What Is Polkadot Actually Used For -- and Does It Justify the Investment?

Polkadot (CRYPTO: DOT) is a network of specialized blockchains that share security and speak natively to one another, and it has a market cap of roughly $2.1 billion. Despite executing on its development roadmap for years, over the last five years, the price of the coin is down by 96%.

For holders, the gap between Polkadot's mostly realized technical ambitions and the market's total lack of enthusiasm at every step of the way has been a slow and painful grind. So does it do anything worthwhile, and is there an investment thesis for buying it?

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What the chain actually does

Polkadot's central chain, the Relay Chain, validates blocks for a bunch of application-specific chains called parachains, which pay the central chain for rented access to its computational power.

Those parachains swap assets and data through Polkadot's native messaging layer without needing additional financial instruments like wrapped tokens or other pieces of technology like third-party cross-chain bridges. In theory, using the native layer to manage on-chain capital should thus mean lower hassle and higher security for its users than the solutions they'd normally be reaching for to accomplish the same types of tasks.

The network currently has more than 65 active parachains, and they cover a broad spread of different applications, including decentralized finance (DeFi), smart contracts, tokenized real-world assets (RWAs), and even gaming.

For example, there's Moonbeam, an Ethereum-compatible parachain that lets Ethereum-native developers deploy apps onto Polkadot using familiar tools. There's also a parachain called Hydration, which is an exchange and DeFi liquidity protocol holding roughly $74 million in total value locked (TVL). Between those parachains and others, Polkadot's ecosystem is thus a microcosm that features most of crypto's most important segments -- much like Ethereum and Solana.

One issue is that Polkadot only has $78 million in stablecoins on its chain, which is a very small sum compared to its two much larger competitors. In other words, there are some users who find what Polkadot offers to be worthwhile enough to park their capital on the network, but they're a small minority.

So, is the token worth owning?

For a network pitched as the crypto sector's crossroads, Polkadot's adoption numbers are very thin. It generated $0 in transaction fees on its chain on April 22. That's a pretty big problem for any bull thesis.

Another pretty big problem is that there isn't a robust mechanism by which holding the coin exposes holders to any upside produced by the network's activity, nor the activity on its parachains, assuming that activity were to exist. Staking is more or less as good as it gets. Holders can stake their tokens for around 5.3% per year in yield. This effectively means that anyone hoping for a larger annual return than that is praying for a boom of speculative interest in the coin -- but there's nothing on the radar that's likely to create those conditions.

Given all of the above, it doesn't really make sense to buy Polkadot at this juncture. Buying Ethereum or Solana is a much better choice.

Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.