Meta/crypto

3 possible reasons why Polkadot plays second fiddle in the L1 race

2021 was something of a “coming of age” for many Layer One (L1) blockchain protocols as the growth of decentralized finance (DeFi) and non-fungible tokens (NFTs) forced users to look for solutions outside of Ethereum (ETH) network, where high fees and network congestion continued to be obstacles for many.

Protocols like Fantom (FTM), Avalanche (AVAX) and cosmos (ATOM) saw their token values ​​soar and ecosystems thrive as 2021 drew to a close. Meanwhile, popular projects like Polkadot (POINT) underperformed comparatively, despite the high expectations many had of the sharded multi-chain protocol.

Daily Chart FTM/USDT vs AVAX/USDT vs ATOM/USDT vs DOT/USDT. Source: TradingView

Aside from the specific capabilities each protocol offers in terms of transactions per second and time to completion, here are a few factors that may have played a role in DOT’s lagging performance compared to other L1 competitors.

Interoperability is a key factor

One of the main themes of 2021 has been cross-chain interoperability between separate blockchain networks, with a bridge to Ethereum being the most important connection to make as most projects are currently running on the network.

Protocols like Fantom, Binance Smart Chain, Avalanche and Harmony developed cross-chain bridges and this resulted in a noticeable increase in their token price, total locked value and on-chain activity.

Despite the fact that Polkadot was specifically designed to offer multi-chain support as a “layer-zero” meta-protocol, there was no major release of a bridge connecting Polkadot to Ethereum in 2021, and this left the protocol from crypto -Traders unloved return to engage in DeFi and NFTs.

Cosmos also didn’t see a major bridge connecting its ecosystem to Ethereum, but there were minor integrations like the addition of Ether as a collateral deposit on Terra that showed cross-chain compatibility was possible.

The late start of parachain auctions

As 2021 drew to a close, all of the aforementioned networks saw a healthy amount of activity and cross-protocol interactions, while projects on Polkadot were still finalizing their preparations for mainnet launch.

This was partly because the parachain auctions for Polkadot didn’t start until November 11, when Moonbeam (GLMR), an Ethereum-compatible smart contract parachain, secured the first slot.

DOT saw its price rise to an all-time high of $55 on November 4th when those interested in contributing to the parachain auctions secured their tokens, but by the time the auctions officially started its price was already in the downtrend Towards a low of $23.28 on Jan 10th.

Moonbeam Official went live on the Polkadot network on January 11th and managed to accumulate more than 1 million transactions as users were finally able to transfer ERC-20 tokens to the Polkadot ecosystem.

⚡​ ONE MILLION TRANSACTIONS ⚡️
Moonbeam hits 1M tx on the network! Moonbeam lights up @Speckle‘s ecosystem with new integrations, 100,000+ wallets, 700+ ERC-20 tokens and 1 million GLMR tokens locked with collators.

See the networkhttps://t.co/6ZhRLYDHgX pic.twitter.com/tczI7mAjlR

— Moonbeam Network (@MoonbeamNetwork) January 20, 2022

The price of DOT saw a slight increase after the launch of Moonbeam but has fallen back below $25.

Related: The launch of Moonbeam (GLMR) brings EVM interoperability closer to the Polkadot network

The benefits of holding DOT

A third factor that could weigh on DOT’s popularity and price is confusion over what the token is used for and the benefits it offers token holders.

Considering selling mine $POINT. I don’t see the purpose of the project anymore, many of the cool projects that wanted to build on it have migrated $MATIC or so.

Why should I keep it?

— Quinten Francois (@QuintenFrancois) July 29, 2021

Many of the competing networks use the native token to perform contract actions like token transfers or swaps, while protocols residing in the Polkadot ecosystem use their native tokens to pay for gas.

Aside from being used to participate in parachain auctions, the main uses of DOT include staking to help with network operations and security, and use in governance voting.

While governance skills are important to the overall health of blockchain protocols, the average cryptocurrency user still hasn’t shown much enthusiasm for participating in voting and is more interested in things like gaming, DeFi, and NFTs.

Multiple-layer-one solutions are launching developer and liquidity incentive programs, and emerging DeFi protocols continue to offer high-yield staking opportunities. Currently, DOT stakers are offering stakers an APR of 13.94%, and it may not be enough to satisfy the appetites of yield farmers looking to get more bang for their buck.

The long-term prospects for Polkadot remain strong and the project has an active and dedicated community of followers led by an experienced development team led by Ethereum co-founder Dr. Gavin Wood will be accompanied.

The launch of Moonbeam could indeed mark a turning point for DOT as cross-chain compatibility is now live and other parachain projects should be launching on mainnet shortly, but it remains to be seen how long it will take the network to catch up its L1 competitors who have a head start in cross-chain interactions and increased on-chain activity.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should do your own research when making a decision.

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