Decentralisation is at the heart of the Cardano protocol. This feature is taken care of by the team and the community. Cardano must be incorruptible, uncensorable, unstoppable, applications uninfluenceable, and the history of the blockchain must remain immutable forever. There is only one way to reliably achieve this and that is decentralization. Blockchain networks must survive long bear markets. During these, unexpected crises such as the current drama surrounding the FTX exchange can suddenly occur. The pressure on the key features of blockchain networks, but also DeFi services, is growing and must withstand all the challenges. Let's take a look at how Cardano manages to maintain a high level of decentralization. TLDR The number of addresses with fewer ADA coins is growing. The largest number of addresses are those with 100-1K ADA coins. There are 1,12M accounts that stake 10-1K ADA coins. The number of staked ADA coins has been steadily increasing and crossed the 25B mark in Epoch 364. ADA holders stake 72% of all coins in circulation. There were no major changes in decentralization during the drama surrounding the FTX exchange. Decentralisation depends on people's behaviour The quality of decentralization is primarily based on the economic incentives that are embedded in the blockchain protocol. Monetary policy, the reward system, long-term economic sustainability, the financial and time investment required to engage in the decentralization process, and other such things influence people's decision-making. In addition, there are secondary factors such as the mood of the markets, the potential of the project, adoption rates, partnerships, etc. All these factors together influence whether someone buys ADA coins and starts to stake them. Anyone who stakes ADA coins from their own Cardano wallet (ideally the hardware one) is contributing to the decentralization of the network in the best possible way. Staking from centralized exchanges is very risky for ADA owners. If an exchange unexpectedly declares bankruptcy or is robbed, users can lose their coins forever. Decentralization always involves whoever owns the private keys to the ADA coins. If someone buys coins on a centralized exchange and stakes them there as well, the staker is the exchange, not the one who bought the coins. The financial risk is borne by the person who paid for the coins. The exchange can commit to compensate for the loss if it loses the coins, but that won't happen if it declares bankruptcy. The Cardano protocol knows nothing of the agreement between the centralised exchange and those who stake coins through them. The distribution of ADA coins One way to measure decentralization is based on the distribution of ADA coins among users. It is possible to look at blockchain addresses and see how many ADA coins are on them. A single ADA coin owner may have created multiple wallets from which she stakes ADA coins, so the number of addresses or staking keys should only be viewed as approximate information. Users normally generate a new blockchain address if they are to receive coins. An active user can be the owner of many addresses. There will always be fewer stakers than staking keys. One staker can have multiple staking keys. Some centralized exchanges may hold ADA coins of multiple users at a single address. From a protocol perspective, however, the owner is always the one holding the private keys. Let's take a look at how ADA coin distribution at addresses changes over time. In the beginning, most ADA coins were naturally only at a small number of addresses. As the first owners gradually sold coins to new owners, the coins went to new addresses. It is good for the health of the ecosystem if the number of whales gradually decreases and the number of new owners increases. As the distribution of ADA coins increases, the decentralization of the network increases. As you can see, a significant coin shift has occurred in the bull market between 2020 and 2021 and is occurring in 2022 as well, likely due to the development of DeFi services. Most addresses hold coins worth 100 to 1000 ADA. Pleasing is the high number of addresses holding less than 100 ADA. The distribution of coins at the addresses does not say anything about the number of transactions, but we can still assume that these are addresses of people who buy smaller numbers of ADA coins or use them within the Cardano ecosystem. It is worth noting the growth in the number of addresses holding 10M to 100M ADA coins. This is likely due to the decline in addresses holding larger amounts of coins. As I explained above, the growth in the number of addresses in one group may not mean that the coins have reached a new owner. Whales can spread their coins over multiple addresses. Staking accounts Let's take a look at the number of staking accounts and the proportion of ADA coins in groups by ADA coin holdings. The largest group where one account holds more than 20M ADA is composed of 249 accounts and has a share of 44%, which is 12.89B ADA. That's a fairly large group, but it doesn't have more than half of the staked ADA. The 2 groups of accounts holding 5M+ and 20M+ coins have a majority share of power. That's almost 600 accounts that collectively have 55% of the ADA coins. Assume that each account represents one staker. If people from these two groups wanted to commit an attack on the network, several hundreds of them would have to cooperate. If, for example, half of the stakers from these two groups were against the attack, the attackers would have to persuade the stakers from the smaller groups. It would be a large number of stakers, on the order of thousands. We can state that there are still whales in the system, but if some of them would not agree to the attack and the stakers from smaller groups would oppose the attack, the whales have no chance to attack the network. A large number of stakers from smaller groups is pleasing. Hundreds of thousands of accounts participate in staking. There are 1.12M accounts that stake 10-1K ADA coins. The group with the most accounts is the group in which stakers have 100-1000 ADA coins. People in this group have only a 1% share of staking combined, and it would be healthy if their share continued to grow. The same applies to other groups in which individuals hold a smaller number of coins. Currently, the number of active stakers is around 1.2M, of which about 70-80k of them will not get rewarded in the epoch. Pools The quality of decentralisation can be viewed through pools. There are over 3200 of them registered in the Cardano network, but not all of them mint a new block in each epoch. There are about 3000 pools that have a stake. The number of pools that create at least 1 block per epoch is around 1,100. The biggest whale in terms of pools is the Binance exchange, which holds almost 11% share. Pleasingly, 22% is made up of a group of pool operators who only operate a single pool. You can see that there are many operators who run multiple pools. The reasons are different. Binance uses the coins that its users hold in the exchange accounts. Basically, Binance can only have as many pools as it has coins. If people withdrew coins into their own wallets, Binance's share of the exchange would decrease. Multiple pools can be operated by an entity that created a new Cardano wallet. The wallet can have a default setting that set staking to pools of the author of the wallet. The advantage is that the coins are still held by the owners and there is no third-party risk. Users can stake to a different pool if they want. Multiple pools can be run by operators who are visible in the ecosystem and have earned the trust of delegators for their work for the community. Long-term trust is important from a decentralisation perspective and such actors will always be present in the Cardano ecosystem. Number of coins used in staking The number of staked ADA coins has been steadily increasing and crossed the 25B mark in Epoch 364. ADA holders stake 72% of all coins in circulation. For other projects, the situation is as follows. 13% of coins are staked on Ethereum, 71% on Solana, 86% on Binance Chain, 63% on Avalanche, 50% on Polkadot and 65% on Cosmos. It's worth remembering that of the above projects, only Cardano has native liquid staking. For all other projects, people use third-party liquid staking. At the time of writing, the liquid staking share on Ethereum is approximately 38%, on Solana 3%, BSC and Polygon 3%, on Avalanche and Near 2%, on Polkadot 1% and on Cosmos 0.2%. The share of liquid staking has the potential to grow as it will allow people to get double yield. Unfortunately, using third-party liquid staking leads to more centralisation. Black swan events The drama surrounding the FTX exchange can be considered a sudden and unexpected crisis that caused a rapid decline in the value of all cryptocurrencies. It was interesting to see how ADA stakers reacted to this situation. It is pleasing that during the crisis the live stake was 0.7% higher than the active stake. This means that people were increasing their staking position. We didn't examine whether they were buying whales or a larger number of smaller stakers, but we can still say that the crisis had no major effect on Cardano's decentralization. People took advantage of the decline in the market value of ADA coins to buy and subsequently stake coins. If people were selling a large number of coins and an attacker was buying them, that could theoretically be a problem. We can't rule out that possibility. However, the difference between active stake and live stake is only 0.7%. This figure is not indicative of how many coins were sold and bought again in total. It could well be that people sold 10% of the ADA coins that were bought by the attacker. The number of transactions during the crisis was not substantially higher than normal, so we can judge that people did not sell ADA. We would have to do a deeper on-chain analysis to say this with a greater degree of certainty. For example, we could analyze the movement of ADA coins at addresses and the change in total stake of all pools. We have not seen any major changes in the total stakes of pools. Let's think about how stakers might think during a crisis. If the market value of ADA coins drops, stakers may not be willing to sell the coins because it is economically disadvantageous for them. It is always more profitable to sell in a bull market than in a bear market. The decline of coins can be seen as an opportunity to buy more ADA and increase the staking position. "Buy the dip" behaviour works across all blockchain projects. The decline in the market value of ADA coins has no direct economic impact on stakers except that the value of the coins calculated in USD has declined. Stakers have no direct economic costs associated with staking, so all they have to do is wait for better times. From a decentralization perspective, this state of affairs is advantageous because nothing fundamental changes in the ecosystem. The system is stable. Note that Cardano has no locking period and people could sell the coins. Yet they didn't. Those who had to sell the coins for some reason could do so. It is an advantage that the upfront costs associated with staking are minimal. Buying cheap ADA coins can be thought of as buying an ASIC miner in the case of Bitcoin. The difference, of course, is that an ASIC miner cannot be transmitted over the network and is many times more expensive than a few ADA coins, which is enough to get you started on decentralizing the Cardano network. If one staker leaves the system and sells coins, he can be immediately replaced by someone else on the other side of the world. This mechanism is very robust. Once a large miner shuts down the ASIC miners in its hall, it may not be as quick and easy to replace them, and the hash rate may drop for several weeks. PoS networks are more likely to withstand a long-term decline in the market value of native coins than PoW networks. Conclusion The bear market can be seen as a protracted crisis during which people's interest in using cryptocurrencies is waning. Not much may be changing in the ecosystem and one would expect to see decentralization decline rather than grow as the number of stakers declines as people leave. The addition of new stakers is not very large in the bear market, but so far, it does not seem to be declining. This is very positive. The FTX drama is still going on, but at this point, it's safe to say that it hasn't had any major effect on Cardano decentralization. People are taking the opportunity to buy ADA coins, which is also a positive phenomenon.
