It’s been a wild year for Polkadot. All three weeks of it.
Over the past seven days, DOT’s price has surged by 122.68%—and with a market cap of $15.2 billion, the altcoin has now overtaken XRP as the world’s No. 4 cryptocurrency.
Polkadot has been described as an “Ethereum killer” because of how it offers an alternative to smart contracts. The platform enables developers to create their very own blockchains instead… paving the way for levels of interoperability that have been non-existent in this fragmented industry until now.
And given that Polkadot was founded by Gavin Wood, a British programmer who was one of Ethereum’s co-founders, this isn’t his first rodeo when it comes to building an ecosystem used by millions.
The question on everybody’s lips is whether DOT’s parabolic run is sustainable, or whether the altcoin is now exceptionally overvalued.
Polkadot’s mainnet went live last summer, and DOT quickly breached $6 in early September. But as often happens in the weeks and months after a high-profile launch, the heat quickly left the market and prices settled between $4 and $5.
Altcoins tend to enjoy a bit of an uplift whenever Bitcoin is in the ascendancy. But even as BTC cracked $25,000 on Christmas Day, DOT seemed fairly muted and was stuck around the $5 mark.
It was only after New Year’s Eve when fireworks really started going off for DOT’s price. It briefly cracked $10 on Jan. 4 before cooling slightly, only to come back with a vengeance on Jan. 13.
There are several factors that can be linked to DOT’s triple-digit rise.
First up, we have Ethereum itself. In recent months, this blockchain has been overwhelmed by the demand created by decentralized finance (DeFi) protocols—with transaction fees occasionally going through the roof as a result. Developers have been left exasperated by the shortcomings, with some even going so far to say that Ethereum renders DeFi unusable.
Polkadot has been seen as an antidote to this because of how it deploys sharding, meaning that transactions can be executed on a series of parallel chains simultaneously. This technology is not too dissimilar to the upgrades planned in ETH 2.0—but here’s the rub: Ethereum’s transition to Proof-of-Stake could take a couple more years yet.
Research from The Block recently suggested that 19% of DeFi projects that received investment from venture capital firms in the fall are building on Polkadot—with a total of 127 projects being built across its whole ecosystem. Interest from early adopters could result in greater momentum going forward.
Second, Polkadot has benefitted from a lot of exposure recently. In late December, Binance announced that it was setting aside $10 million in funding for projects that are being built on this blockchain. The exchange’s decision to list the DOT/BUSD on its homepage may also have contributed to a surge in trading volumes and interest surrounding this altcoin.
And third, it could be argued that XRP’s turbulent start to the year may have also helped DOT. After a rapid rise, XRP’s market cap may have been untouchable if the cryptocurrency hadn’t suffered such sharp sell-offs in the wake of the SEC rolling out a lawsuit against Ripple.
There’s also plenty of excitement surrounding Polkadot’s Substrate 3.0 upgrade, which is slated to bring greater levels of compatibility with Ethereum. With a fair wind, Wood believes that this could be rolled out in the first half of 2021—giving the project even more momentum.
Hold on a minute
Not everyone is wild about Polkadot, and some critics claim that DOT is now vastly overvalued.
One Reddit user pointed to how Ethereum has consistently managed to process 850 transactions per minute for the past six months. By contrast, Polkadot has only started to break six transactions per minute in recent days.
Pointing to how Polkadot has 11% of Ethereum’s market cap despite having just 0.7% of the network volume, OxygenJacket concluded: “Either Polkadot is overvalued or ETH is undervalued.
“I’m all about thinking long term but there’s no way I’d be jumping into DOT right now. You have the risk of investing in a start-up chain but because of the size of its market cap you only get the reward of investing in ETH 12 months ago. (Ether’s market cap was a similar amount in early 2020.)”
Crypto investors are looking for new places to park their capital and enjoy explosive gains as Bitcoin and Ethereum look like they may be starting to run out of steam. Will DOT manage to smite ETH, or will this altcoin’s boost be short lived? That’s shaping up to be one of the early themes of 2021.