Barriers

This suggestion is for the official team. In terms of marketing Polkadot, it can consider increasing the topic activity and user engagement on traditional media platforms (especially Twitter). At the same time, it can provide more frequent updates on Polkadot’s latest developments, such as key updates and expected launch dates.

In addition, there is a lot for new and existing users to learn about Polkadot, and the learning curve is too long, which is not conducive to spreading the word. Measures should be taken to lower the learning barriers for users. For example, summarizing many of Polkadot’s new technologies and mechanisms in a simple and easy-to-understand way, and creating more concise content that is easier for non-technical people to understand. Another option could be establishing a continuously updated set of content that allows Polkadot newcomers to quickly understand its past, present, and future. Organizing Q&A activities or other means to disseminate important information could also be helpful.

https://forum.polkadot.network/t/polkadot-app-for-onboarding/4032), but this is still not enough. In the future, we hope to further simplify the user’s operation, so that users only need to express their intentions, and an application can directly execute without the need for complicated on-chain operations. ③Improving governance functions For example, the current voting process for proposals is too simplified. Besides voting for or against a proposal, it should be further divided into specific aspects such as feasibility, costs, etc., so that the proposer can optimize based on this feedback and make suggestions that are more likely to be implemented. At the same time, there should be a standardized format for how proposals should be written and what content should be included. The approval process for proposals should also have a standardized verification and feedback mechanism, such as adding more feedback indicators such as feasibility and costs, and providing richer options to show how the proposal performs in various indicators.

4 Possible Questions about the Plan

①How to ensure that treasury support does not affect the price of DOT? After OpenGov, many DOT holders believe that treasury support for many proposals leads to a large amount of selling pressure, so they voted against a large number of proposals. However, this approach undoubtedly ties one’s own hands, because limiting treasury expenditure means limiting development, which will only make the development of Polkadot worse. But this sentiment is not just held by a few individuals, so simple preaching cannot persuade a large number of people who think this way. Therefore, the only way to address the issue of selling pressure caused by treasury support is to address it from a mechanism perspective. Here, the author offers two ideas: a. Extend the distribution time for all treasury support, distributing a portion of the rewards in each block over a period of time. This not only prolongs the redemption period, making everyone who receives rewards continuously receive them, forcing them to wait for a certain period of time before they can receive all rewards, thus increasing participant retention; it also spreads out the selling pressure over a long period of time, avoiding panic-induced market crashes. b. Promote the development of decentralized stablecoins like MakerDAO and distribute rewards in the form of stablecoins generated through over-collateralization. In this way, treasury funds will not cause selling pressure, and if proposers have a bullish view on Polkadot and are willing to convert the stablecoins they receive into DOT, it will create buying pressure. However, the drawback of this approach is that the utilization rate of funds becomes lower, because MakerDAO’s mechanism involves over-collateralization, which means that if the treasury support is $10,000, it may require more than $10,000 worth of DOT to generate $10,000 of decentralized stablecoins. This to some extent solves the problem of obvious selling pressure caused by treasury support.

②Aren’t these strategies too proactive and contradict the principle of decentralization? Decentralization does not mean that there cannot be proactive initiatives, and proactive initiatives do not mean centralization. The strategies mentioned in this article can only be implemented through governance voting, and this article is just providing strategic references. In addition, Polkadot needs to take proactive measures at this stage. The current public blockchain landscape is dominated by Ethereum and its Layer 2 solutions, which have the largest network effects in terms of users, projects, and funding. When Ethereum was first launched, there was no public chain with a large support for smart contracts, so it was enough for Ethereum to focus on its own development, as it was the pioneer in the market. However, for other public chains now, there is already a highly mature and richly-ecosystem Ethereum with strong network effects ahead of them. Therefore, other public chains cannot simply rely on technical excellence to attract users, projects, and funding because new projects are more inclined to mature markets where success is more possible. So, including Polkadot, other public chains must adopt more proactive strategies to attract users, funding, and developers.

③These strategies have a lot of incentives. What if they result in favoritism? First, it is impossible to achieve 100% fairness and justice. No matter how clever the measures are, there will still be areas that can be manipulated. Secondly, instead of not making mistakes and just researching from the sidelines, we, the Polkadot Ecosystem Research Institute, hope to constantly experiment and explore possibilities for the future. Even if we are criticized for making mistakes, we believe that it is better to make mistakes than to do nothing or slow down the iteration speed by 50% for the sake of an additional 5% of fairness. We hope that the entire mechanism can quickly try, iterate, and evolve to a stable and error-free state.

Epilogue

After finishing this nearly 30,000-word report, the author feels deeply moved. For Polkadot, some may consider it a successful representative as it was once in the top ten of global market capitalization and was even regarded as “beyond Ethereum”. However, the actual development process is much more challenging than we imagine, and it will also face many criticisms and doubts, just like many startup teams. In the past few years, we have witnessed the construction of Polkadot from scratch. Although it is still in the early stage of development (we think so), compared to many other Web3 startups of the same kind, it has gained a good reputation and received many accolades. However, there are still many problems to be faced in the development. As a participant in this ecosystem, we do not want to be mere “onlookers” or “complainers”, but to immerse ourselves and explore new possibilities with the spirit of Web3. This is a less traveled path, but we are still moving forward, along with a small group of people. Once again, thank you for patiently reading this lengthy report. I believe that you must have a deep concern and expectation for Polkadot’s present and future. This is our honor and also the driving force for Polkadot’s progress. Since Dr. Gavin proposed the concept of Web3 almost 10 years ago, we are still on the road. Please continue to be patient and persevering. “Pessimists are always right, optimists always move forward.”

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