Blockchain interoperability project Polkadot wasn’t even in the top 100 cryptocurrency rankings three weeks ago; now it sits at number seven, with a market capitalization of over $3.7 billion. It’s a meteoric rise, and it’s at least partly down to something called “redenomination.”
On August 21, after a community vote, DOT was redenominated—meaning that the circulating supply of the token was inflated by 100 times. The process is similar to a stock split, which can see the value of a stock rise substantially after the event, as small investors perceive it as becoming more affordable.
In the cryptocurrency space, however, it's unheard of. Essentially, Polkadot’s redenomination saw one old DOT divided into 100 new ones. Consequently, the total supply increased from 10 million tokens at Genesis to 1 billion.
The split doesn’t change the value of investors' total holdings in the protocol. However, it has led to speculation that the event was at least partly responsible for the rise in the token's fortunes.
Token splits are the new stock splits
The primary motive of a stock split is to make shares seem more affordable to small investors, increasing liquidity in the stock. And the Polkadot community’s reasoning for redenomination has followed similar lines.
The decision to devalue DOT was taken to make the token easier to calculate and therefore buy—“more ergonomic,” in the words of the platform’s creator Gavin Wood. In addition, the early decision limiting Polkadot’s initial supply at 10 million was ostensibly an arbitrary one.
The process required a community referendum, which took place in July, with 86% of the community in agreement.
The team chose an auspicious date to redenominate its token. Electric vehicle manufacturer Tesla performed a stock split on the same day and saw its share price rally 12% when trading resumed 10 days later.
DOT saw even more dramatic gains. The token rose from $2.92 prior to the redenomination, to a recent high of $6.84 on September 1. It currently stands at $4.37—having taken a pounding along with the rest of the crypto market in recent days.
But analysts told Decrypt that devaluation isn’t the only factor behind DOT’s rapid rise.
Thomas Kuhn, a Macro Analyst at research consultancy Quantum Economics, gave three reasons: the project has a decent war chest to start with, so they could fund a strong team; Polkadot is a fairly recent project—compared to Ethereum, for example, which is faced with upgrading a legacy platform, and, in addition, DOT is a relatively new asset.
“Holders have not been holding for years waiting to abandon ship on the first increase in price,” he explained.
Polkadot’s three-year journey
DOT isn’t exactly a new token, though. The project launched in 2017 and has been in development for over three years. In recent months, as well as the redenomination, there have been several major changes, not least the launch of the Polkadot mainet in May.
In fact, arguably, the most pivotal event in the project’s history was another community vote to allow holders to transfer their tokens. Prior to that, transferring tokens had been very difficult, and was only possible via so-called “over-the-counter” exchanges, and IOUs.
The transferability vote finally enabled exchanges to list DOT. Binance and Kraken swiftly did so—in fact, they acted a little too swiftly and were accused by the Polkadot community of jumping the gun, listing the token on August 18, three days before the agreed-upon date.
As forewarned, some unscrupulous exchanges listed 𝘕𝘦𝘸 𝘋𝘖𝘛 today rather than Friday - the Denomination Day agreed upon by the @Polkadot community.
While we can't control these CEXs, we can urge them to stop.
Their actions are putting our community at risk.
— Gavin Wood (@gavofyork) August 18, 2020
With transferability enabled, DOT’s market capitalization leaped, catapulting it into the top ten cryptocurrencies even prior to its redenomination. After redenomination, it reached the top five, before falling back to its current position in the seventh spot.
The market capitalization of a token is determined by multiplying its price with the circulating supply. But while redenomination increases the circulating supply of a token, its market capitalization remains unchanged. Thus, a DOT investor who previously had only one token will now have 100. But while the number of their outstanding shares will have increased, the total value will be the same.
The prognosis for Polkadot
Notably, DOTs traded volumes also surged in recent weeks, topping $1.4 billion on August 27.
It’s fair to say that transformability and redenomination have caused quite a bit of confusion. But most importantly, it hasn’t dampened enthusiasm in the project.
“It’s a reflection of the superb job the Foundation has done community building around the globe,” said Corey Miller, who heads up growth at dYdX exchange and is a partner at Genesis Block Capital. “The results of that have led to increased developer awareness and adoption.”
The Polkadot community’s ambition to build an ecosystem to rival Ethereum is now firmly in the frame. Will they settle for seventh place?