Cryptocurrencies are waking up after another long slumber. Ethereum (CRYPTO: ETH) has gained 92% over the last year, while Bitcoin (CRYPTO: BTC) climbed 128% higher. From the introduction of new crypto-based investment vehicles to the upcoming halving of Bitcoin-mining rewards, many forces have combined to thaw the latest crypto winter.

But not every cryptocurrency has been invited to the party yet, even if their growth prospects look at least as promising as Bitcoin's or Ethereum's. In particular, Polkadot (CRYPTO: DOT) seems undervalued and poised to break out in a market-beating run. The official blockchain network of the Web3 Foundation isn't getting the market respect it deserves.

Polkadot's low price sticks out like a freshly stubbed toe if you agree that a decentralized and personalized internet is the future.

I'm not saying you should sell all your Bitcoin and Ethereum to reinvest it in Polkadot today. A diverse portfolio always makes more sense, even in the uncharted waters of the crypto industry.

But in case you haven't considered adding some Polkadot yet, let me explain why this token is in a prime position to beat both the stock and crypto markets over the next few years.

What is Polkadot, anyway?

Polkadot is a blockchain network designed to solve a fundamental problem of the crypto world: different blockchains can't easily talk to one other. Imagine a world where your Apple iPhone couldn't connect directly to a Samsung Galaxy device -- that's the old blockchain reality. Polkadot acts as a translator and bridge, allowing blockchains with different purposes and designs to seamlessly communicate and share data.

The Web3 vision for the internet is all about decentralization and user control. Polkadot makes this possible by enabling customized blockchains (so-called "parachains") to plug into its network. These parachains can be tailored for specific uses like gaming, finance, or social media, creating an interconnected ecosystem where value and information flow freely.

This programming ecosystem supports quick and easy development of apps and programs that take advantage of the best features in many different blockchains. Polkadot makes it easy to store monetary value in Bitcoin, execute Ethereum's smart contracts, collect real-world data from Chainlink (CRYPTO: LINK), and more.

And the DOT token (commonly referred to as Polkadot) is the lifeblood of this decentralized system, passing data between different blockchain networks with ease while ensuring the security of data transfers. Plus, its multichain design allows for many transactions to be processed quickly, avoiding the bottlenecks of less scalable blockchains.

How the DOT blockchain makes money

Running transactions through Polkadot's proof-of-stake ecosystem generates a tiny fee for the validation nodes that process every request. This toll fee for traveling on the next-generation information superhighway serves as an incentive for helping the system work.

In this way, increased use of the Polkadot network directly translates to higher demand for DOT tokens, since they are needed to pay transaction fees. As the ecosystem grows and more value flows through Polkadot, the underlying DOT token becomes more valuable.

The current reward rate for staking your Polkadot tokens stands at 17.3%. That's quite high, in order to motivate more DOT owners to stake their tokens and take a more active role in the system. Less than 53% of all DOT tokens are staked today, below the target rate of 60%. So the reward rate could change over time as the staked portion grows or shrinks. Staking also lets DOT holders participate in network governance, further influencing the value of their holdings.

Plus, that's the raw reward rate for people running their own nodes on the DOT network under ideal conditions. The rate will be lower if your chosen crypto-trading service keeps a part of the staking revenue for itself. For example, my Coinbase (NASDAQ: COIN) account currently shows a 6.9% earning rate for staking DOT tokens.

These mechanisms ensure that DOT's value is tied to the growth and success of the Polkadot network.

Polkadot has room to grow, but many market makers haven't noticed yet

DOT's 14% gain over the past year pales in comparison to Bitcoin's and Ethereum's returns. Yet those larger crypto names operate in different, often less-dynamic market segments.

With its interoperability focus, Polkadot sits at the leading edge of Web3 innovation. Market caps are often imperfect metrics in rapidly evolving industries, and DOT's $10.5 billion market value should grow much larger in 2024 and beyond.

It seems like a gross undervaluation given Polkadot's pivotal role in the emerging decentralized internet. Astute investors can see this mispricing as a chance to buy into a leading Web3 infrastructure play at a significant discount.

Should you invest $1,000 in Polkadot right now?

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Anders Bylund has positions in Bitcoin, Coinbase Global, Ethereum, and Polkadot. The Motley Fool has positions in and recommends Apple, Bitcoin, Chainlink, Coinbase Global, and Ethereum. The Motley Fool has a disclosure policy.

Forget Bitcoin and Ethereum: This Cryptocurrency Is Poised for an Incredible Run was originally published by The Motley Fool