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Cardano as the basis for a credible financial alternative

Published 13.12.2022

Blockchain is a disruptive technology. Cardano is one of many implementations of blockchain. One of the biggest advantages of this technology is also a disadvantage. The openness, anonymity, global nature and unregulated environment attract fraudsters. Fraudulent projects are being created on a large scale on the foundations of the biggest technological innovation of the internet in the last 10 years. Cardano will have to overcome this difficult phase that all other platforms have gone through. Cardano must differentiate itself not only technologically, but also reputationally. For this to happen, alternative financial services must be built on top of it. They must be economically sustainable in the long term, solve real problems and be adopted by the masses. This will not be easy.

TLDR

  • Blockchain has to overcome the phase in which the bad will be more visible than the good.
  • High volatility and absurdly high-yield farming are a poor basis for mass adoption.
  • It may be necessary to first improve the basic features of blockchain technology before more advanced services can be built.
  • One of the most successful concepts that have taken off and are increasingly being used is tokenization. This can be a stepping stone for other services.
  • Many CeFi services have failed and everyone knows that DeFi is a good direction.

Why is blockchain perceived negatively?

Blockchain has to overcome the phase in which the bad will be more visible than the good. The blockchain industry is at a similar stage to the internet when it was introduced in primary schools so that children could learn to use it. The Internet had to go through a phase of fraud and theft as well. In its initial phase, the Internet was synonymous with providing incorrect and false information, spam emails, sharing prohibited content, tricking victims out of money, stealing sensitive information, abusing digital identities, selling fake goods, phishing, and we could go on and on. Many problems still exist today. Yet we have learned to use the internet in a safe way, and many of us use it for several hours a day.

Blockchain technology is being abused by fraudsters. The key features of blockchain are its openness to anyone who wants to use it and build financial services on top of it. Blockchain networks are decentralized and global. If a financial application is built on a blockchain, it is available to everyone in the world, regardless of whether they live in a developed or developing country. These characteristics are very similar to those of the Internet.

Not surprisingly, the scammers asked for funding for projects that they did not plan to deliver. It's no wonder that yield farming services are created that don't have a sustainable economic model. No wonder some projects have failed because of poor design or other technological imperfections. To these failures, we can add the bankruptcies of CeFi services (Celsius, 3AC, BlockFi, FTX, etc.) that have very little to do with blockchain.

The blockchain industry has a bad reputation. 99 projects out of 100 will not survive. Unfortunately, the few promising projects are not very visible and are unfairly affected by negative sentiment.

The good news is that the Internet has transcended this period and is now an integral part of our lives. The ability to communicate remotely with literally the whole world via computer was a powerful enough innovation to survive the difficult early days. We believe that blockchain will suffer the same fate. What needs to happen for Cardano to overcome the fraud and failure phase and see mass adoption?

Failures of DeFi services

Blockchain has been around for over a decade, but the reality is that the technology has impacted a small number of people. It is clear that there is a lack of use cases that would attract a higher number of users. Let's look at why this is so.

First and foremost, the high volatility of cryptocurrencies is to blame. It is very difficult to build a stable and sustainable business around high volatility. It doesn't make sense to hedge loans with a volatile asset. It is hard for someone who borrows money to live with the idea of having to provide extra collateral once the markets fall. This concept is used in many DeFi services. People on the street have no reason to use a service that assumes they own cryptocurrency. It is safer for them to borrow at a predefined interest rate than to risk a margin call in a bear market.

Yield farming is another phenomenon that will go down in history as a nonsensical concept from the early days of the blockchain industry. All the services that had ridiculously high yields have disappeared because their economic model was only sustainable in the short term. As similar services emerged side by side, speculators migrated between them. If it is obvious at first glance that it is nonsense, smart people will avoid such a service. These services have a very short life span, so they have no chance of attracting the masses.

The high frequency of hacks and many rug-pulls is another reason why no DeFi service has seen mass adoption. Many projects are trying to deliver their solution to the market as fast as possible. Teams don't realize that financial applications need to be secure in the first place and that a security audit is a prerequisite for launching a service. Many projects are non-transparent and little is said about the fact that the security of many of them is based on a multi-signature scheme in which a few admin keys are held by team members. With each new problem, the distrust of DeFi grows.

From the perspective of traditional users of financial services, blockchain has characteristics that are not necessarily perceived as positive. Self-custody and direct control over assets is seen as one of the biggest advantages of blockchain technology. Users perceive this feature more as a disadvantage as they fear losing assets in case something goes wrong.

The teams are trying to build alternative financial services despite the fact that using them can be perceived as complex and risky by ordinary people. More people hold cryptocurrencies through centralized services than in their wallets. This should be a warning to us and should be seen as a problem that we need to solve.

Perhaps teams are building services based on technologies that are not yet ready for mass adoption. Self-custody is definitely a great concept, but maybe it is technologically possible to increase the safety of use. More user-friendly hardware wallets, greater integration with mobile phones, or solutions that prevent the loss of assets if users lose their passphrases can improve the user experience. It may be necessary to first improve the basic features of blockchain technology before more advanced services can be built.

Meaningful services for the masses

Many DeFi concepts that have proven to be unviable have originated on Ethereum. This is not the fault of this platform. Ethereum was the first to open the door to new opportunities that were exploited by scammers or teams lacking experience and expertise.

Many of the new platforms are mere copies of Ethereum in the sense that there are many projects with similarly nonsensical concepts. Cardano will go through the same period in the next few years. We will definitely see yield farming projects, lending platforms with unattractive business models, or fraudulent funding applications.

The Cardano community should be aware of this. We should be vigilant and call out projects that don't deserve attention. On the contrary, we should seek out and support those projects that have a chance to make it en masse. These can only be those that insulate users from the high volatility of cryptocurrencies, have a sustainable economic model, are secure enough, and most importantly solve a real problem or offer better conditions than traditional financial services.

Such services may also be created on other platforms, including Ethereum. Each ecosystem will strive to build meaningful services on top of it and overcome the initial period of fraud and crashes described above.

Scams will keep popping up just as they keep popping up on the Internet. People need to be able to spot them and find those projects that will be useful to them. The blockchain industry as we know it today must die to make room for new concepts and attract new users. Teams that don't look to the past, or learn from it, and start building something meaningful can succeed.

It is very likely that the next stage of blockchain industry development will be more regulated. This can help in many ways. One of the most successful concepts that have taken off and are increasingly being used is tokenization. A tokenized USD on the blockchain is very likely to generate the largest number of transactions. The market capitalization of the most used stables is roughly half that of Bitcoin. That's the great success of tokenization.

The reason for the success is obvious. Stables insulate users from volatility. In countries with unstable fiat currencies, stables are an increasingly popular alternative. Algorithmic stables have a chance to outperform USD-backed ones. Tokenization will very likely extend to other financial assets such as stocks, bonds, commodities, etc. Without a clear regulatory framework, tokenisation of other assets is not possible.

The next phase of the adoption of stables and tokenised assets will be financial services such as trading, lending, insurance and savings. These services are very likely to be accompanied by the use of decentralised identity. Most services will not be on open ledger blockchains. The services will be private. In the case of Cardano, this means adopting the Midnight sidechain.

The NFT industry has shown its strength and was more talked about than Bitcoin during the hype. Many IT giants started using NFT for their businesses. The first metaverse projects started to appear. NFT is definitely not a dead concept and we can expect the next development phase to be more successful than the first one.

Copyright on the Internet is still an unsolved problem. NFT technology will not prevent illegal copying of media content, but it will allow copyright to be treated differently than the traditional system allows.

Cardano is one of the most technologically advanced implementations of blockchain technology. The Plutus platform still has the best ahead of it. This is a very good basis for success, but it is not enough on its own. Cardano needs to become the platform of choice for teams to build their services on top of it. People don't adopt platforms, they adopt services. Cardano needs to be adopted by third-party teams. They must be able to build services on Cardano that are attractive to people.

Third-party teams know that quality and secure services cannot be built on a poor foundation. Serious teams and institutions will look for the best possible solution and do their research before deciding on a particular platform. Cardano needs to build a good reputation among those with ambitions to build next-generation financial services.

Cardano has the potential to succeed as it is not associated with a negative DeFi reputation and no apps have been hacked yet. That will change. Nonsensical projects will arise and hacks will undoubtedly happen. Cardano needs to survive this.

No service built on blockchain technology has managed to gain mass adoption. CeFi services have been more successful than DeFi services. Many CeFi services have failed and everyone knows that DeFi is a good direction. This potential needs to be tapped.

Conclusion

Decentralisation as a concept has the potential to solve the current financial problems. However, with higher adoption rates, there will inevitably be the disruption that may not be to the liking of those who benefit from centralisation. They will resist the adoption of decentralised services. But they will not stop technological progress and sooner or later they will succumb.

No one could have foreseen the impact the internet would have on society. The same can be said of blockchain technology. Some experts are firmly convinced that blockchain has no chance to succeed. Others say the opposite and believe that the blockchain industry will change the world in the same way that the internet has changed it. People will change habits and patterns of behaviour. Many current financial services will disappear and be replaced. Cardano will be one of the projects that will participate in this change.

The blockchain revolution is first and foremost about technology. We don't want to say that Cardano is the best implementation of blockchain, but it's definitely one of the top. What other project should be the key to changing society than one with a background in science and math? Cardano will definitely survive the bear market and its dominance will grow. Not necessarily in market capitalization at first, but as a technology leader.

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