Polkadot's interoperability project wasn't even in the top 100 cryptocurrencies three weeks ago; now it is in seventh place, with a market capitalization of more than $ 3.7 billion. It is a meteoric rise and, at least in part, it is due to something called “redenomination”.
On August 21, after a community vote, the DOT was renamed – meaning that the token's circulating supply has been inflated 10 times. The process is similar to a stock split, which can cause the value of a stock to rise substantially after the event, as small investors realize that it is becoming more affordable.
In the cryptocurrency market, however, this is unprecedented. Essentially, Polkadot's redenomination saw an old DOT divided into 100 new ones. As a result, the total offer has increased from 10 million original tokens to 1 billion.
The division does not change the value of total investors' holdings in the company. However, this led to speculation that the event was, at least in part, responsible for the increase in the token's capitalization.
Why split tokens
The main reason for a share split is to make the shares appear more accessible to small investors, increasing the liquidity of the shares. And the Polkadot community's rationale for redenomination followed similar lines.
The decision to devalue the DOT was made to make the token easier to calculate and therefore to buy – “more ergonomic”, in the words of the platform's creator, Gavin Wood. In addition, the initial decision limiting Polkadot's initial offer to 10 million was ostensibly arbitrary.
The process called for a community referendum, which took place in July, with 86% of the community in agreement.
The Polkadot community can choose how often to split. (Image: Polkadot)
The team chose a good date to perform the split. Tesla also carried out a split on the same day and saw its share price rise 12% when trading resumed 10 days later.
The DOT made even stronger gains. The token rose from $ 2.92 to a recent high of $ 6.84 on September 1. It is currently at $ 4.37.
But analysts told Decrypt that the split is not the only factor behind the rapid increase in DOT. Thomas Kuhn, Macro Analyst at Quantum Economics, gave three reasons: the project has good funding capital to start with, so they could finance a strong team; Polkadot is a very recent project – compared to Ethereum, for example.
"Investors have not been waiting for years to abandon the ship at the first price increase," he explained.
Polkadot's three-year journey
DOT is not exactly a new token, however. The project was launched in 2017 and has been in development for over three years. In recent months, in addition to the redenomination, there have been several major changes, including the launch of the Polkadot mainet in May.
In fact, without a doubt, the most important event in the project's history was another community vote to allow investors to transfer their tokens. Before that, the transfer of tokens was very difficult and was only possible through OTCs and p2p.
The transferability vote finally allowed the exchanges to list the DOT. Binance and Kraken did this quickly – in fact, they acted a little too quickly and were accused by the Polkadot community of being too hasty, listing the token on August 18, three days before the agreed redenomination.
With the transfer capability enabled, DOT's market capitalization jumped, catapulting it into the top ten cryptocurrencies, even before its redenomination. After the redenomination, he reached the top five places, before falling back to his current position in seventh place.
The market capitalization of a token is determined by multiplying its price by the current offer. But while redenomination increases the circulating supply of a token, its market capitalization remains unchanged. Thus, an investor who previously had only one token will now have 100. But, although the number of his outstanding shares has increased, the total value will be the same.
The forecast for Polkadot
DOTs traded volumes have also increased in recent weeks, reaching $ 1.4 billion on August 27. Recent events have caused some confusion for investors. But most importantly, enthusiasm for the project has not diminished.
"It is a reflection of the excellent work the Foundation has done to build communities around the world," said Corey Miller, who leads the growth of dYdX exchange and is a partner at Genesis Block Capital. "The results of this have led to increased developer awareness and adoption."
The Polkadot community's ambition to build an ecosystem that rivals Ethereum is ready.