Cryptocurrency

3 possible reasons why Polkadot is secondary in L1 competition

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2021 will be a “ripe” for many Layer 1 (L1) blockchain protocols, as the growth of Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs) force users to find solutions outside of Ethereum plan(Ethereum) High fees and network congestion remain obstacles for many.

Fantom (FTM), Avalanche (AVAX) and the universe (atom) by the end of 2021, their token value has risen and the ecosystem has flourished. At the same time, like Polkadot (point) performed relatively poorly, although many had high hopes for a sharded multichain protocol.

FTM/USDT vs. AVAX/USDT vs. ATOM/USDT vs. DOT/USDT daily chart. Source: TradingView

Setting aside the specific capabilities provided by each protocol in terms of transactions per second and completion times, here are several factors that may have played a role in DOT’s lagging performance compared to other L1 competitors.

Interoperability is the key factor

One of the main themes for 2021 is cross-chain interoperability between different blockchain networks, and since most projects are currently running on the network, building a bridge to Ethereum is the most important connection.

Protocols such as Fantom, Binance Smart Chain, Avalanche, and Harmony have developed cross-chain bridges, which have resulted in significant increases in their token prices, total value locked, and on-chain activity.

Although Polkadot was specifically designed to provide multi-chain support as a “layer-zero” meta-protocol, no major version of the bridge connecting Polkadot to Ethereum was released in 2021, making the protocol unloved by crypto traders. Participate in DeFi and NFTs.

Likewise, Cosmos has not seen the release of a major bridge connecting its ecosystem to Ethereum, but there are some small integrations, such as the addition of ether as a collateral asset on Terra, suggesting that cross-chain compatibility is possible.

Delayed launch of parachain auctions

As 2021 comes to a close, all of the aforementioned networks are seeing healthy activity and cross-protocol interactions, while projects on Polkadot are still finally getting ready to launch on mainnet.

That’s partly because Polkadot’s parachain auction didn’t begin until November 11, when the Ethereum-compatible smart contract parachain Moonbeam (GLMR) took the first spot.

DOT saw its price rise to an all-time high of $55 on Nov. 4 as those interested in contributing to the parachain auction got their tokens, but by the time the auction officially started, its price had dropped to a low of $55. $23.28 on Jan. 10.

Moonbeam officially went live on the Polkadot network on January 11 and successfully completed over 1 million transactions as users were finally able to transfer ERC-20 tokens into the Polkadot ecosystem.

The price of DOT rose slightly after the launch of Moonbeam, but fell back below $25 again.

related: Moonbeam (GLMR) launch brings EVM interoperability closer to the Polkadot network

The benefits of holding DOT

A third factor that may affect DOT’s popularity and price is confusion about what the token is for and what benefits it offers token holders.

On many competing networks, native tokens are used to perform contract operations, such as token transfers or swaps, while protocols in the Polkadot ecosystem use their native tokens to pay for gas.

In addition to participating in parachain auctions, DOT’s primary uses include supporting the operation and security of the network and for governance voting.

While governance capabilities are important to the overall health of a blockchain protocol, the average cryptocurrency user is still not showing enthusiasm for participating in voting, and is more interested in things like gaming, DeFi, and NFTs.

Multiple Layer 1 solutions are launching developer and liquidity incentive programs, while emerging DeFi protocols are still offering high-yield staking opportunities. Currently, DOT offers stakers an annual interest rate of 13.94%, which may not be enough to satisfy the appetite of yield farmers looking for more.

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

The launch of Moonbeam may indeed mark an inflection point for DOT as cross-chain compatibility is now live and other parachain projects should start launching on mainnet soon, but it remains to be seen how long it will take the network to catch up with it of L1 competitors lead in cross-chain interactions and increased on-chain activity.

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