A modern blockchain allows tokens to be minted, has smart contracts, several L2s, scales well (sharding), has a privacy solution, etc. It is often about multiple interconnected chains in one ecosystem. The crypto industry is entering a phase where the ability to implement existing technologies best becomes important. Teams need to think about security, efficiency, and user experience. Bitcoin has a BRC-20 token standard, the community is talking about stablecoins and DEXes, the first ZK rollup through BitVM was recently introduced, etc. Bitcoin is catching up and adopting existing technologies from other projects. How is Cardano doing in this regard? This is somewhat similar to Apple's strategy. Cardano is never first to market, but when it comes up with something new, the design is well thought out and it works reliably. Some projects copy Cardano and vice versa, Cardano adopts technologies from others. One of the aspects that can determine success will be the quality of the implementation of available technologies.
Bitcoin Is Becoming A DeFi Platform
The days when the Bitcoin community considered smart contracts and tokens unnecessary are probably gone forever. Some members of the Bitcoin community openly talk about the fact that stablecoins are necessary for developing countries. Some are crazy about Ordinals & Inscriptions. The CEO of Microstrategy wants to tokenize real-world assets on Bitcoin. EVM-compatible applications are to be built on the new ZK rollup.
Bitcoin community reacts to Ethereum's success. Blockchain networks and L2s are used by a huge number of people to transact with stablecoins. It is increasingly evident that DeFi will transform the financial world. Institutions will not only hold and trade cryptocurrencies but will use blockchain networks.
We can state that the direction set by Ethereum is relevant. Bitcoin jumping on this trajectory is just confirmation of what many people have known for years.
I expect that in the coming years, we will see the efforts of teams to implement the technologies as best as possible.
The debate will not be about whether we need tokens or not, but about which standard and which implementation is the most efficient, secure, and suitable for specific use cases.
Let's look briefly at the L1 token standards, as they form the basis for DeFi.
It has always been said that Bitcoin is capable of adopting the best technologies when the time is right. This is happening. We can think about whether Bitcoin has the best token standard.
BRC-20 Is The Worst Token Standard Available
The BRC-20 token standard is an experimental token standard that uses Ordinals & Inscriptions to enable the minting and transfer of fungible tokens on the Bitcoin blockchain. It employs JSON data to initiate token contracts, create new tokens, and move tokens around.
Unlike its Ethereum counterpart ERC-20, BRC-20 does not rely on smart contracts for its operation.
Instead, it uses a unique identifier inscribed onto a Satoshi. This identifier, along with the Ordinal's data, is inserted into a part of the Bitcoin transaction called the witness signature field. This data verifies the legitimate ownership of the funds being utilized and ensures they are not double-spent.
There is no on-chain validation in the same way that there is with smart contracts on the Ethereum blockchain.
To use BRC-20, it is necessary to use external protocols. These protocols help to handle the complexities of the BRC-20 standard, such as managing the ordinal inscriptions and ensuring the correct operation of the tokens.
Simply put, the Bitcoin protocol knows nothing about tokens, even though the JSON data is stored in the blockchain. The BRC-20 standard is unsuitable for DeFi and asset tokenization.
Ethereum was the first to enable the minting of tokens through smart contracts. A smart contract is a piece of code in which the issuer of the tokens defines the behavior of the tokens, including the transfer. Every token operation requires on-chain validation. It is not necessary to use any external protocols. ERC-20 is a significantly more suitable standard for DeFi.
Cardano has native assets. Token issuers define the basic characteristics of tokens through the minting script, but not the details related to storage in the ledger or transfer. The Cardano protocol is responsible for token transfer. A smart contract (script) is not used to transfer tokens. Cardano performs on-chain validation, which is more secure and efficient than Ethereum, but at the expense of less programmability.
We assume that the readers of our articles understand well the difference between tokens minted on Ethereum and Cardano.
We briefly described 3 different token standards to demonstrate that the same capability can be implemented very differently.
Ethereum had a first-mover advantage. The IOG team could look at the Ethereum implementation and come up with a different standard. Native assets are the same in that on-chain validation takes place, but they differ in the extent of programmability. The IOG team preferred efficiency and security.
Why does Bitcoin have such a bad token standard? Because this standard is not the work of a team that thought carefully about the design, but as many say, it is an abuse of the protocol.
Technology Adoption Is Hard Without The Support Of The Team
There is no consensus in the Bitcoin community on whether to go the DeFi route. Teams building on top of Bitcoin are forced to abuse the options available. The Bitcoin Core team is often against any changes that would allow for a better implementation of the technology.
At the moment, it seems that better token standards on Bitcoin will be created on L2s. It is uncertain whether tokens on Bitcoin can compete with the efficiency and security of tokens on SC platforms, as Bitcoin Script is very limited.
It is incredibly difficult for third-party teams to create anything on Bitcoin. All solutions eventually end up with some form of centralized or federated infrastructure.
It is important to note that if the block time of Bitcoin does not change and remains at 10 minutes, it will harm the finality of transactions of all L2s. Bitcoin's PoW has a probabilistic block finality, plus more than 50% of the blocks are mined by 2 pools. L2s will be hurt by that regarding finality and security.
It seems that the team and the community must be in agreement regarding innovations and changes to the protocol. Some form of on-chain governance may be a key capability for the future of the protocol.
If the Bitcoin team actively resists changes to the protocol with the argument that the protocol is good as it is, it pushes innovation to the second layers or forces third-party teams to abuse the protocol. Unfortunately, the result is very inefficient solutions.
Many projects, including Cardano, have taken the opposite route. They try to learn from the mistakes of other projects, to innovate and improve technologies. This is done through the active or passive support of the community.
If you are a fan of the Cardano project, you probably don't expect the development to end with the Voltaire era. You expect the team to gradually improve consensus (staking was delivered in the Shelley era, and the Basho era focuses on scalability) and smart contracts (Goguen era).
As the competition between projects intensifies, there is no significant difference between what blockchains offer. The quality and characteristics of individual features are becoming important.
What we have shown on token standards will be similar to smart contracts, scalability, security, decentralization, privacy, etc.
It will no longer matter how many DEXs a given ecosystem has, but how many of them will be hacked (security), how quickly and for how much it is possible to make a swap, how many people can simultaneously use the platform (scalability), etc.
User experience depends on the quality of implementation of individual technologies. An ecosystem may not maintain its market dominance if it ceases to be a technology leader. With mass adoption, much higher requirements for efficiency and the ability to quickly adapt to new conditions will be placed on projects.
Success will depend on the size and expertise of the teams, the financing of innovation, and the form of governance.
Is Cardano Always Last On The Market?
Some people perceive Cardano as a project that delivers slowly. They may be right to some extent, as Ethereum has tokens much longer than Cardano, Solana scales much better than Cardano, Polkadot and Cosmos have application-specific blockchains, Monero has private transactions, etc.
Cardano is never the first to market with any technology. This resembles Apple's strategy without being the team's intention.
The Nxt project had the first pure implementation of PoS consensus already in 2013. The Tezos project had liquid staking before Cardano already in 2018.
Cardano was not the first blockchain to implement PoS with liquid staking, but it was the first project in the top 10 to have it and it still is in the top 10. The number of ADA stakers is constantly growing, so it can be said that this is a successful implementation.
The Cardano project is one of the few pioneers of the UTxO model. Only two projects in the top 10 use this accounting model. The IOG team improved the Bitcoin UTxO model and thereby increased expressiveness and efficiency. All tokens on Cardano are UTxOs and have similar properties to ADA coins. Cardano is not the first project to have tokens. The IOG team took the best of Bitcoin and Ethereum and created their token standard with unique features.
I dare to say that the advantages of Cardano's native assets will prove to be an advantage in the future due to efficiency (less demands on computer resources during transfer).
Many SC platforms are EVM-compatible. The IOG team went their own way. Plutus scripts are a mix of Bitcoin Script and Solidity smart contracts. Even in this case, it is a unique approach.
The UTxO model and Plutus scripts enabled the Axo team to build a unique order-book DEX. Axo DEX is very resource-efficient and from the user's point of view, it offers options that we haven't had in crypto so far.
Genius Yield is another great DEX that enables transparent and predictable trades without any slippage and impermanent loss.
Cardano allows users to run their non-custodial trading bot through the wallet. Even if bots trade with ADA, coins remain staked and staking rewards go to user addresses.
The IOG team is capable of taking existing technologies to the next level. This can be a winning strategy just like for Apple. Apple didn't come up with the first smartphone and virtual/augmented reality glasses, but they always came up with the best version on the market after several iterations.
The IOG team took over Parity's Substrate to build the Partner Chain Framework. A significant part of the code has already been rewritten, so this will not be a copy of this concept. It is difficult to anticipate what the result will be, but based on history we can estimate that it will be above average.
This can be perceived in such a way that the project was able to reflect the technological progress of other projects and adapt to it effectively.
It will be again after the competition has delivered the same, but Cardano can have a very high-quality solution again.
We certainly do not want to say that Cardano is the Apple of the blockchain industry. It's just a good analogy for the IOG team's approach to technology. The goal is not to be the first in the market or to copy the competition. The goal is to think about design in the context of protocol and other technologies.
Properties such as high decentralization, determinism, or predictable fees positively affect everything that happens on the protocol.
Third-party applications are dependent on network consensus, accounting model, Plutus platform, token standard, L2s, etc. Future upgrades and the ability to improve applications are important for success. We can see that Plutus V2 applications are significantly more efficient than Plutus V1. Plutus V3 is coming.
Today, it is not important to have some functionality but to continue improving it. Just as each new version of the iPhone is better, individual blockchain technologies must be improved. Every new version doesn't have to be revolutionary, but the difference between say every 5 versions should be significant.
Perhaps we should ask if the currently available technologies are really the best. Maybe the teams delivered them too early and now they are facing problems like numerous hacks, network restarts, inability to scale L1 better, high fees, failed transactions, etc.
Blockchain technology is developing rapidly, although adoption may seem slower. Perhaps the blockchain industry is not ready for adoption and we will have to wait a few years. I am almost certain of one thing. Once adoption occurs, technological progress will be faster than today. Teams will gradually improve protocols similar to how IT giants improve their services. Sometimes something revolutionary comes along that disrupts the entire industry. This could be some combination of blockchain with AI, or technology that allows the transfer of crypto assets without blockchain.
Being first to market is a big advantage. It is not certain that the project with the best mix of technologies will be the most successful. We have seen many times in history that those who were first to market lost. We've also seen inferior technologies win. It is difficult to predict the future. Apple is not the only company that sells smartphones. The American state of Wyoming is preparing to issue a stablecoin and is considering it to be a multi-platform project. The future of crypto will not be about a single winner. Cardano will be part of the future because it has unique features that set it apart from others. But mainly thanks to the fact that the team is able to deliver above-average quality technologies.