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 10 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 of the company. However, it has led to speculation that the event was at least partly responsible for the rise in the token's fortunes. 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 devaluation, 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.
The Polkadot community’s ambition to build an ecosystem to rival Ethereum is now firmly in the frame. Will they settle for seventh place?
