In 2022, the U.S. Federal Reserve hiked interest rates 7 times for a total of 425 basis points, causing a global liquidity crunch. Moreover, with the collapse of several large crypto institutions, 2022 suffered a severe bear market. The DeFi TVL fell 76% throughout the year, and the total market value shrank by about 65% from its high.
No ecosystem was completely immune from the volatility, yet Polkadot performed rather well in 2022:
- Polkadot completed 15 seamless and forkless upgrades;
- Relay Chain v9190 unlocked secure cross-chain data transfer over XCM which helped Polkadot achieve interoperability across chains;
- OpenGov optimized the network governance system with a more decentralized and flexible mechanism.
- 74 Parachains linked to Polkadot and Kusama (referred as “Dotsama”) networks, and more than 540 projects deployed on the Polkadot ecosystem, DeFi, NFT market, infrastructure (wallets, tools, and indexing), and games were growing fast.
- Polkadot’s developer activity remained industry-leading, with the community metrics growing consistently.
Part 1: Mainnet Overview
Smooth Network Operation
The Polkadot Mainnet overall operation this year was stable: the number of active Validators remained at 297; the number of active Nominators steadily increased by 4.9% at the end of the year, compared to Q1; and 87% of increasing DOT user accounts compared to Q1 reflected the Polkadot network’s overall good situation in 2022.
Polkadot Mainnet also completed 15 seamless and forkless upgrades this year, bringing the total number of upgrades to over 50 in its lifetime. Polkadot outperforms Ethereum in terms of ease of upgrading, which completed 3 and 4 hard fork upgrades in 2022 and 2021, respectively.
More Decentralized and Secure Architecture
Polkadot made many improvements in decentralization and security. For example, Polkadot’s Nakamoto coefficient reached 70 by the end of 2022, much higher than that of mainstream chains such as BSC, Solana, and Avalanche. The Nakamoto coefficient combines the Gini coefficient and Lorenz curves to measure the minimum threshold required to break the blockchain network, with higher values indicating greater decentralization.
Polkadot’s high degree of decentralization is mainly due to the NPoS consensus mechanism, which can carry out staking distribution more efficiently and equitably, boosting the decentralization and security of the network.
In addition, the Nomination Pool that Polkadot introduced this year significantly lowered the threshold for participating in a stake — from the previous minimum stake of 10 DOT to the current 1 DOT — and further improved the decentralization and security of the Polkadot network.
Another piece of good news was the Web3 Foundation announced in November 2022 that DOT had moved from security to software, making a key milestone in Polkadot’s decentralization progress.
Part 2: Core Technology Updates
XCM is Growing Rapidly
- In the crypto market, there were 12 security accidents triggered by cross-chain bridges, resulting in a $1.89 billion loss. Cross-chain bridge security has become an important barrier limiting the crypto market’s development. Polkadot XCM technology is one of the most secure methods of asset cross-chain transfers.
- Polkadot team has been focusing on promoting XCM technology. Polkadot parachains accelerated the adoption of XCM channels after XCMv2 passed the second audit in April. By the end of the year, 19 parachains had opened 91 XCM cross-chain channels, and 162,000 transfers were relayed. Acala, Moonbeam, Parallel, Interlay, and Astar were the most active parachains using XCM in the Polkadot. 25 Kusama parachains opened 165 XCM cross-chain channels, and 187,000 transfers were relayed. The most active parachains using XCM on Kusama were Karura, Moonriver, Bifrost Kusama, Parallel Heiko, and Kintsugi.
Common Good Parachains
The Common Good Parachains are awarded through on-chain governance rather than the parachain auction. The Common Good Parachains serve several purposes, such as assisting Polkadot to do parachain governance, realizing asset creation & management that cannot be done by relay chains, etc. To some extent, the development of Common Good Parachains can reflect the Polkadot Network’s level of governance and function achievement.
In terms of development, Statemint/Statemine, Collectives, and Encointer have been launched. Statemint supports 24 assets’ creation and management, while Statemine supports 145 assets.
Bridge Hub and Polkadot <-> Kusama Bridge and Snowbridge, mostly cross-chain bridge hubs, were among the Common Good Parachains under development.
Part 3: Progress of Decentralized Governance
● More decentralized: In the V1 governance system, OpenGov system dissolves the council and gives authority to the community.
● The referendum mechanism is more flexible: In Governance V1, there is a fixed 28-day implementation delay period (the period between the end of the referendum and the implementation of the proposal), whereas OpenGov allows you to customize the election turnout, and approval rate, deposit, and minimum implementation period in advance.
● Higher efficiency: In governance V1, only one referendum can be held at one time, while multiple referendums can be held simultaneously in OpenGov, which is more efficient.
● The threshold is lower: Any token holder can submit a proposal at any time without restriction, significantly increasing the governance participation of token holders.
● Polkadot Fellowship: It will be launched in OpenGov to replace the technical committee. The Polkadot Fellowship has a wider membership (It can accommodate tens of thousands of members) and fewer barriers to entry (in terms of management processes and expertise) than the technical committee in governance V1.
OpenGov system is now live on Kusama. 52 referenda were initiated, of which 33 were approved, 8 were rejected, 7 were in the voting, and the rest were terminated. The types of proposals in the referendum include staking, treasury, white list, slot, etc.
Part 4: Development of Parachain
Parachain Overall Auction and Operation
In 2022, many parachains deployed to Dotsama. According to Parachains data, 186 projects were announced for the Dotsama Parachain Auction, 116 of which have completed cross-chain messaging tests based on Rococo — Dotsama parachain test network — and 77 projects participated in the Parachain Auction, and 74 parachains went live by the end of 2022. Be more specific:
● Polkadot has completed 35 auctions of parachain slots, with 33 parachains launched and more than 130 million DOT (US$620 million) locked up, taking up about 10.5% of the total supply.
● Kusama has successfully completed 63 auctions of parachain slots, of which 41 parachains have been launched, with a cumulative lock of nearly 300,000 KSM, which is about 2.8% of the total supply, valued at nearly US$7 million.
According to Polkadot parachain quarterly auction (as shown in Figure 7), the cumulative number of DOT locked by auction steadily increases, while bidding DOT by parachain auction is gradually decreasing, reflecting that the threshold of parachain auction is getting lower and lower, which will help to attract more projects into Polkadot ecosystem.
Performance of Leading Parachains
Polkadot parachains were first applied in 2022. We can see representative parachains in every field and have respectively been adopted in some very influential ways.
- Astar Network, a smart contract parachain, accelerated its ecosystem expansion after completing $22 million strategic financing at the beginning of the year. It attracted more than 150 projects to be deployed in its ecosystem.
- Efinity, an NFT parachain, partnered with gaming giant Square Enix to develop NFT for the top-tier Final Fantasy series.
- Composable Finance, a DeFi Parachain, closed a $32 million funding in early 2022 and launched cross-chain bridge Picasso in H2 of 2022.
- Centrifuge, a decentralized asset management parachain which is dedicated to introducing real-world assets into the blockchain, received investment from Coinbase Venture in November 2022, and BlockTower and MakerDAO subsequently created a $220 million pool of funds on Centrifuge.
- Manta Network, a privacy hub parachain.
- KILT, a decentralized identity parachain.
Similar to other blockchain ecosystems, the most active parachains in the Dotsama ecosystem are DeFi projects, and the DeFi sector also has the largest number of protocols.
According to DeFi TVL data, pair networks like Moonbeam/Moonriver, Acala/Karura, Astar/Shiden, and Parallel/Heiko have the best performance, among which the TVL of Moonbeam/Moonriver has reached $116 million, accounting for 46.62% of the total TVL of Polkadot/Kusama, more than twice that of Acala/Karura (22.75%). Parallel/Heiko (13.92%) and Astar/Shiden (13.28%) share a similar share of TVL.
In terms of application protocol amount, the Moonbeam/Moonriver pair network ecosystem has the best performance, with 44 and 54 DeFi protocols live, respectively, ranking first among all Dotsama parachains, followed by Astar/Shiden, which has launched 40 application protocols in total. The number of application protocols on other parachains is less than 10.
Part 5: Ecosystem Incentives
In 2022, the Polkadot Treasury was more active than ever. 125 of 206 proposals in the Polkadot Treasury were initiated this year, accounting for 60.7%, with 107 of which have been approved and awarded, accounting for 87.0%. The Treasury allocated a total of 1,721,744.933 DOTs to these proposals. Each one received an average of 16,091.1 DOTs (worth about $ 75,000).
The Polkadot Treasury is a collection of on-chain funds generated via inflation/block rewards, transaction fees, slashing, staking inefficiencies, etc. Now, the inflation rate is over 7%， and token burning is the main path of financial expenditure, accounting for the majority at about 66.6%. By the end of 2022, nearly 43 million DOTs, valued at approximately $200 million, were available in the Polkadot Treasury.
Web3 Foundation Grant
The Web3 Foundation, founded by Gavin Wood, continued to promote the ecosystem incentive program to fund software development and research work related to Polkadot, Kusama, and Substrate. In 2022, Web3 Foundation Grants achieved a historical milestone of 400 grants. According to Web3 Foundation disclosures, it funded 146 projects in 2022, a 17.7% increase from 124 in 2021. Despite the crypto market downturn, the number of projects funded by the Web3 Foundation increased considerably throughout the quarter.
The Substrate Builders Program (SBP) initiated by Parity is also a core funding program to support the Substrate ecosystem. Most parachain projects have received support from the SBP. In 2022, SBP selected 32 new teams from 127 projects to give access to Parity’s extensive technical, strategic, and ecosystem support.
Moreover, to stimulate the network’s overall growth and mass adoption, some leading parachain projects also launched Grant programs, such as Moonbeam Grants Program, Acala Ecosystem Program, SubQuery Grants Program, OAK’s Grant Program, Picasso/Composable Grants Program, etc.
Part 6: Ecosystem Funding
Even though the whole market performed poorly in 2022, the volume of deals and capital exceeded that of 2021. According to Messari, there were 1,769 fundraising deals in the crypto market throughout 2022, totaling $37.73 billion. Among them, 1,197 were raised in H1, totaling $30.3 billion, and 572 were raised in H2, totaling $7.43 billion. Although the number and amount of funding declined dramatically in H2, the full-year figures are nevertheless greatly above those of 2021, with 1,313 deals and $30.2 billion in cumulative financing.
In 2022, the Polkadot ecosystem projects also garnered a lot of investment, mainly from institutions including DFG, Polychain, Coinbase Ventures, etc. Over 20 projects, covering popular tracks such as DeFi, NFT, public chain, and zero knowledge, raised nearly $400 million in total. Apart from a massive drop in financing cases in H2 compared to H1, Polkadot ecosystem cases in H2 did not hugely fall, showing that investors continue to have a positive outlook on the Polkadot ecosystem’s prospects.
DFG and AU21 were evidently strong supporters of the “Dotsama” ecosystem, with 44 and 32 projects in their portfolios, respectively. NGC Ventures, Hypersphere, Signum Capital, and CMS Holdings invested in over 20 projects as well. Furthermore, large and well-known institutions such as Coinbase Ventures, Binance Labs, and Polychain have invested in the ecosystem.
Part 7: Ecosystem Map
According to dotinsights data, 544 projects/applications have joined the Dotsama ecosystem, representing 28 subcategories and almost all crypto segments.
Specifically, DeFi has the largest number of applications, up to 144, including:
- Polkadot’s native DEX projects: Stella Swap (TVL of $25 million), Solarbeam (TVL of $16.32 million), etc.
- Polkadot’s native loan projects: Moonwell Artemis (TVL of $29.46 million), Moonwell Apollo (TVL of $18.53 million), etc.
- Polkadot’s native liquid staking projects: Bifrost Staking (TVL of $29.18 million), Acala Liquid Staking (TVL of $16.15 million), etc.
Other than DeFi, these projects stood out:
- Wallet projects, such as Talisman, SubWallet, and CLV Wallet.
- Infrastructure projects, such as Ternoa, Crust network, etc.
- Tools and data projects, such as Dotinsight, Subquery, Covalent, etc.
- NFT trading markets, like RMRK, Unique Network, etc.
- Games and game platforms like Moonsama, Moonfit, etc.
Part 8: Community Trends
In 2022, Polkadot’s developer activity was consistent and upward, with annual cumulative development activities reaching about 140,000 times. Compared with the first half of the year, the development activities in the second half elevated remarkably, and the annual development activities ranked second across the mainstream public chains. Cardano ranked first with 151,700 annual development activities. Solana and Ethereum ranked third and fourth, with annual cumulative development activities of 114,000 and 107,000, respectively. Still, Solana developer activities in the second half of the year were much lower than that in the first half of the year.
In the context of the bear market in 2022, the global crypto user growth rate for the whole year was only 8.5%, obviously slower than the 192% user growth rate in 2021. The Polkadot community developed progressively, notwithstanding. Dotsama’s Twitter followers climbed by about 28% throughout the year, reaching 1.38 million and 285,000, respectively; the number of Reddit community users increased by roughly 15%, from 70,000 in 2021 to 80,500 in 2022. The number of Discord community users increased by 18% over 2021, and the number of Youtube channel subscribers increased by 19% to 47,600.
Part 9: Future Prospects
2022 witnessed the key upgrades of Polkadot’s core technologies and functional modules, such as XCM asset cross-chain technology, collective parachain, and staking system. It also saw the debut of OpenGov, Polkadot’s next-generation governance system, where Polkadot took another critical step toward a fully decentralized and trustless Web3 ecosystem.
For 2023, exciting developments are planned ahead: the upgrade iteration of OpenGov, parachain Asynchronous Backing, XCMv3, Parathreads, and Statemint function extension.
● OpenGov has been launched in Kusama, making the whole governance more flexible, decentralized， and with a lower threshold. These features will gradually play a role in the governance of the entire Polkadot network in the future.
● The Asynchronous Backing function is expected to reduce the parachains’ block generation time to 6 seconds while increasing the available block space of each block by 5–10 times. It is also expected that the total TPS of the upgraded network would surge from 100,000 to 1,000,000. If successfully implemented, it will provide strong technical support for the Polkadot ecosystem’s parachain applications.
● XCMv3 will add support for bridging functions, such as query operation, NFT and API fee payment, and improvement of calling pallets on other chains when using external networks;
● Parallel threads will greatly reduce the threshold for project teams to obtain slots, allowing projects to easily deploy smart contracts while sharing the security of the Polkadot network;
● Statemint will provide support for parachain native assets and bridge assets, more advanced NFT support, DEX support, and asset locking/retention functionalities.
Overall, as the Dotsama ecosystem parachains mature, their fundamental functions and products will be launched in succession, ultimately attracting more application agreements and projects. As a result, DFG believes that the Polkadot ecosystem will continue to surprise us in 2023.