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Does Cardano need meme coins?

Published 9.5.2023

Traditional banks and cryptocurrency exchanges are collapsing. Blockchain is an emerging technology that can potentially improve how banks operate. DeFi offers an alternative to the traditional financial world. When else but now is the chance to get the spotlight. Unfortunately, instead of DeFi, the media is filled with articles about meme coins. The craze started thanks to unexpected Bitcoin innovation, namely projects Ordinals, and BRC-20. Speculators have started to get excited about the possibility of issuing tokens on Bitcoin. The craze soon spread to Ethereum and we have beautiful new meme coins in the Cardano ecosystem as well. Bitcoin and Ethereum are congested and many transactions are waiting in the mem pool. Transaction fees are skyrocketing. Cardano is also slowly approaching its throughput limit. Are meme coins the blockchain industry's best answer to failing banks? We can agree that it's definitely not. The current mania has reopened debates about the scalability of the first layers and the readiness of the blockchain industry for the financial revolution. Are meme coins useful for the Cardano ecosystem?

TLDR

We should not attract speculators to the Cardano ecosystem, but people who may want to use staking, or hold stablecoin DJED instead of USD in an unreliable bank. The existence of meme coins tests the reliability of Cardano and 20% of the transaction fees go to the treasury. Meme coins have reopened the topic of the low scalability of blockchains. Ouroboros Leios may improve Cardano's scalability by several orders of magnitude.

Do meme coins really attract new users?

It is a widely held view that meme coins attract new users to the ecosystem, so their existence is good for the blockchain industry. Is this really the case? Has anyone asked how many people are rather repelled by meme coins and how many people have left because of it?

We are convinced that meme coins are mainly bought by people who have already installed a wallet and know how to use the network. I don't think that newcomers will be attracted by strange-looking characters and a token with no utility. The problem is that meme coins are often created just to temporarily pump up their market capitalization. Newcomers serve as exit liquidity. Do we really want the first experience of people entering the blockchain industry to be scams of this type? Inexperienced people may believe that if something is increasing in market value, it must be a good buy. Before they figure out how the rules of the game work, they will lose.

Disappointed people are the last thing we need. These people may never return to the blockchain industry because they will lose trust. Some people may accept the loss and take it as a lesson. They may stay and start to differentiate more between what is a serious project and what is just dangerous entertainment for speculators.

The Cardano community should think more about what kind of people we want to attract to the ecosystem and to what specific services. This should be in line with the mission of the project.

Staking and DeFi are the main areas that will determine success for Cardano. We have to explain to people what staking is good for in terms of decentralizing the network. We also need to show them DeFi and explain the advantages compared to the traditional financial world.

If the banks fail, it might be a good idea to hold some of the wealth in algorithmic stablecoins. So far, the DJED appears to be a solid alternative to holding USD in banks. If inflation is high, it might be a good idea to secure passive income through staking. People won't get rich overnight on these financial services, but it will allow them to protect assets in uncertain times.

The blockchain industry will only succeed if it is perceived by the public as a workable and reliable alternative. In contrast to meme coins, it may be boring, but that's the way it should be. In the traditional financial world, it's not possible for anyone to draw silly pictures and put them on tokens. He will then sell the tokens to other people with the sole purpose and that is self-enrichment. If this happened outside of the blockchain industry, everyone would know immediately that this is a scam. The authorities would soon put a stop to it.

The blockchain industry must be able to regulate itself. Cardano is a public and open blockchain, so anyone in the world can issue their own tokens or launch a decentralized application. This can be used but also abused. The community should help newcomers to distinguish fraudulent projects from solid ones, point out problems, and not be afraid to say that something is outright fraud. The blockchain industry is the wild west and each of us can contribute to making it a little more transparent and fair to newcomers.

What are meme coins for?

We would not like to condemn all meme coins in a blanket way. Everyone has the right to come into existence in their own way. Authors should communicate fairly about the meaning of tokens and their purpose. People should be able to decide for themselves what tokens to get and why. It can be speculation as long as all buyers know it is speculation. Unfortunately, that doesn't always happen.

Freedom has its limits, and deliberately trying to make money off others is fraud. It's fair to talk about it that way.

Whatever the usefulness of individual tokens, in the wider context it is good that they are being created and that people are using them. Cardano has had tokens for a relatively short period of time and it is important that this functionality is properly tested before the network can be used to tokenize shares, for example. Institutions will want to look for the best possible solution available, and those projects that have been around longer will have an advantage. This is because the technology has stood the test of time and can be trusted more.

Minting and sending tokens thus verifies that Cardano works as expected according to the specification. This means that tokens don't multiply if they're not supposed to, that transfers between users are secure, that the network is sufficiently bandwidth efficient, that applications can use the tokens, and many other things.

Sending tokens has one nice benefit: 20% of the fees go to the Cardano treasury. Meme coins thus increase the number of ADA that can be used in the future to develop the ecosystem. Only a network that is used and profitable enough will not have a problem with the security budget.

Of course, the security budget cannot rely on the mania of meme coins. Some people mistakenly believe that meme coins will save Bitcoin's security budget. This is very naive to think. When this mania dies down, everything will be the same as before. The utility of the blockchain must be long term and fees must be generated by DeFi and similar services. They can be tokens, but only ones that people will use for decades and send to each other daily. That's stablecoins, for example.

The security budget of all public blockchain networks must rely on utilities that are in demand and have an economically sustainable model. Don't expect new meme coins to be created every month that people will go crazy for. Fads may return over time, but they will definitely die out completely sooner or later.

Scalability is a topic again

In 2017, CryptoKitties was one of the first applications on the Ethereum blockchain that became popular and started to overload the network. This problem pointed to the limited capacity of the Ethereum network and the need to improve the scaling of the blockchain, which led to the development of new technologies.

The craze has died down and has been replaced by DeFi and NFTs. The current meme coin mania has clogged the Bitcoin and Ethereum networks, and Cardano may suffer from it too. Again, the question of whether the blockchain industry is sufficiently prepared for the mission for which projects are being created has been raised.

Clogged networks, high fees, and long settlement of transactions are not synonymous with a reliable financial alternative. Unfortunately. Since 2017, people have been hoping that second layers like Lightning Network (LN), but also rollups on Ethereum, will solve scalability. It turns out that this is not the case. L1 networks are again clogged despite the fact that L2 has been working for several years. How is that possible?

People forget that L2 will always depend heavily on the scalability of L1. If L1 is clogged, it will affect the quality of use of L2. People may not be able to transfer assets quickly and cheaply from L1 to L2 and back. That's exactly what's happening on Bitcoin right now. The mania around meme coins is limiting people from opening and closing LN channels.

People who want to buy BTC or ETH for the first time in their lives are finding that an on-chain transaction will cost them perhaps as much as $30. This can put them off. Popular regular purchases of cryptocurrencies in small amounts stop making sense with fees this high. People are forced to use custodial services. Second layers will hardly help them get assets into secure hardware wallets. These are all problems associated with low scalability.

Cardano is specific as currently the fees are fixed. Even if the network is overloaded, the fees will not go up. Cardano processes transactions in a first-come-first-serve manner. Once the network becomes congested, it will take longer for transactions to get into the block. Some transactions will never make it to the block and users will have to resend them. Fortunately, there is no need to pay a fee for transactions that don't make it to the blockchain. Users do not have to pay high fees on the Cardano network, but the user experience will not be friendly if they are forced to resubmit transactions.

Better blockchain scalability has been a topic ever since Satoshi launched Bitcoin. No blockchain project is significantly ahead of the rest technologically. All projects in the top 10 work similarly in that one randomly selected producer proposes a block in a given time period and the other nodes in the distributed network make autonomous decisions about accepting it.

This mechanism is very inefficient. In Bitcoin, a new block is produced every 10 minutes. Ethereum can produce one every 12 seconds, and Cardano every 20 seconds. Let's add that the size of the block is limited and can't be raised much, as the size affects the distribution time and the overall size of the blockchain. Nodes basically do almost nothing for a long time, and then do a relatively short and lightweight task (create a new block, accept a new block, etc.).

Although the inefficiencies of this process are obvious, no team has yet been able to substantially improve block production. The Bitcoin Core team has no ambition to change the protocol and hopes that scalability will only be solved through higher layers. The Ethereum team had planned to deliver sharding, but as far as I know, they have given up and will focus on developing second layers. There are already several blockchains that have successfully delivered sharding, so it is proven that it can work (despite some limitations).

The IOG team has a plan to fundamentally improve the scalability of the first layer. There will be an improved Ouroboros PoS consensus. This enhancement has been named Leios. The team has the advantage that Cardano uses the UTxO model, so more parallelization in transaction verification is possible. The construction of the blockchain will be based on 3 types of blocks.

The most frequent will be INPUT blocks, which will contain user transactions or other content. These blocks can occur very frequently and in large numbers. These blocks can be validated concurrently. When spread over multiple nodes, it means validation happens with some degree of parallelism.

The second type of block will be ENDORSEMENT blocks, which will contain agreements of other nodes over the content (validated transactions). The last block type will be RANKING blocks, which will contain only references to ENDORSEMENT blocks. Ranking blocks are similar to the current Cardano blocks and will reflect the currently accepted global state.

Ranking blocks can be seen as decentralized checkpoints. At this level, it will be possible to perform final verification regarding double-spend attack attempts. Nodes will be able to validate endorsement blocks and will have information about how many nodes (or even how much of the total stake) agree with the newly proposed block. The level of certainty will be high from the perspective of the node that will produce the ranking block.

This concept is based on the fact that most transactions are independent of each other (different senders and receivers). They arise concurrently and therefore can be validated in the same way. The transactions are not in conflict with each other, and if they are, it is possible that someone is attempting a double spending attack. The mechanism accounts for this and such an attempt will be easily detected.

The blockchain trilemma will one day be a solved problem if it isn't already. We dare say that without higher scalability at the first layers, it is impossible to expect blockchain projects to be adopted as an alternative to the current financial system. It is not possible for meme coins to limit people from using the network for financial transactions.

Can meme coins be seen as an attack on blockchain networks? From a certain perspective, yes, as it is relatively cheap for attackers and they can even profit from it. Just fool people into buying a meaningless token. The madness of the crowd essentially clogs up the network and the fees are paid by the speculators, not the token issuer.

The problem is that reputable financial services compete for block space with meme coins and there is no third party that can decide what transactions should take precedence. This can be seen as an attack on scalability.

The solution is to prevent the creation of all tokens, which was the way the Bitcoin team had planned before the Ordinals project was created. Another solution is to allow the issuance of tokens while increasing scalability enough to prevent a possible frenzy from clogging the network. However, this doesn't necessarily always work reliably, as we imagine that if 10% of the population used blockchain every day, there would be a large number of speculators or those who might be confused by a new token.

Conclusion

Meme coins can have a very negative impact on the reputation of the blockchain industry as they are associated with sharp market value movements, rug pulls, exit scams, and other things. It's important to note that global decentralized networks didn't come about because of this, but because of a revolution in the financial world. The Cardano community should be able to self-regulate and be vocal about what we want and don't want in the ecosystem. No one can stop someone else from issuing tokens on Cardano. However, it is possible to call out nonsensical projects and we should do so.

Some people often abuse meme coins and say something like this: you lost money on meme coins, you see, the whole Cardano is useless, buy Bitcoin instead. This is obviously an oversimplification and sounds very silly. Not all tokens are meme coins. Tokens can be meaningful and it is important to distinguish between them well. The ability to issue tokens that are available to everyone in the world is a wonderful innovation. Stablecoins are massively used and will be even more in developing countries. Decentralization is a great thing, but unfortunately, it can be abused.

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