Threats to Cardano's Success

Several relevant reasons threaten the success of the Cardano project. Let's look at them and consider if they are solvable. We will focus on the reluctance of users to use self-custody of assets, the absence of USD-backed stablecoins, competition, and technology development.

Self-Custody is Scary

Cryptocurrencies are mostly speculation for most holders. More than 95% of crypto owners hold cryptocurrencies on centralized exchanges. Only a small percentage of people own a hardware wallet and perceive self-custody of assets positively.

According to expert estimates, hardware wallets are owned by millions of users (a few tens of millions at most). This is also evidenced by the number of addresses with value of various blockchain projects.

Cardano's success is primarily based on users and stakers. People have to use Cardano, which means they have to use DeFi applications. For this to be possible, they must have their own Cardano wallet, i.e. not to be afraid of self-custody of assets. It is not possible to use Cardano from centralized exchanges.

It can be argued that this is not just a problem for Cardano but for the entire blockchain industry. It seems that people are not interested in the main advantage of decentralization and only speculate that there will be an interest in it sometime in the future.

For Bitcoin, this is a bit less of a problem, as it is a HODL project. Provided that centralized exchanges behave honestly and are more regulated (supervised), Bitcoin can succeed. Even though people in the Bitcoin ecosystem are trying to get people to hold BTC in their wallets, most of the community is looking forward to the approval of the Bitcoin ETF with their finger on the sell button.

From my point of view, this is a difficult problem to solve. Blockchain comes with a unique feature that people have not yet learned to use. Dependence on centralized infrastructure is a risk. The fall of FTX caused a steep drop in value across the entire crypto market. Another fall of the Binance exchange, for example, would be very bad for the reputation of the blockchain.

The Cardano ecosystem has two options. Trying to take over users of other ecosystems and attract new users who are not yet in crypto. Both are complicated.

People are mostly loyal to the platforms they got rich on. This applies especially to early adopters. They are one of the biggest influencers in the crypto space today. On the other hand, some people are trying out new platforms and are willing to move elsewhere or use multiple chains. Cardano needs to attract and retain these people. This can be done.

Attracting newcomers is difficult from my point of view because most of them do not start using DeFi, but rather buy cryptocurrencies and only then start to educate themselves. The road to DeFi is long with many obstacles along the way. Significant partnerships and support of existing businesses can help. We need more partnerships like the collaboration between the IOG and the government of Ethiopia. Not one such partnership in 3 years, but several each year. This is also a big challenge.

People have to have Cardano on their mobile phone and use it, for example, for payments with stablecoins or for digital identity (DID). This is the only path to mass adoption of DeFi.

One thing is certain. Unless people start using their wallets more, DeFi adoption will be very difficult. It's not even happening in the Bitcoin ecosystem yet. We cannot expect that because of Cardano or other SC platforms, people will start using it in large numbers. On the other hand, if it would be economically advantageous or otherwise useful to hold crypto in one's wallet, people would have an incentive to learn it. Yields in DeFi can be that incentive.

USD-Backed Stablecoins

The biggest obstacle to higher adoption of Cardano is currently the absence of a USD-backed stablecoin in the ecosystem. We have Indigo, but we need something that people are not afraid to use. These are USD-backed stablecoins.

Emurgo has promised to launch a USDA stablecoin in Q1 2023, I believe, but this attempt is unlikely to succeed due to regulatory hurdles. As far as I know, Emurgo is still trying to launch the project, but I haven't heard any positive updates for a long time.

The Mehen (USDM) project is trying to fill the gap in the market. This project received funding from Catalyst Fund10 and promises to launch this year, i.e. by the end of 2023.

The IOG team hired two senior experts, W. Sean Ford and David Markley, to create a stablecoin company. This is certainly a step in the right direction, but the question is how long it will take us to see the first results of their efforts. I daresay this should have come sooner. Perhaps this is a response to the failure of the USDA. Anyway, I believe this move will be successful.

I would like the new team to try to negotiate with existing projects and get USDT and USDC on Cardano. We'll see if it's on their agenda.

Cardano needs to have a USD-backed stablecoin before the next bull market and that has either started or will start sometime next year (2024). I can't imagine the success of DeFi on Cardano without stablecoins.

I'm a big fan of the Djed project and I think algorithmic and overcollateralized stablecoins are the future of money. This type of project can use volatile cryptocurrencies and create stable coins without having to trust custodians (banks).

Unfortunately, after the collapse of the Terra Luna project, people do not trust this kind of stablecoin. I expect that time will heal the wounds, but I cannot estimate when that will be.

High Competition

Cardano is not the only project that needs more DeFi users. Moreover, it is relatively new with a unique architecture. People have learned to use applications in other ecosystems, especially the Ethereum one, but they are not always motivated to try something new.

The growth of DeFi is also dependent on the number and quality of applications. This is influenced by the number of developers in the ecosystem. The Cardano Foundation recently did research related to developers. The results showed that developers can build on Cardano without major obstacles. That's positive.

What is surprising is that most developers plan to use Aiken instead of Haskell (which is, however, the second most preferred choice). Aiken is a community project that has gained tremendous traction.

According to the DefiLlama portal, there are 950 applications deployed in the Ethereum ecosystem, 650 applications on BSC, 500 on Arbitrum and Polygon, 350 on Avalanche, and 110 on Solana.

The number of applications usually correlates with TVL and number of users. We only find 29 apps on Cardano (however, DefiLlama doesn't list all deployed applications for some reason).

Cardano is on a similar level to Algorand (29), Tron (26), Near (21), EOS (20), and Tezos (17). It can be said that Cardano has surpassed projects such as Waves (9), Ton (10), Bitcoin (10, but Bitcoin is not a platform), Wanchain (8), Hedera (8), Zilliqa (5), etc. in the number of applications.

I don't think the number of apps is critical. For example, Tron has a lower number of applications than Cardano, but TVL has the second highest after Ethereum. However, this is an exception.

It is positive for Cardano that many applications are still being built and teams are improving those already deployed. The IOG team registers approximately 1300 projects that are built on Cardano. If teams managed to deliver only 10% of them, we would have roughly 200 applications on Cardano.

Cardano still maintains its reputation as a hack-free platform. This is a huge advantage from a real-world perspective that the market has not yet evaluated. Hacks are bound to happen at some point. Some third-party team makes a fatal mistake and a vulnerability appears in the smart contract code that hackers exploit.

It is important that some projects in the ecosystem work for years without a single hack. The DEX must work for several years without a problem before it is certain that it will be the new Uniswap on Cardano. The same applies to lending platforms. I believe that we will see one day.

I perceive the development of applications positively and I assume that their number will grow. However, this does not necessarily ensure an influx of new users in the next bull market. A high number of applications, low fees, reliability, high security, resolved scalability, privacy, and decentralized identity are all features that can attract users in the 5 to 10-year horizon. In what number and if Cardano will reach the top 3 cannot be predicted. Other projects are trying to do the same thing.

Ethereum has a first-mover advantage among platforms, and that will be hard to overcome. What can be overcome is the large number of L2s in the Ethereum ecosystem. On the other hand, some L2s can fundamentally assert themselves and become dominant. For example, Base can succeed because Coinbase has a high user base.

I dare say that Cardano is being built with a slightly higher goal than catching the first fans of decentralization and DeFi. Cardano is built with a high degree of care. A research-first approach and formal development methods are used.

This approach takes time. However, from a market perspective, this is slowness. Some people say that Cardano is late and has no chance. It is too early to say this at this point, but the reality is that people are using what is available.

According to IOG, 150 projects have already been launched on Cardano (more than what DefiLlama states), and almost 80K token policies have been issued. There are a large number of wallets (almost 20) in the Cardano ecosystem. Cardano still seems to have a strong chance to succeed. All the more so because the main waves of adoption are just ahead of us (see the first chapter dedicated to self-custody).

Technology Stack

Sometimes I come across the opinion that the new Ethereum killers no longer have a chance because Ethereum will win through the second layers. They say that it is too late for new SC platforms and that this chance existed in the last bull market when Ethereum had big problems with scalability.

This may or may not be the case. Only time will tell.

IOG has devoted a lot of time to making Cardano perfectly decentralized. Cardano has superior staking which significantly contributes to decentralization. From my point of view, it was the right move, because the blockchain industry has a chance to succeed through decentralization, not through speculation.

The reality is that most cryptocurrency fans don't care that much about decentralization. For them, current utility is more important, i.e. DeFi, token minting, or a cheap global transmission network. The competition has an edge in this.

L2s have solved Ethereum's low scalability problem, so this ecosystem will retain a significant portion of users. Still, I think L1s need to scale significantly better once the new wave of new users arrives. We will once again see absurdly large fees on both Bitcoin and Ethereum because the networks will be clogged. Cardano may appear to be a more attractive platform, but only if it is better prepared for this wave. It is not at the moment.

If Cardano is to succeed, it needs to scale well, ideally by next year. I don't think it's possible to deliver Input Endorsers that quickly. Maybe Hydra can help if teams manage to use this solution and incorporate it into their applications. The SundaeSwap team presented a prototype in which their DEX uses Hydra. This could be a good direction for the next bull run.

From the user's point of view, the second layers can be somewhat difficult to use. They split users and capital into more separate units. It would be ideal to have one, two, or three L2s that will be reliably connected. Having many L2s competing with each other, old ones disappearing and new ones emerging, is not ideal. Users are forced to learn new things and constantly switch between them. Some of them may get tired of it.

Cardano has some advantages in that it uses the UTxO model. This makes it a significantly different platform than those that use an account-based model and copy EVM. The question is whether this is an advantage in the long term from the point of view of parallelization, or a disadvantage due to the complexity of development from the perspective of developers.

There is no definite answer to this. I think it's more of an advantage. Developers have learned the UTxO model, continue to explore it, and come up with new concepts. Applications such as Axo DEX are being created, which, according to the team, could not be created on an account-based model.

We know from history that better technology does not necessarily win. This is not to say that Cardano has better technology. More importantly, the development takes longer (even though the IOG team delivered PoS 2 years earlier than the Ethereum team) and it is difficult to estimate whether this is an advantage or a disadvantage in the context of the market in the long term, say 10 years.

If the current projects have some problems, whether it is low scalability, hacks, or people becoming more interested in the quality of decentralization, etc., it could be a certain advantage for Cardano. But, firstly, you cannot rely on that, and secondly, Cardano must be ready to take over the position of the dominant platform at that moment.

In other words, the market may value the network effect (number of users) more than the quality of the technology (which is always largely subjective). Sometimes it is better to bet on quick solutions and put beta versions into live operation. Sometimes it is better to bet on building high-quality technologies and then take over the users of the competition. No one can predict at the moment how it will play out in the blockchain industry. Specific events can change everything quickly.

I consider the IOG team, and therefore Cardano, to be the innovation leader in the blockchain industry. This is an achievement that attracts attention and is one of the reasons why Cardano has such a huge and loyal community. DeFi users are born from the community. However, it's still relatively few people in the context of other platforms and L2s.

It would need to come up with some killer app or killer use case that would attract new users. It would be useful to be ahead of the competition in something. Some hope may be Midnight, which will bring privacy to the Cardano ecosystem. However, ZK projects are also built elsewhere.

Conclusion

I believe that Cardano will find its users. One project has no chance to take over all users. Neither Bitcoin nor Ethereum succeeded. A competitive environment is healthy and let's be happy about it. People see the blockchain industry more as an investment opportunity than as a hope to change things around us. When the numbers go up, it is considered a success and it overshadows all the debates about important things like decentralization, security, governance, etc. I hope for a rational debate about the future of the blockchain industry. However, this may never happen because there will not be sufficient social or economic incentives for this.

At the moment, the biggest obstacle to the adoption of Cardano is primarily the absence of a USD-backed stablecoin. Fortunately, this is a relatively easy problem to solve and is being addressed by the IOG. We can also hope for the launch of the USDM. Everything else described in the article is open and hard to predict.

I dare to say that no one can predict well which direction the blockchain industry will take. There are many attempts at manipulation through the media in the space, and the main driver of adoption is greed. Debates about the necessity of self-custody are overshadowed by unnecessary topics and dramas.