Three reasons why Polkadot is en-route to a new all-time high even after a 256% rally

Steady development and strong fundamentals suggest a DOT rally toward a new all-time high is in the making. The recent 256% recovery by Polkadot (DOT) over the past 56 days has been nothing short of spectacular. Although the price is 23% below its $49.80 all-time high from four months ago, the altcoin's $39 billion market capitalization has outperformed Ether (ETH) by 66% over the past thirty days.

Polkadot is a blockchain network designed to support various interconnected, application-specific parallel chains — known as parachains. This scalability-focused project breaks transactions up into many shards and processes them in parallel, similar to what ETH 2.0 aims to achieve.

Polkadot refers to the entire ecosystem of parachains that plug into a single base platform known as the relay chain. This base layer provides security to the network and handles the consensus, finality and voting logic. To support parachain launches, users vote for projects by locking up DOT tokens. Currently, only Kusama — Polkadot's "canary" network and an early, unrefined release of Polkadot — is holding its own auctions for these slots. Polkadot is expected to initiate the same process over the next couple of months.

Polkadot's integration to DeFi increases

Polkadot's ecosystem has been growing consistently. On Sept. 8, SubQuery, a decentralized data aggregator, raised $9 million to build Polkadot's first data aggregation layer. As an example of this integration, the Moonbeam parachain has tokens built on Polkadot's development tool (Substrate). These tokens can be sent seamlessly to Ethereum wallets and smart contract addresses. On Sept. 9, Moonbeam announced a partnership with Lido, a decentralized liquid staking derivatives protocol currently deployed to Ethereum and Terra.

The latest update came from dTrade, a decentralized exchange (DEX). After successfully raising $6.4 million in a seed funding round in May of 2021, the DEX gathered another $22.8 million market-making fund designed to provide "deep liquidity" and backed by some of crypto's most prominent market makers.

Derivatives data shows potential for a fresh all-time high

Technical analysts are quick to make price projections, but investors should analyze Polkadot's derivatives data. For example, a nonexistent futures contracts premium means that investors are not comfortable creating bullish positions using leverage. DOT's total futures open interest grew from $360 million to $685 million in 30 days. That is a positive indicator because it reflects the willingness of leverage traders to keep their long positions open despite the rally.

In futures contracts trading, both longs (buyers) and shorts (sellers) are matched at all times, but their leverage varies. Eventual imbalances are reflected in the funding rate, and derivatives exchanges will charge whichever side is using more leverage to balance their risk.

Steady protocol development will be the ultimate driver of DOT price

In the first week of September, a healthy dose of optimism surfaced because the eight-hour funding rate reached 0.10%, equivalent to 2.1% per week. Nevertheless, the situation reverted after the 35% price crash on the morning of Sept. 7. This $22.70 intraday low from a week ago might seem irrelevant since the price of DOT is above $36.00, but traders' appetites for leveraged long positions have yet to recover from this.

The most likely scenario is a "glass half full" one where investors will regain confidence as the project continues to deliver.