Will I buy Cardano?

I talk a lot about cryptocurrencies on this blog. But I’ve never spoken before about one of the largest cryptocurrencies in the world in terms of market cap, ADA, commonly referred to by the name of its blockchain “Cardano”.

As of the date of writing this, Cardano occupies the 3rd largest spot in terms of market cap among all cryptocurrencies.

In this article, we’re going to talk about what Cardano is, how it compares to its main competition Ethereum, and at the end, I’m going to let you know if I’ll be buying any of it.

How Cardano Started

Cardano was created by one of the co-founders of Ethereum: Charles Hoskinson. In 2014, Hoskinson was removed from the Ethereum project by Vitalik Buterin, the key founder of Ethereum, after a dispute over whether the project should be commercial (Hoskinson’s view) or a nonprofit (Buterin’s view).

After leaving the Ethereum team, Hoskinson co-founded Cardano which launched in 2017, around two years after Ethereum went live.

Similar to Ethereum, Cardano is intended to serve as a platform for smart contracts.

What are Smart Contracts?

In simple terms, smart contracts are programs stored on a blockchain that run when predetermined conditions are met and without the need for an intermediary to enforce the agreement.

Possible use cases of Smart contracts are basically infinite.

For example, one potential use case for smart contracts could be inheritance distributions. Upon registration of the death certificate, money could be automatically transferred from one account to the accounts of their heirs based on the wishes of the deceased without the involvement of a third party.

Ethical Considerations

I’ve mentioned before on this blog that as a Muslim, my view of smart contracts, blockchain technology, and decentralization, in general, is a positive one as I see them enabling equal access to services for more people on more fair terms. Allah SWT says translated into English

“Allah commands justice…” (The Holy Qur’an 16:90)

With decentralization, there is no central authority that can be corrupted to exercise unfairness. Therefore, decentralization and the technologies that enable it are ones that I support.

Cardano vs. Ethereum

Proof of Work V.S. Proof of Stake

While Ethereum is currently transitioning from a Proof-of-Work (PoW) network to a Proof-of-Stake (PoS) network to validate transactions on its blockchain, Cardano already uses a Proof-of-Stake (PoS) system.

With Proof of Work, miners must use high-powered computers to solve increasingly difficult puzzles to verify transactions. This is extremely energy-intensive and slow.

With Proof-of-Stake, miners put their crypto holdings at stake to verify transactions. This results in much faster transaction times and significantly less energy usage and is, therefore, more environmentally friendly.

Cardano has more experience being a Proof of Stake protocol than Ethereum which has yet to transition to Proof of Stake but is scheduled to in the coming months.

In this respect, Cardano is ahead of Ethereum.

Inflation

Like Bitcoin, Cardano’s native currency, ADA, has a hard cap of 45 billion tokens. This cap creates a sense of scarcity and can help drive up its value over time. I say a sense of scarcity because in reality the inflation rate of Ethereum, which doesn’t have a hard cap on its supply, is currently lower than that of Cardano.

Public Image

Cardano’s public image and stated strategy rely heavily on its claim of following a very academic approach to its code, design, and tests. Upgrades to the Cardano protocol are peer-reviewed by a pool of academics.

Many parts of the Cardano codebase have been rewritten many times, by different teams, using what is claimed to be rigorous methodology. 

Traction

The main drawback of Cardano when compared to its competition Ethereum can be summarized in the following:

It’s not used for anything and yet it’s valued at ~$70 Billion.

That’s a problem for me.

Yes, there are some examples of Cardano’s utility but they are very limited and the Cardano upgrade which enabled smart contracts is still recent.

Additionally, the fact remains that about 80% of Dapps (Decentralized Applications) run on the Ethereum network. Ethereum hosts most of the non-fungible tokens and the decentralized finance activity.

Today, Ethereum’s usage in the real-world dwarfs that of Cardano. This may change in the future, but for now, this is the fact of the matter.

Yet when I look at Cardano’s valuation which is fast approaching $100 Billion, it seems to me that a substantial migration from Ethereum to the Cardano protocol is already priced in.

Due to the network effect, for a protocol like Cardano to take substantial market share from Ethereum, the advantages of Cardano’s blockchain have to be enormous. This enormous advantage is unclear to me.

Some argue that Cardano will eventually be able to, at least in theory, process about 1 million transactions per second. In comparison, once it launches, Ethereum 2.0 will be able to process an estimated 100,000 transactions per second. To put those transaction speeds in context, Visa processes about 1,700 transactions per second.

Is this the advantage that is going to cause mass migration from Ethereum to Cardano?

It’s not clear to me that 1 million transactions per second is even needed and by the time it is needed perhaps Ethereum will be able to process a similar transaction load.

1 million transactions per second kind of seems like those truck commercials where they are showing the truck pulling a aircraft carrier. Which makes you think, is that even needed? When was the last time you had to pull a aircraft carrier with your truck?

My Opinion and Conclusion

I think it’s very possible that Ethereum and Cardano co-exist sort of like Uber and Lyft and both do extremely well long term. However, it’s hard for me to justify buying Cardano at its current valuation given the limited number of Decentralized Applications that are built on it.

That said, I would not be surprised at all if the price of Cardano continues to appreciate in the near term as euphoria in the crypto space swells. However, when the tide dies down, I think the less real-world usage a crypto has, the more severely its price is going to be hit.

If I start to notice a trend wherein developers and decentralized applications are shifting away from Ethereum to Cardano then I will reconsider my calculus.

For me, for the time being at least, I don’t feel compelled to buy Cardano given the fundamentals and I’m content with my exposure to Ethereum and the other cryptos in my portfolio.

Speaking of which, if you’d like to follow my crypto portfolio you can do so by becoming a premium member on our buymeacoffee page.

Disclaimer: Not investment advice. Be sure to do your own due diligence. Never invest money you can’t afford to lose.