Cardano Digital Asset Report: Introduction
Cardano is the product of a scientific approach toward solving the most pressing issues of early blockchain projects. The project represents a comprehensive effort to tackle latency, throughput, security, decentralization, incentivization and system flexibility.
It is unique in the fact that it was the first project in the space to be built on peer-reviewed academic research. It is also one of the pioneers of the proof-of-stake consensus protocol and promises a number of advanced architectural solutions, including a multi-layered network, HD wallet and a community-governed treasury.
However, Cardano’s strengths are also its biggest weaknesses. At its core, Cardano is a research project, and while it has been hailed as a blockchain 3.0 network, it has severely lagged behind the likes of Ethereum and EOS in terms of adoption.
Academic and technological prowess means nothing without commercial acceptance, and Cardano’s slow progress in this area puts at risk of being irrelevant. Cardano is a strong project that needs to show some tangible adoption results in order to break into the upper echelon of blockchain businesses.
Initiation Report Summary
Cardano is a blockchain network that utilizes PoS and aims to become a comprehensive financial system.
It has faced internal issues, stemming from the alleged misconduct of Cardano Foundation leadership, which has highlighted issues of governance and strategy.
Despite strong technological progress, Cardano has struggled with tangible adoption, threatening its eventual success against more active competitors.
Part One: The Business Case
Cardano Market Opportunities
Cardano positions itself as a financial system, and consequently holds a position as a player in the financial services space. The OECD estimates that financial services account for around 20% of GDP in developed economies. The financial services application market is expected to grow to over $103 billion by 2019. In addition, the size of the global banking and financial services software market is projected to eclipse $24 billion.
The fact that Cardano is still in development and has not seen much in the form of dApp development makes it difficult to analyze future use cases. However, both the payment transaction and remittance space are clearly potential avenues for the network. The global market for contactless payment transactions is forecasted to grow $801 billion by 2025. Furthermore, the size of the digital remittance space is expected to exceed $8.5 billion by 2025.
Clearly, there is a multibillion-dollar opportunity for Cardano’s network. However, the market is hotly contested by both blockchain and traditional market players. Since ADA is considered to be a cryptocurrency, everyone from Dash to Monero must be taken into consideration as direct competition.
In this segment of the space, Cardano is far behind in terms of adoption and market penetration. Dash, for example, has devoted much effort to building infrastructure components for end users, such as ATMs, to satisfy some of the most sought-after use cases. A number of cryptocurrency projects have gone after the underbanked population of the world, eyeing this demographic as a potential market with the least amount of resistance from traditional industry players.
While the developed markets will no doubt prove difficult to gain a foothold in, Cardano is facing the prospect of facing an uphill battle in the developing markets as well.
Much of Cardano’s future success will depend on its ability to establish a dApp ecosystem. While, in theory, the network has several standout features, such as flexible architecture, HD wallets, low transactions costs, and interoperability, there is currently not much there for users or developers to play with.
The dApp marketplace might be young, but there are already several big players vying for user attention. Ethereum has been a clear leader in terms of the number of dApps, but now EOS is making a run at the title. Furthermore, with the likes of Stellar introducing smart contracts, the space promises to become crowded very quickly.
Number of New dApps per Month
Finance is one of the most active dApp segments right now; as a result,the longer Cardano remains an afterthought for developers and users, the harder it will be for the platform to overcome the accumulating network effects of its rivals.
dApp Market Category Breakdown
A few years ago, PoS was a breakthrough solution for scalability problems facing blockchain tech, but by now projects have come out with upgrades and new consensus protocols of their own to address the issues. In the absence of real market penetration, the shine of the peer-reviewed label has started to wear off.
Competition in the Blockchain Space
However, despite a seemingly low level of adoption, Cardano appears to provide better value, at least on NVT basis.
NVT Comparison
The bear market will likely prune many of the overhyped bubble-assets. The fact that Cardano appears to be undervalued even given its low level of adoption may increase its chances of survival. If so, Cardano may get a chance to highlight its technological prowess and stand out as one of the tangible projects.
However, Cardano must compete with more than just fellow blockchain startups, but also the incumbent powerhouses.
Competition in the Traditional Space
Cardano is competing with companies with vastly greater financial resources, as well as superior brand recognition. Furthermore, some of these companies are much less interested in the open-source nature of the blockchain technology and are accumulating patents. So, it is critical that Cardano accelerates its pace of development and adoption in order to be able to take advantage of the market opportunity window while it remains open.
There exists a significant market opportunity for Cardano, and the down market may actually enable the project to showcase its tech-over-hype approach in action.
With a possible market consolidation in the cards, Cardano may get the opportunity to play catch up. However, given the pace of development in the blockchain space, Cardano does not have that much time. Many of the projects that have started after Cardano are already much further ahead when it comes to adoption. It is imperative for the network to achieve meaningful market penetration before the opportunity escapes.
Ecosystem Development
Cardano is a multilayered network that utilizes a PoS consensus protocol. Time is split into epochs, which are comprised of slots. Transactions are endorsed/proposed for each slot, and then verified and confirmed. The network nodes form the backbone of the system. Cardano has three types of nodes:
Core – these are the only nodes that can be slot leaders, and so the only nodes that can create blocks.
Relay – these nodes form an insulation layer for the core nodes. They cannot propose transactions or create blocks; they simply relay information from the edge nodes to the core nodes.
Edge – these nodes create currency transactions and communicate with the core nodes through the relay nodes.
The core nodes are controlled by a predefined set of users (IOHK and partners) until the network enters the Reward stage of development. The transaction fees are collected, but the block rewards are burnt, instead of being accumulated.
The relay nodes are controlled by a federated committee of initial stakeholders. In the Reward stage, the network will move to a complete PoS-based system. However, as it stands right now, Cardano’s network more closely resembles a permissioned system, and is highly centralized.
According to adatracker.com, the top 10 addresses own nearly 39% of the available ADA supply. Cardano is planning to address the classical centralization issues of PoS using a game-theory-rooted stake pools approach.
IOHK researchers have designed a rewards scheme that should incentivize the formation of a number of pools. It is unclear how many pools Cardano would like to see form, and initially IOHK will have to determine the number.
In theory the scheme should lead to manageable centralization-decentralization.
Top-10 Wallet Distribution
With a number of permissioned and delegation-based solutions coming to the market, being truly decentralized may end up being an important differentiating factor. However, if the network will remain centralized, it will have a hard time separating from the likes of EOS, which has a head start in adoption and a much larger budget.
Cardano aims to move towards a self-governance model. The network will have a Treasury, funded through a block reward tax, minting, and donations. Much like Dash, Cardano will enable node owners to vote for proposals to be funded, but it will allow users to maintain privacy as voters.
Cardano will support vote delegation for both block creation and governance purposes, which promises to make it more stable and efficient. In the case of self-governance, it will enable the network to utilize experts for decision-making. However, delegation inherently implies a greater degree of centralization.
The self-governance model is an underappreciated feature of Cardano.
As the space undergoes consolidation and business cycle effects take hold, centralized organizational models that are responsible for network development will become a major driver of risk. If the community has no say in the direction of growth and development of the platform, it is forced to trust just a few people who can make mistakes or even be poached. Cardano’s model should serve to mitigate this particular risk.
Cardano’s ecosystem is driven by three key organizations:
The Cardano Foundation – its goal is to further adoption of the network through education, promotion, and representation of the ecosystem.
Emurgo – this is the commercial/enterprise adoption branch of the ecosystem. Its goal is to help existing companies integrate the technology, as well as, invest in and help startups that want to build applications with Cardano.
IOHK – this is the development branch of the ecosystem. It is responsible for designing, building, and maintaining the network through 2020.
With the recent trouble surrounding the Cardano Foundation and the resignation of Michael Parsons, it appears that IOHK and Emurgo will look to take on some of its responsibilities.
The Cardano Foundation Council added new members: Nathan Kaiser, Manmeet Singh, Domino Burki, with the first two coming from IOHK and Emurgo. The former Chairman was called out for mismanagement and an inability to achieve tangible results for the project by both the community, in the form of the Guardians of Cardano, and project leaders at IOHK and Emurgo. Both sides published open letters, with the IOHK and Emurgo joint letter serving as the ultimate vote of no-confidence, essentially exiling the Cardano Foundation.
While it is encouraging to see the Cardano leadership listen to the community, and affect change in the organization, it is concerning that an apparent systemic issue went unchecked for so long, since one of the biggest criticisms of the network is the lack of market penetration.
News items, such as the adoption of ADA tokens by Metaps, and a strategic partnership with Sirin Labs, have been few and far between. Traxia has been the only ICO to make noise for Cardano, and even that was a project expected to migrate from Ethereum.
The community was teased with the possibility of a tie-up with Tron, before those rumors were dispelled. A similar story repeated with Google, before partnership rumors were eventually cooled by Charles Hoskinson.
From this perspective, it appears the biggest community headlines are about partnerships that never materialize, instead of the other way around. Technology alone is not enough for commercial success, and at the moment, Cardano appears to be losing the adoption battle.
Cardano has been making a push into the African continent, with moves like a partnership with the Ethiopian government. Cardano has also been active when it comes to meetups in the region. While Africa makes sense for Cardano, as it is one of the most underbanked regions in the world, the network needs to see tangible return in terms of ecosystem development for the effort to continue to make sense.
At the same time, the engineering effort has been strong and geared towards enticing the development community. Cardano will be able to support a dApp ecosystem and user issued asset. This requires an immense outside development effort. The release of the Rust SDK should make it easier for a large section of the development community to develop dApps on the Cardano network. This represents a concrete sign Cardano is going to make a more concerted effort to build its ecosystem.
Cardano has a sizeable and loyal community, in addition to a team that has published numerous white papers and whiteboard videos to help educate the populace. The development team maintains a consistent track record of accountability through weekly technical reports.
Community Involvement Comparison
Cardano has a sizeable following, and with the bear market exposing hype-only projects, a science-first network may be one of the projects around which the community consolidates.
However, in the absence of a tangible dApp ecosystem, it is getting difficult to see how Cardano will compete with its rivals who remain far ahead on this front.
Cardano is not the only serious project on the market, and the competition is doing much more to acquire users. In a P2P environment, reputation is everything. Right now, Cardano is known for being a R&D project- not a financial system.
Token Economics
The Cardano native currency, ADA, is used both as a medium of exchange and as a staking and defense instrument. The network also allows for the issuance of custom assets.
Reward – once the network enters the Reward Era, core node operators will be able to obtain rewards for block creation.
Staking – core node operators need a minimal stake in order to be eligible to vote and be selected as slot leaders. The nodes receive rewards proportional to their stakes.
Fees – Cardano uses fees as both a defense mechanism against DDoS attacks, and an incentive tool for network participants. Transaction fees are calculated as follows:
Fee = a + b × size
a is a DDoS prevention constant, currently 0.155381 ADA;
b is a transaction cost constant, currently 0.000043946 ADA/byte;
size is the size of the transaction in bytes.
Currency – Cardano can be used as medium of exchange, and is also a speculative asset that is traded on several popular exchanges.
UIA – in the future, Cardano will enable projects to issue their own assets within the network ecosystem.
Speculation – ADA is traded on many of the popular crypto-exchanges.
The total supply of ADA has been arbitrarily capped at 45 billion. Of these, 31,112,484,646 were made available at the launch: 25,927,070,538 were sold and 5,185,414,108 distributed to IOHK, Emurgo and the Cardano Foundation. See below for the latest data.
The constants could be adjusted in the future. This factor is important, as over 30% of Cardano’s total supply is still available for minting. If the fee structure is intended to provide a DDoS deterrent, then it will be important for Cardano to be able to adjust the constants to reflect market price.
However, while the ongoing bear market has significantly depressed the price of ADA, Cardano has not amended its fee formula. This could be due to the fact the network is still in Bootstrap stage, but the lack of clarity around the formula dynamics raises the question of whether the fees are truly a DDoS deterrent.
Similarly, concerns arise regarding the incentive model. As the validation reward is comprised of newly minted coins and transaction fees, if the price of ADA becomes significantly depressed, there will be a drop off in incentives for the node operators. Furthermore, as there will be a tax on the block rewards to support the Treasury, the incentives will be further depressed.
During the ramp up period for a network, the number of transactions per slot should be expected to be fairly low. This will disincentivize potential node operators. To some extent, the remaining 30%+ of the token supply will be used to buttress the rewards system until enough transactions are processed on a daily basis. However, without knowing the release schedule, it is difficult to forecast the exact impact on the node operators.
The fact that the tripartite consortium comprised of the Cardano Foundation, IOHK and Emurgo were allocated more than 10% of the total supply of ADA also adds downward pressure on the price of the cryptocurrency. It is likely that in some way, this ADA will need to be converted into fiat to cover the operating expenses and staff costs.
At the same time, the inflationary dynamics are good for dApp publishers, as a lower ADA price translates to lower operating costs.
Token ComparisonProject NameTickerUIAKey UsesTotal SupplyCardanoADAYes-payment;
-tokens;
-dApps;45 billionEthereumETHYes-payment;
-tokens;
-dApps;120.2 millionDashDASHNo-payment;21.3 millionStellarXLMYes-payment;
-tokens;
-dApps
-DEX;104.44 billion
It is unclear how ADA’s price will be stabilized long-term. The ambiguity around token minting together with the fixed fee rate open the network participants to potential high cost fluctuations (in USD terms), which may hinder adoption efforts.
It is important to note that because Cardano is trying to implement a truly decentralized model, it does not have the luxury of foregoing an incentive-driven token economics model. While the likes of Stellar can rely on key players to run nodes for the sake of operational efficiency, Cardano needs to motivate widespread node ownership.
Ultimately, Cardano has a clear and fixed incentive model that also doubles as a defense mechanism. However, given the volatility of the underlying asset, the model may be suboptimal for its stated use-cases.
Cardano is extremely dependent on widespread adoption of its network for the incentives model to be successful, which, given its apparent disregard for marketing and PR activities, further compounds the risk associated with low adoption.
Lead Team
Charles Hoskinson – Charles is the CEO of IOHK. He was also one of the founders of Ethereum and Invictus Innovations. His engagements in the crypto space also include the Bitcoin Foundation’s education committee and the Cryptocurrency Research Group.
Ken Kodama – Ken is the CEO of Emurgo. He started as a financial planner and then moved into promoting cryptocurrency. He founded Emurgo in 2017.
Pascal Schmid – Paul is the Chairman of the Cardano Foundation. He has experience in taxes, accounting and finance. Paul took over the chairman role after Michael Parsons resigned.
Cardano faces a number of risks associated with its team. Cardano is driven by three independent organizations, each with their own mandate and tasks. In theory, that enables specialization.
However, in practice it allows for discord, lack of transparency and prevents proper management execution. This was clearly shown in the situation surrounding alleged misconduct at the Cardano Foundation. The organization that was responsible for furthering adoption did not deliver results, while the Chairman, Michael Parsons, appeared to be executing a power grab.
While there was outrage in the community, the other two organizations, IOHK and Emurgo, could not force any action from the Cardano Foundation. Michael Parsons ultimately resigned, but the situation highlighted the problems with governance that exist among the supporting organizations.
Cardano has a strong group of researchers and developers that make the project stand out. IOHK has 31 people on a dedicated Cardano team, 7 people on the Daedalus team, 5 people in QA, and 4 people in cryptocurrency diligence.
In addition, there are various research, support, operations and management personnel. By comparison, there is a lot less marketing and business development personnel supporting the network. With IOHK and Emurgo now required to pick up the slack for the Cardano Foundation, it looks like there is not enough talent to get the job done.
Emurgo has brought in a 30 under 30, Florian Bohnert, to serve as Chief Marketing Officer. This move should help boost Cardano adoption commercial efforts, but there will need to be a bigger hiring effort to balance out the network’s supporting staff.
Finally, IOHK has a five-year contract to develop Cardano that runs out in 2020. In theory, by that point the network should have an implemented self-governance model that will enable ADA holders to vote for development projects and decide who the main developers will be.
There are several risks involved with this scenario. First of all, with the ongoing delays, self-governance may not be ready in time. IOHK will need a new contract and it is unclear how that will be done. On the other hand, it is possible that the self-governance is deployed, but voting power is concentrated in the hands of people who remain incentivized to work with another development company.
One potential scenario would involve the ousting of IOHK, resulting in a loss of the team that has the most knowledge and experience of its technology.
The Cardano team is strong when it comes to development and research, but is lacking when it comes to marketing, adoption, and awareness personnel. There are additional risks when it comes to governance, which bring into question the long-term prospects of the ecosystem.
Part Two: The Technology Case
Underlying Technology
Cardano is a multi-layered protocol that utilizes proof-of-stake consensus throughout the system. The separation into the settlement layer (SL) and computation layer (CL) was created to increase the efficiency, scalability and flexibility of the network. By splitting out the layers, the network can separately optimize each without the need to make compromises.
Many of Cardano’s competitors are currently dealing with issues stemming from attempts to combine all of the functionality on one layer, forcing an artificial creation of second-layer protocols. Cardano’s forward-thinking architecture will give it an edge when it comes to adapting to changing user and developer needs.
SL – this is the value ledger of the network. Its primary purpose is to account for the value of transactions. Cardano has the following goals for this layer:
Two scripting languages (one to move value and another to enhance overlay protocol support);
KMZ sidechains for connecting to other blockchain-based protocols;
Multiple types of signature including quantum resistant signatures;
Support UIA;
True scalability – more users joining equals more system capabilities.
CL – this layer is responsible for the “reasons” behind the values and will enable users to implement conditional activities, support and comply with regulation requirements, and offer use of a VM.
Both layers use the PoS consensus protocol, Ouroboros. The protocol sees time in terms of epochs, which in turn are comprised of slots (about 20 seconds long). A slot leader (one of the nodes) is elected for each slot, and the leader has the sole right to create a block during that slot. Slot leaders are elected in advance during an ongoing epoch for the next epoch.
The election process is made up of two stages, randomization, which is accomplished using multiparty computation, and the selection process, which is accomplished using the follow the Satoshi algorithm.
The MPC procedure is made up of three phases: commitment, reveal and recovery, which results in the electors having a seed. The seed is used by the FTS algorithm to select the slot leaders. The chance that a node gets selected to be a slot leader is proportional to its stake.
Cardano has shared an example transaction assurance table to show levels of confidence that a transaction will not be canceled by a fork. The table example is based on a market cap of $60 million, and shows assurance based on block depth.
Transaction Assurance
Scalability Comparison
The time to confirmation, based on a 15 count threshold used by Kraken, is very high for a would-be payment instrument. If the network is not optimized to improve on that statistic, it will be hard for Cardano to compete with the likes of Stellar.
Cardano is being developed using Haskell, and has developed Plutus for smart contract definition and interoperability.
In addition, Cardano has designed an update methodology based on soft and hard forks, to make the network flexible toward future developments.
Since the launch of the network in September 2017, Cardano has made several significant technology releases. There have been several updates made to the Cardano HD wallet, Daedalus. The wallet is being built to have backup and restore functionality, enable import/export, generation of an arbitrary number of accounts, account naming and more. IOHK has also released Icarus, a lightweight reference implementation of a wallet.
Cardano has also launched the KEVM testnet and the IELE virtual machine. The Cardano VM supports Solidity, meaning that Ethereum dApps could migrate to its network. Among other things, it introduces a uniform gas model and a more secure framework for smart contracts.
The uniform gas cost should make it easier for Cardano to aggregate dApps from other chains, should developers be enticed to migrate. A standard model should be user-friendly. However, the presence of gas makes the system less practical than the no-gas models.
Cardano’s transaction throughput is not regularly reported. Forum postings from 2017 show 5-7 tps. Tests results have been reported to be as high as 200-250 tps. However, Cardano has been working on scalability and is looking to implement sharding using Ouroboros Hydra.
Overall, Cardano has made a lot of progress over the last year. However, the delayed Shelley release, which is expected to usher in decentralization, is bound to raise concerns, as the competition in the blockchain space intensifies. In the meantime, the release of the Yoroi wallet and the release of the Rust SDK have given the community some positive news.
The GitHub activity has mostly been steady, with the sinusoidal pattern going into the valley of late.
Cardano is a comprehensive project, which explains why the development effort is so prolonged. However, given that the ecosystem is lacking in terms of marketing and adoption, the project will require a consistent stream of technology catalysts to maintain market interest.
Roadmap
The Cardano roadmap is detailed and transparent. The team has regular check-ins with the community to update supporters on the progress.
The Cardano timeline has been divided into three eras:
Testnet Era – this was the beta testing phase of the network, during which users where encouraged to play with the SL client.
Bootstrap Era – this is the current stage of the network. At this point, the network is controlled by a pool of trusted nodes.
Reward Era – this will be the stage of full decentralization, during which block rewards will be awarded and staking pools will form.
The Roadmap is separated into its own stages as well:
Byron – this has been the initial stage after the network launch, improvements to core components have been made and the SL layer is being prepared for decentralization.
Shelley – this stage focuses on decentralization and will feature staking pools.
Goguen – this stage will feature smart contracts.
Basho – this stage focuses on performance security and scalability.
Voltaire – this stage will feature the treasury system and governance.
The components and updates in different stages are being worked on in parallel, and the progress level for each can be viewed in the roadmap. The level of transparency that IOHK has provided throughout the development process instills trust in the project.
Part Three: The Investment Case
Token Performance
Cardano is a top-10 blockchain project based on market cap, and a top-25 based on 24-hour volume rankings. It has suffered the same fate as the rest of the crypto industry and has fallen over 96% from the January ATH.
Price Comparison
Expectedly, the ADA price chart follows the pattern of its industry competitors, but with somewhat steeper price drops.
ADA trading is dominated by ADA/USDT, ADA/BTC and ADA/KRW markets. The fact that ADA/fiat pairs are well represented is encouraging, given that Cardano is trying to make a play in the financial services sector.
However, it is concerning to see the steep downtrend in exchange volume for ADA. This could be considered as a sign of waning interest in the cryptocurrency and the project as a whole. Without significant catalysts to draw the market back in, Cardano may see further drop-off in volume. Low liquidity could be a real hindrance to Cardano becoming a financial services network, effectively trapping the project in a negative feedback loop.
Volume Comparison
ADA’s 30-day volatility has largely followed a downtrend over the past year. However, after a steady period in the summer and a drop in the autumn, the recent panic-like sell-off in the market has spiked the volatility numbers back towards the summer levels.
30-Day Volatility Comparison
It would help Cardano to see the volatility stabilize, but with liquidity drying up, that may not be in the cards.
More live data and more information about Cardano can be found here.
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