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A critical study of Cardano (ADA)

Cardano future price

What is Cardano?

According to the Cardano website, `Cardano is a blockchain platform for changemakers, innovators, and visionaries, with the tools and technologies required to create possibilities for the many, as well as the few, and bring about positive global change`. This is a rather vague description of what Cardano is and describes numerous blockchain projects… Therefore, let’s dig deeper.

Cardano is a PoS (proof of stake) blockchain platform that aims to create a decentralized network allowing for the development of decentralized applications (Dapps).

The purpose of Cardano is to remove intermediaries, bring accountability and empower individuals. They aim to achieve this through using `evidence-based research`. Unfortunately for Cardano, despite holding a $62,000,000 USD ICO almost half a decade ago in 2016, they still have only just launched their smart contracts despite Solana, Cosmos, AVAX, Algorand, EOS all doing so within a shorter timespan.

However, after years of waiting, we now have Cardano smart contracts, built through `groundbreaking research’.

In order to understand what the future may hold, first, let’s run through the project’s history.

Founding

Cardano began its development in 2015, held its ICO in 2016 and was launched in 2017. Cardano was founded by Charles Hoskinson, one of the eight original founders of Ethereum.

Charles Hoskinson

The primary reason for the founding of Cardano relates to a disagreement between Charles Hoskinson and Vitalik Buterin. Hoskins was removed from Ethereum by Buterin due to his wishes for Ethereum to be commercialized, wishing to change Ethereum from the non-profit organisation it is.

Figure one – How Hoskinson was removed from Ethereum (simple)

Upon being removed from Ethereum, Hoskinson along with Jeremy Wood founded IOHK. IOHK is a technology company, working for government, private and public clients. They consist of over 400 employees and work completely remotely from over 50 countries.  IOHK is classed as a partner of Cardano, researching blockchain, with research conducted, then utilized by Cardano.

Upon founding IOHK, Hoskinson founded Cardano. Hoskinson founded the Cardano foundation in 2015, with the non-profit foundation based in Switzerland.

The Cardano foundation aims to conduct the following:

  • Increase adoption of Cardano
  • Grow the Cardano community
  • Facilitate partnerships
  • Ensure stakeholder accountability
  • Shape legislation standards
  • Shape commercial standards

The Cardano foundation is the owner of the Cardano brand. Alongside IOHK and the Cardano Foundation are EMURGO. EMURGO is a multinational organization that aims to provide blockchain solutions, founded by Ken Kodama. Together EMURGO, IOHK and the Cardano Foundation form the trio of partners who drive the adoption and development of Cardano.

Figure two – The Cardano Trio

Figure three – Hoskinson founded ⅔ of the Cardano partners

ADA

Cardano is a multi-layer blockchain computing platform that utilises the token ADA. ADA is the native token of the Cardano platform. At the time of writing, ADA is the third-largest cryptocurrency with a market capitalization of $75,000,000,000 USD. With ADA holders can send monetary value (this is a common trait among every cryptocurrency) and stake the cryptocurrency. Additionally, ADA will be utilized by applications built on Cardano.

Price Action History of ADA

Cardano held its ICO between the 30th September 2016 to 31st December 2016. During this period the ICO price for one ADA was $0.0024 USD. In October 2017 ADA hit the market at $0.026 USD. Upon hitting the market, ADA saw sideways movement until the 2017 altcoin season hit. Within the space of only three months, ADA increased +5500%.

Figure fourADA / USDT +5500% in 2017

However, like many altcoins in 2018, these price gains were not to last. From January 2018 to March 2020, ADA lost over 98% of its value as ADA continually shed price gains seen over the course of 2017/18.

Figure five – ADA lost almost 99% of its value from 2018 – 2020

This price collapse has been long forgotten by many due to the performance of ADA over the past 18 months. Since March 2020 to the time of writing ADA is up 9,500% and is one of the top-performing cryptocurrencies since the March 2020 crash.

Figure six – ADA / USD price action since March 2020

Figure seven – ADA has out performed numerous major cryptocurrencies

The positive price action seen by ADA over the recent month has led to the Cardano community becoming increasingly bullish over recent months. In the figure below is the social sentiment on Cardano since September 2019.

Figure eight – People are becoming increasingly bullish on Cardano

Why the Cardano community are bullish – smart contracts

On 12/09/21 Cardano finally deployed their long awaited smart contracts through the Alonzo upgrade. The Alonzo upgrade was a hard fork and now sets Cardano into stage 3 / 5 of its long term roadmap:

Stage one = Byron (foundation of Cardano)

Stage two = Shelly (decentralisation)

Stage three = Goguen (smart contracts) – Cardano is here

Stage four = Basho (scaling)

Stage five = Voltaire (governance)

With smart contracts now available on Cardano, the community is predicting a rapid ecosystem expansion as more cryptocurrency teams look to build on Cardano. The most notable cryptocurrency project now building on Cardano is SingularityNET, founded by Ben Goetzel.

Now that smart contracts have been deployed, Cardano will look towards completing the remainder of the Goguen roadmap segment. In the figure below you can find the remainder of the Cardano roadmap.

Figure nine – Cardano roadmap

SingularityNET X Cardano

SingularityNET is the leading AI group within the cryptocurrency space. SingularityNET allows anyone to create, monetize and share AI programs/services across the globe. They are most well known for providing major contributions towards the humanoid robot Sophia. Currently, many AI programs have been held in great secrecy by tech giants such as Facebook and Google. However, with SignulaityNET we now (the people) have access to numerous leading AI services.

Figure ten – SingularityNET currently have over 50 AI services to choose from

SingularityNET was originally on Ethereum as an ERC-20 token. However, the team behind SingularityNET decided to make the switch from Ethereum to Cardano due to speed and cost concerns. Additionally, SingularityNET jumped ship due to concerns as to whether Ethereum 2.0 is actually going to happen due to constant delays. Ben Goetzel believes that the transaction onto a new blockchain with scale and speed is the way forward, improving SingularityNET.

Figure eleven – the transition from Ethereum to Cardano for SingularityNET

Comparison of various blockchain speed / scaling abilities

As mentioned earlier, one of the primary reasons for SingularityNET joining forces with Cardano was due to the superior transaction speeds and scaling abilities compared to Ethereum. This is correct when evaluating both the TPS and transaction times offered by Cardano in comparison to Ethereum.

However, just because Cardano is faster than Ethereum, this does not make it a fast blockchain. The first example of this is when we compare the TPS of various major cryptocurrencies. As shown in the figure below, Cardano is around the halfway mark from the cryptocurrencies evaluated with a TPS of 250 (January 2021).

Figure twelve – TPS of multiple high market capitalization cryptocurrencies

TPS is a measurement of scalability. The network in question can process x number of transactions a second. However, there is another crucial piece of data needed to determine a cryptocurrencies speed and that is the transaction time. For a cryptocurrency blockchain to be truly fast and scalable, it must have a high TPS and low transaction time.

Figure thirteen – transaction times of various blockchains

Once again Cardano is in the midfield in regards to performance. However, one important note is that Cardano (10 minutes) is behind Ethereum (6 minutes). In order to gauge the overall speed and scalability of a cryptocurrency, let’s now divide the TPS by the transaction time in order to generate a score and a rank for each cryptocurrency.

CryptocurrencyTPSTransaction TimeTPS / Transaction TimeRank
Ethereum1462.3410
Bitcoin7600.11614
Litecoin56301.86611
Bitcoin Cash30010039
BSV224603.7338
Tezos40301.3312
Lisk25510.4913
Algorand10000.7513336
Cosmos100000.01675988022
Avalanche45000.0251800003
NEO100000.25400004
Ripple15000.067223885
Solana290000.04296759901
Cardano25010257

Figure fourteen – TPS / Transaction Time for each cryptocurrency

The reasoning for the switch from Ethereum to Cardano for SingluarityNET from a performance perspective can be seen above with Ethereum ranked 10th and Cardano 7th. However, we can also see that there are numerous cryptocurrencies with substantially higher TPS and lower transaction times. For example, Solana can handle X166 the amount of TPS, compared to Cardano.

From the figures demonstrated, Cardano is a high-performance blockchain, although is not one of the highest performance blockchains currently available. If SingularityNET wished to switch blockchains purely from a performance perspective, they would have likely switched to Cosmos, Solana, AVAX, or Algorand. 

It should be noted that some cryptocurrencies mentioned on this list do not aim for extremely high speed e.g. Bitcoin focuses on security rather than speed. Furthermore, superior blockchain performance metrics does not equate to a blockchain being of higher quality and certainly do not say anything about levels of decentralization. BSV is ranked 8th above Ethereum, although it suffered three 51% attacks in 2021, for which it was subsequently delisted from AAX.

Financial Incentives

Cardano has managed to claw its way up into the top three at the time of writing with a valuation of $79,000,000,000 USD. This is despite Cardano only recently releasing their smart contracts, over four years since Cardano came to fruition in 2015. This market capitalization is extortionate in comparison to the other cryptocurrencies surrounding it.

For example, Cardano has a market capitalization $13 billion USD higher than BNB. This $13 billion USD higher valuation is intriguing due to the high usage and less speculative value BNB has. For example, BNB has $17 billion USD locked in the binance smart chain ecosystem, while the Cardano DeFi ecosystem is near non-existent.

Figure fifteen – TVL BSC DeFi

Additionally, BNB is an integral part of the world’s largest exchange Binance, allowing users to take part in token sales through holding BNB, providing discount trading fees, and acting as a trading pair. Additionally, BNB is being used for the binance smart chain gas fees, with users required to hold some BNB in order to pay for gas fees.

Figure sixteen – binance smart chain daily gas used

Figure seventeen – BNB is used as gas for the millions of transactions taking place on BsC everyday

From the figures shown, it is clear that BNB currently has a significantly higher tangible value than the speculative Cardano valuation. This then brings us to the question `how did Cardano rise to such a high market cap with such little working product?`.

Research conducted from this article points towards two answers.

Reason one – Financial Incentives

Inflation rate

Many cryptocurrencies have an inflation rate, ADA is no different. Let’s compare the inflation rate of ADA in comparison to other cryptocurrencies and the staking % offered in order to see the current financial incentives of supporting the Cardano network.

Figure eighteen – Current inflation rate of various cryptocurrencies

As we can see from the chart above, ADA offers a relatively low inflation rate. From this list, ADA has the third-lowest inflation rate at 2.06%, while other cryptocurrencies such as ALGO, MATIC, and AVAX have extortionate inflation rates upwards of 15% a year.

Yearly staking offered by a cryptocurrency project is as important as the inflation rate. Before running through why this is the case, firstly let’s evaluate yearly staking APY of various cryptos.

Figure nineteen – ADA offers a yearly staking APY of 6.22%

As we can see in the chart above, ADA does not offer one of the highest APYs. However, this is offset by a low inflation rate. Through offering a low inflation rate and decent staking APY, people are financially incentivised to purchase ADA and stake. This is because if someone does so, they will witness positional growth, rather than retraction.

Growth vs Retraction

If a cryptocurrency has a staking/inflation numerical value over one (x>1), this means that the investor in question will see their position grow within a cryptocurrency ecosystem as they beat the inflation rate. This encourages long term staking of a cryptocurrency as users HODL their cryptocurrency through staking.  

Figure twenty – Staking / Inflation

Surprisingly, numerous PoS cryptocurrencies do not offer S/I rates over one. This means that after one year of inflation, the user in question would have lost out to inflation, reducing their market impact. However, Cardano is within the above inflation section, offering a competitive S/I of 3.019, losing out only to ETH and BNB.

Figure twenty one – cryptos with staking above the inflation rate

This x>1 P/I rate offered by Cardano encourages users to stake the cryptocurrency. In the figure below we can see that this has led to 69.75% of the cryptocurrency being staked. ADA is only behind ATOM, SOL and BNB, some of the top-performing cryptocurrencies in 2021:

  • ATOM = +480%
  • SOL = +6240%
  • BNB = +978%

Figure twenty-two – the percentage of circulating supply currently staked with various cryptocurrencies

The high % of ADA being staked has led to a supply shock, reducing the amount of ADA available on the open market. This is due to the Cardano staking encouraging long-term holding.

Figure twenty three – low supply available on market

This supply shock has now caused rapid exponential coin growth. The rate of exponential growth is further compounded by having a low inflation rate etc.

It should be noted that when staking ADA the coins are never locked. Users remain in full control of their coins. However, staking is not as easy as simply HODLing in an exchange wallet and encourages macro rather than micro holding/trading.

Figure twenty four – low supply on market induces exponential growth

In the figure below we can see the final overall incentive ranks. ADA is third behind only BNB and ATOM. Therefore from the evidence collected, we can conclude that ADA has partially increased in valuation due to the current financial incentives of staking on the ADA network. This increase in price would likely have not occurred if there were not market wide valuation increases. Price gains this year would not have been possible due to the lack of token utility and lack of network performance.

Figure twenty five – financial incentive ranks from cryptocurrencies evaluated

Cardano Growth Strategy

Research for this article suggests that financial incentives have majorly increased the valuation of ADA due to the potential growth strategy deployed by Cardano. The figure below shows how Cardano potentially has used the crypto winter, Hoskinson’s Ethereum removal, financial incentives and marketing to steamroll their way to being the third-largest cryptocurrency…

Figure twenty six – Cardano growth strategy.

Is the Cardano growth strategy sustainable?

Eventually, the cryptocurrency market will see the current bull run come to an end. The aftermath of the current bull run will likely be a bloody affair as it was in 2014, 2018, and likely 2022. During the next bearish period we will likely see the following:

  • ETH issues self-resolve due to reduced network traffic
  • Reduction in staking across the board as users take profits / quit through fear
    • Resulting in increased supply on market
      • Increase in supply & decrease in demand will see ADA have a dramatic reduction in value
  • Bitcoin dominance increase
    • Altcoins will see major losses across the board
  • No more FOMO – hyperbolic price movement will not continue

Figure twenty seven – Future potential supply run issue

The result of what could occur would be exponential decay of ADA valuation.

Figure twenty eight – ADA could see exponential valuation decay

Cardano growth strategy conclusion

In conclusion, the growth strategy deployed by Cardano has been extremely successful in increasing the market capitalization of the project, increasing ADA’s valuation, and raising awareness for Cardano. However, the growth strategy is not sustainable in the long term and will likely result in Cardano losing substantial value in the next bear market. This is compounded by Cardano being a highly speculative cryptocurrency.

Cardano conclusion

Cardano is a cryptocurrency that is highly speculative, fueled by financial incentives, a we vs them mindset deployed, and an impressive growth strategy. However, with a lack of token utility, slow development, and mediocre cryptocurrency performance metrics despite being valued at more than $75 billion USD, it may very well be possible that Cardano will not be able to maintain its position in the top 5 cryptocurrencies by market cap.

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