DFG 2023 H1 Polkadot Report

Brief

In the first half of 2023, the Federal Reserve raised interest rates 3 times which took the Fed funds rate to a target range of 5%-5.25%, the highest since August 2007. Global market concerns about tightening liquidity have further intensified. Although ChatGPT led a wave of AI that led to Nvidia’s market cap surpassing $1 trillion and Nasdaq hitting a new high, these had limited impact on the crypto industry.

The total market cap of cryptocurrencies currently stands at $1.22tn, up 47% from the beginning of the year, and the positive news of a possible BTC ETF approval spurred the BTC price to cross the $30,000 mark at one point. However, panic in the cryptocurrency market prevailed for a while due to the recent SEC regulation of Coinbase and Binance, and the next paradigm of the cryptocurrency industry revolution is yet to come.

No ecosystem is completely immune to macroeconomic and market volatility, and while the crypto industry is still not fully out of the bear market, Polkadot nevertheless performed well in 2023 H1，and the Polkadot’s community is working together to create a brand new and agile Polkadot.

• Polkadot’s developer activity remained industry-leading with a consistent growth in active accounts and community metrics.
• The number of active nomination pools doubled and the decentralization and robustness of the network were further improved.
• OpenGov launched on Polkadot In mid-June and optimized the on-chain governance in a more decentralized and efficient manner.
• XCM V3 was successfully merged into the Polkadot code base and would support many advanced features, along with significant growth in XCM transfers.
• Polkadot completed 7 seamless and forkless upgrades and the mainnet kept running smoothly.
• 82 Parachains linked to Polkadot and Kusama (referred to as “Dotsama”) relay chains, and nearly 560 projects deployed in the tracks of DeFi, infrastructure, NFT marketplace, game, and social platforms, the number was growing steadily.
• Gavin Wood has just redefined the next generation of Polkadot at the Polkadot Decoded 2023. Polkadot will be a ubiquitous supercomputer, one that will be based on more elaborated block space rather than a chain architecture, focusing on building application-centric middleware and resilient application platform, along with a more agile approach to assigning and scheduling core computing resources.

Part 1: Mainnet Overview

In the first half of 2023, the overall operation of the Polkadot mainnet was stable with the number of active validators remaining at 297 (total validators 979). The number of DOT user accounts increased by approximately 22% compared to the end of 2022, with over 60,000 accounts active in the last 7 days, reflecting the overall good usage of the Polkadot network since the first half of the year.

It is worth mentioning that the launch of nomination pools in the fourth quarter of last year has significantly stimulated the active accounts in Polkadot, with 129 active nomination pools and 11,629 cumulative pool members as of this writing, which is a significant increase from the figures at the end of last year (64 nomination pools with 3,500 pool members). Within nomination pools, members are given significantly fewer restrictions and also have more control over their staking rewards. Nomination pools enable more users to participate in Polkadot native staking and also make Polkadot’s staking more decentralized.

In addition, year-to-date, the Polkadot mainnet has completed seven seamless, forkless upgrades, totaling nearly 60 to date. By comparison, Ethereum completed 3 hard fork upgrades in all of 2022, making the Polkadot network’s ease of upgradability more obvious.

Fig.1. 2023 H1 Polkadot Network Key Metrics / Source: Subscan

Part 2: Core Technology Updates

XCM (Cross-Consensus Message) is a messaging format and language used to communicate between consensus systems and is one of the core technologies for Polkadot’s cross-chain interoperability implementation. XCM enables complex cross-consensus interactions by providing a standard messaging format for blockchains to enable seamless communication between blockchains. Polkadot officially launched XCM in May 2022, enabling communication between parachains, and this technology is one of the most secure methods of asset cross-chain transfers.

In the first half of 2023, Polkadot officially launched XCM v3. There are several key advances compared to v2, such as the ability to connect to external ecosystems via bridging, plus new features such as multi-hop setup, cross-chain NFT, remote locking, etc. The launch of XCM v3 marks the full functionality readiness of XCM, and Polkadot’s interoperability, scalability, and programmability will be further improved.

With the introduction of XCM v3, Polkadot parachains have accelerated the adoption of XCM channels. As of this writing, a cumulative total of 22 Polkadot parachains have opened 137 XCM cross-chain channels with 258,689 relay transfers, up about 60% compared to late 2022.

Moonbeam, Acala, Parallel, Interlay, and Astar are the most active parachains using XCM in Polkadot. Of these, Moonbeam has opened the largest number of parachain channels with 24 Opened Channels, linking a total of 12 parachains, while the XCM channel between Moonbeam and Acala is the one with the most transfer messages, generating a cumulative 16,779 transfers.

Kusama was an early adopter of XCM technology, and to date, a cumulative total of 27 Kusama parachains have opened 182 XCM cross-chain channels, and 264,230 transfers have been relayed, an increase of 41% compared to the end of 2022. Karura, Moonriver, Bifrost Kusama, Parallel Heiko, and Kintsugi are the most active parachains using XCM on Kusama. The channel between Karura and Bifrost is the most frequently used, with 28,345 cumulative transfers.

Fig.2. Top 5 Polkadot Parachains by XCM Transfers / Source: Subscan

Fig.3. Top 5 Kusama Parachains by XCM Transfers / Source: Subscan

Part 3: Progress of Decentralized Governance

OpenGov is a next-generation blockchain governance system from Polkadot Ecosystem. OpenGov dissolves the Council collective and the Technical Committee and creates a more democratic and open on-chain governance process while maintaining security. Compared to Governance v1 (the old governance system), OpenGov’s referendum mechanism is more flexible, lower threshold, and is more efficient.

The OpenGov V2 governance system has been running successfully on Kusama for more than six months (it went live last November). OpenGov has proven to bring significant improvements in governance efficiency. In Gov1, only one referendum can be processed every 28 days at the fastest, while in Polkadot OpenGov, referenda can be processed in more than 10 tracks in parallel, and the capacity of referenda that can be processed in different tracks varies from 1 to 1000 (for example, the capacity of Root is 1, and the capacity of ReferendumCanceller is 1000).

As of writing, the cumulative number of referenda processed/being processed within the Kusama ecosystem is 228, of which 55 are rejected, 134 are Executed, 11 are Approved, 3 are in Deciding, and the rest are Cancelled & TimedOut status. Referendum proposal types include Staking, Treasury, Whitelist, etc.

Fig.4. Kusama Referenda Spread over 13 tracks / Source: Subsquare

In accordance with the resolution of Polkadot Referendum №121, the OpenGov V2 governance system went live in Polkadot on June 15. As of writing, the Polkadot community has launched a cumulative total of 46 proposals covering 9 Tracks types (like Kusama, Polkadot OpenGov supports a total of 15 Tracks categories), with the Medium Spender category having the highest number of proposals (nearly 44% of the total). All of these referendums are currently in progress as the 28-day voting cycle has not yet ended.

Fig.5. Polkadot Referenda Spread over 9 tracks / Source: Subsquare

With the launch of OpenGov in Polkadot and Kusama, the decision to spend Treasury funds was handed over from the Council and Technical Committee to the DOT holders, which naturally decentralized the governance. Governance concerns and discussions have increased throughout the community, and some community members have begun to take it upon themselves to improve and audit the governance process so that OpenGov can run more smoothly and rationally. Over time, the number of referendum proposals on Polkadot will also increase, and the democratization of Polkadot governance will continue to grow.

Part 4: Development of Parachain

4.1 Parachain Overall Auction and Operation

It is worth noting that the first round of leases for the first batch of parachains on Polkadot such as Moonbeam, Acala, Astar, Parallel, and Clover will expire in October this year. Acala and Moonbeam have already successfully renewed their leases, extending the network’s block production capacity until Q2 2025. Failure of other projects to renew their leases in a timely manner will affect the network’s ability to produce blocks. Given the overall decrease in the frequency of Polkadot parachain slot auctions and the fact that new projects continue to apply for parachain slots, competition for Polkadot parachain slots is likely to increase in the next few months.

According to Parachains.info, a cumulative total of 190 projects have announced to participate in the Dotsama parachain auction, of which 128 projects have completed cross-chain messaging testing based on Rococo (Dotsama’s parachain testnet), and 85 projects have participated in the parachain auction, and as of writing Dotsama ecosystem has 82 parachains online so far. In Specific:

• Polkadot has successfully completed 44 parachain slot auctions and currently has 43 parachains with a cumulative lock of over 133 million DOTs (approximately 10% of the total supply, valued at nearly $580 million).
• Kusama has successfully completed 87 auctions of parachain slots and currently has 39 parachains, with a cumulative total of nearly 108,000 KSMs locked in, accounting for about 1% of the total supply and valued at over $2.3 million. The lease period of parachain slots on Kusama is short, and many projects have made more than one auction to renew the lease, which is why we seem to have a large number of parachain slots auctioned, but the actual number of parachains currently online is low.

According to Polkadot parachain slot auctions by quarter (as shown in the chart below), the cumulative number of DOT bonded 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, and we can also see that the number of projects participating in parachain slot auctions is always steadily increasing.

We know that in the early days, in order to win a parachain slot auction, candidate projects often need to put up a large percentage of their native tokens as an incentive, and now this situation has been greatly improved. From the 9 projects in the first half of this year, the average cost of a parachain slot auction is less than 90,000 $DOT (current value $380,000), which will help attract more projects to Polkadot to develop parachain applications. We can also find that more and more projects have the ability to win the auction by self-funded rather than crowdloan.

Fig. 6. Polkadot Parachain Auction Statistics from 4Q21 to 2Q23 / Source: Parachain.info & DFG

4.2 Performance of Leading Parachains

Polkadot’s rich and diverse ecosystem of parachains has a wide range of use cases in DeFi, smart contracts, decentralized identity, social media, gaming, metaverse, and many other areas. These parachains are constantly iterated and updated to drive Web3 to the ground.

-Astar Network, a smart contract parachain, has cooperated with large traditional enterprises such as Toyota, Sony and JR Kyushu, the Japanese railroad network, in the first half of this year. 100+ enterprises have joined its Astar Japan Lab program, and Astar recently announced the launch of Astar 2.0, which will further accelerate the landing application of its network.

-Moonbeam remains an EVM platform known for being developer-friendly and taking on a large number of users and liquidity from the Ethereum ecosystem, and the Moonbeam Foundation’s Accelerator Program incubation program funded double-digit projects in the first half of this year.

-Acala, the first parachain on Polkadot, launched the Acala EVM+ mainnet in the first quarter of this year and recently presented the Exodus Plan, an updated product roadmap and tokenomics that plans to build attractive and sustainable liquidity and ecological prosperity.

-Efinity, one NFT parachain, recently went live with a new mainnet called Efinity Matrixchain, which will make it easier to create and distribute NFT at scale.

According to DeFi TVL data, pair networks like Moonbeam/Moonriver、Acala/Karura、Astar/Shiden and Parallel/Heiko have the best performance.Moonbeam/Moonriver, the sister network, has the highest TVL share of the total Dotsama ecosystem at 37.18%, a significant drop from the end of last year (46.62%), mainly due to Moonriver losing a larger TVL market share (from 16.33% to 6.67%);

Acala and Karura (20.6%) came in second; the two sister networks, Astar/Shiden and Parallel/Heiko have comparable TVL volume, with Astar’s TVL share increasing significantly from 13.18% at the end of last year to 18.01% currently. Of course, the overall TVL of Dotsama’s DeFi shrunk by 44% (from $251m to $152m) due to the broad market sentiment.

Fig.7. TVL Shares of Leading Parachains in Dotsama Ecosystem/ Source: Defillama

In terms of application protocol amount, the Moonbeam/Moonriver pair network ecosystem has the best performance. Moonbeam and Moonriver both have 50+ DeFi protocols, followed by Astar with 36 application protocols, while other parachains have less than 10 application protocols. Compared with the end of last year, the list of Top 10 parachains ranked by TVL has changed less, although the overall TVL of each parachain has shrunk significantly due to the overall bear market conditions.

Fig.8. Top 10 TVL Parachains in Dotsama Ecosystem / Source: Defillama

Part 5: Ecosystem Incentives

5.1 Polkadot Treasury

Polkadot Treasury continues to be highly active in the first half of 2023. 95 of the 301 proposals in Governance 1 (32% of the total) were initiated this year, surpassing the number of 57 for the same period in 2022. Of these, 52 proposals (nearly 55% of 95) have been approved and awarded, and since the beginning of the year, the Treasury has allocated a cumulative total of 1.397 million DOT ($7.12 million) to approved proposals, with each proposal receiving an average of approximately 27,000 $DOT (valued at approximately $138,000). Funds have been used for a variety of initiatives, including infrastructure and application deployment, community events, and providing liquidity.

The Polkadot Treasury is a collection of on-chain funds generated via inflation/block rewards, transaction fees, slashing, staking inefficiencies, etc. Inflation is the dominant source of revenue (98.9%) with a rate of around 6.8%, and token burning accounts for the majority of fiscal spending, at about 65%. By the end of 2023 H1, nearly 46 million $DOTs, valued at approximately $240 million, were available in the Treasury, and the treasury remains well-funded.

Fig.9. Incremental Funds Held by Polkadot Treasury / Source: Dotreasury

With the launch of OpenGov, the efficiency of proposal voting execution and treasury fund allocation will be greatly improved, and on-chain governance will be further automated and democratized. Of course, the increase in the number of proposals passed may also be accompanied by a series of problems such as voting bribery and misuse of funds, which will pose new challenges for proposal quality review and treasury fund management.

5.2 Web3 Foundation Foundation

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. To date, the Web3 Foundation has achieved a historic milestone of over 500 project grants. According to official disclosures, a total of 82 projects have been funded year-to-date in 2023, a 21% increase over the total of 68 in Q1 and Q2 of the same period in 2022. Despite the downturn in the cryptocurrency market, the number of projects funded by the Web3 Foundation remained high throughout the first half of the year.

Fig.10. Number of Projects Funded by Web3 Foundation Grant from Q1 19 to Q2 23 / Source: GitHub

5.3 Other Foundation

To stimulate the overall growth and mass adoption of the network, some leading parachains launched grants and accelerator programs in the first half of this year. For example, Moonbeam issued the first tranche of Spring 2023 Ecosystem Grants through community referenda, which were first voted upon using a Snapshot vote in April this year, with several projects being awarded such as DAM Finance, BeamSwap, StellaSwap, etc. Astar and Sony jointly launched the Web3 Incubation Program to explore the possibility of commercializing Web3, attracting nearly 200 projects to register and submit their applications. The incubation program has now concluded its first batch of selection, with a total of 19 high-quality projects selected and qualified for incubation.

Part 6: Ecosystem Funding

According to RootData, as of May 2023, the crypto industry has disclosed 519 funding rounds with a total funding amount of $3.89 billion, well below the $18.51 billion raised in the same period in 2022 and down approximately 79% YoY. The $2.32 billion raised in Q1 2023 was also a significant decline from the $3.46 billion raised in Q4 2022, down 33% QoQ. Both the number of recent funding rounds and the amount raised are at record lows since 2021.

Fig.11. Crypto Funding Trend from Q4 21 to Q1 23 / Source: Rootdata & DFG

This shows that after the crypto industry entered the bear market cycle, the pace of funding in the primary market fell off a cliff, and VCs were relatively cautious and did not actively participate. On the other hand, the Inversion of primary and secondary valuations makes the secondary market more favored by investors than the primary market.

Despite the overall funding chill in the industry, DFG and AU21 remain strong supporters of the Dotsama ecosystem, with more than 50 and 40 Dotsama projects in their portfolios to date. NGC Ventures and Hypersphere have also invested in more than 30 projects. In addition, large and well-known institutions such as Polychain, Coinbase Ventures, and Hashkey have also invested in the ecosystem with double-digit projects.

Fig.12. Number of Dotsama Projects Backed By VCs / Source: DFG & Parachains.info

Part 7: Ecosystem Map

According to dotinsights data, a cumulative total of 558 projects/applications are now counted in the Polkadot and Kusama ecosystem, covering 29 sub-categories and almost all crypto market segments.

With a specific view, the largest number of applications is in the DeFi with 137, including:

• Biggest native DEX projects: ArthSwap (TVL $11.33M), HydraDX (TVL $10.7M), StellaSwap (TVL $5.82M), Solarbeam (TVL $4.5M), etc.
• Native lending projects Moonwell Artemis (TVL $34.17M), Moonwell Apollo (TVL $3.63M), etc.
• Native liquidity staking projects such as Bifrost Staking (TVL $13.19M), Algem (TVL $9.12M), and Acala Liquid-Staking (TVL $10.95M).

Other than DeFi, these projects stood out:

• Infrastructure projects include Tanssi Network, Sumi Network, Ternoa, Crust Network, Bit.Country, RMRK, t3rn, etc.
• Wallet projects include SubWallet, Talisman, CLV Wallet, etc.
• Tools and data projects include Subsuqid, Subquery, dotinsights, etc.
• SocialFi applications such as Subsocial, Zeitgeist, Public Pressure, Saito, etc.
• NFT trading markets include Unique Network, Singular, Beatport, etc.
• Game platforms include such as Ajuna, Moonsama, Moonfit, etc.

It is worth pointing out that the same project in the chart below may be classified in different categories, as many projects cover a wide range of products and businesses. For example, Subsquid and SubQuery, which both provide Web3 data indexing solutions for the Polkadot ecosystem, fall under both the Data and Tooling categories. Bit.Country, a metaverse-as-a-service(MaaS) platform that supports users to create metaverse and games on it, falls under Infrastructure, SocialFi as well as Metaverse.

Fig.13. Dotsama Ecosystem Map / Source: dotinsights

Compared to 544 projects at the end of last year, the overall number of Polkadot projects in the first half of 2023 did not grow much, but the emergence of more business cases shows us the great potential of Polkadot in mass adoption and commercialization, as follows:

• Social networking app MeWe is adopting the Frequency parachain, built on Polkadot, to bring self-sovereign blockchain-based identities to its 20 million users.
• Mythical Games, the number one gaming blockchain and top four blockchains of all by monthly NFT sales, is leaving Ethereum to launch its new Mythos ecosystem on Polkadot.
• Beatport, the global leader in electronic music for DJs, producers, and their fans, is teaming up with Aventus to launch Beatport.io, a digital collectible marketplace bringing electronic music culture to Web3.
• Deloitte, one of the renowned accounting firms, announced integrating KILT and Polimec blockchain technologies for issuing reusable digital credentials to support KYC and KYB processes to enable global fundraising for digital assets.
• Leading fashion brand DUNDAS is bringing the next generation of NFT to fashion lovers around the world by partnering with Unique Network, Polkadot, and UME Studio.DUNDAS is a popular women’s designer clothing brand known for pairing fashion with modern technology and dressing celebrities such as Beyonce, Reese Witherspoon, Olivia Wilde, Mary J Blige, and many others.
• Web3 media pioneer Public Pressure and KILT Protocol announced at SXSW the use of KILT’s infrastructure for issuing public credentials to verify NFT collections and logging into the Public Pressure Marketplace.

Part 8: Community Trends

8.1 Development Activities

So far in 2023, Polkadot’s developer activity continues to rise, with cumulative development activity reaching 81,815 in the first half of the year. Compared to the same period last year, development activity continues to increase, ranking second among mainstream public chains. Cardano still ranks first with 81,890 development activities, but the lead is slimmer compared to the end of 2022. Ethereum and Cosmos are third and fourth, with 56,000 and 54,000 cumulative development activities in the last six months, respectively.

Fig.14. Developer activities as of June 20 in 2023 / Source: Santiment

8.2 Community Metrics

In the first half of 2023, total crypto market capitalization grew from $831.8 billion at the beginning of the year to $1,223.1 billion today, a 47% gain, reversing previous losses due to the FTX crash, but the next paradigm revolution-driven bull market in the crypto industry is yet to come.

Twitter followers of Polkadot grew by 2% in the first half of the year to surpass 1.4 million; Reddit community members increased from 80,500 in 2022 to 81,100 in the first half of 2023. The number of Youtube channel subscribers increased by 2% to 48,600. Community metrics of Polkadot have grown steadily along with the crypto industry recovery.

Part 9: Future Prospects

During the first half of 2023, Polkaot continued to drive its network development and ecosystem expansion. In the last six months, Polkaot successfully launched 9 additional parachains (bringing the total to 43), went live with the latest version of its governance system, OpenGov, and continued to drive the adoption of XCM, which is steadily growing in usage and the number of XCM channels, and implemented 7 forkless runtime upgrades, in addition to the Polkadot projects disclosed a number of business partnerships with traditionally known companies.

On Polkadot’s roadmap for the future, notable development modules include continued iterations of XCM V3, OpenGov, and system parachains.It is also very exciting to see what Gavin Wood, the founder of Polkadot, mentioned at the Polkadot Decoded2023 conference about building an agile Polkadot, application-centric resilient platform, which will help solidify the Polkadot developer community as a hub of innovation, and perhaps soon we will see a new Polkadot ecosystem.

• XCM V3: The format for Cross-Consensus Communication(XCM) Version 3 has been merged into the Polkadot code base and this new version supports many advanced features allowing bridges, cross-chain locking, exchanges, NFTs, conditionals, context-tracking and more. The subsequent widespread adoption of XCM V3 will bring more new use cases and opportunities to the Polkadot ecosystem.
• OpenGov: Following the successful launch on Kusama and Moonriver, OpenGov was officially launched on Polkadot in mid-June, and is expected to be widely used in Polkadot and the whole Dotsama ecosystems, further enhancing the governance efficiency and decentralization of these ecosystems.
• Agile Polkadot: Gavin proposed that the allocation of Polkadot Core (which refers to the entire computing resources of Polkadot, similar to CPU) should be changed. Unlike the existing Lease and Slots, Polkadot Core will be leased and used more flexibly and close to the market.
• Application-centric middleware: Polkadot will be based on application-centric middlewares instead of chain-centric ones, and will host dapps through system chains instead of relay chains. This part will introduce some new architectures, such as Accord (an opt-in treaty across many chains), Hermit Relay, Project CAPI, etc.
• A resilient application platform: Polkadot is working through ZK primitives, Sassafras consensus (a new forkless block production consensus), mass adoption of light-client, Internode Mixnet, and Human decentralization, etc. together to create a resilient system.

To sum up, as the core technology and parachains in Dotsama ecosystem continue to develop, well-built functions and infrastructures will launch one after another, which will eventually attract more application protocols and projects and emerge more successful cases of Web3 commercialization, and Polkadot is realizing the ambitious vision of ubiquitous supercomputer as envisioned by Gavin Wood step by step. Therefore, DFG remains firmly bullish on the Polkadot ecosystem, along with the revolutionary underlying technical and economic system design originated from Gavin and the Parity team, and expects the next generation of brand-new Polkadot to continue to bring more surprises to the crypto world.

About DFG

Digital Finance Group (DFG) is a global blockchain and cryptocurrency investment firm founded in 2015 with assets under management of over $1 billion. Through a wide range of sectors within the blockchain ecosystem such as Web3.0, CeFi, DeFi, NFTs, the Polkadot ecosystem.

Investments include Circle, Ledger, Coinlist, FV Bank, Astar, ChainSafe and over 100 more. DFG intends to create value, through analytical research, based on the most impactful and promising global blockchain and Web3.0 projects that will bring a paradigm shift to the world.

DFG Website: https://dfg.group
DFG Twitter: @DFG__Official
DFG LinkedIn: DFG