People come to cryptocurrencies for speculation. That’s fine, it’s in our nature to want to make a profit. Blockchain technology will only be successful if it overcomes the speculative aspect and offers people benefits that are insulated from market volatility. People must stay for the sake of greater freedom, the right to privacy, and the potential transformation of society.
TLDR
- If we want to measure success, we first need to understand the mission of the project and set metrics accordingly.
- People should see blockchain not only as a means of self-enrichment but more importantly as a technology that can play a significant role in transforming our society.
- The utility of social networks is not linked to financial speculation. It can be the same with services built on blockchain.
- Volatility is a utility killer and it starts with transaction fees.
- Few people are willing to admit that most current economic models of many DeFi projects fail because of token volatility.
- The service will attract new users and promote network effect growth only if it is actually useful compared to competitors.
- Stable coins are a perfect example of how to push the value growth of volatile assets like ADA while insulating users from volatility.
- Minting Djed requires ADA coins, so the demand for stablecoins will essentially increase the demand for ADA coins.
How to measure the success of blockchain technology
Each individual project was created for a different purpose. Clearly, there is no one metric that fits all projects to measure success. From a technology perspective, the emphasis is on different qualities.
If Bitcoin is to fulfill the narrative of a store of value, success is linked not so much to the number of users, but more importantly to market capitalization. The belief that more institutional investors will come is attracting retail investors who want to play the game alongside the big players. Technologically, everything is subordinated to a high level of security, i.e. the use of Proof-of-Work network consensus. Furthermore, there is an emphasis on a conservative approach in terms of development. The team wants to avoid potential problems that could arise when introducing changes to the protocol. The strategy chosen is “let it be as it is and don’t touch it”.
The mission of the Cardano project is different. Cardano is being built as a global social and financial operating system. Cardano is primarily a mission-oriented project. Success is linked to the number of users the system will allow interacting financially. The team is mainly focusing on developing countries, as that is where Cardano can be most useful. Building infrastructure where none exists is always easier than overcoming the bureaucratic barrier in Western countries. It cannot be said that the adoption of the Cardano network will be easy. Many places on the planet have to deal with the lack of internet infrastructure. Adoption is thus more dependent on collaboration with governments and many other teams and projects that are sympathetic to the project’s mission.
The approach to protocol development is completely opposite to that of Bitcoin. The team strives to constantly innovate, as it considers this a key aspect of the Cardano project’s existence. As with Bitcoin, decentralization and security are top of mind for the team building Cardano. However, this is not enough. Cardano must also scale well and cannot rely solely on second layers. The ability to issue its own tokens and the programmability to create complex financial products is important.
There is no point in comparing individual blockchain projects. If we want to measure success, we first need to understand the mission of the project and set metrics accordingly.
It is certainly not true that success is measured only by the highest market capitalization. People should know that this metric may be false and may only have short-term meaning. The success of projects is always mainly dependent on the fundamentals and, as we said, different metrics are relevant for different projects.
No project lives in a vacuum and it is obvious that different projects will try to achieve similar goals. In the world of cryptocurrencies, there will be competition for users, as the growth of the network effect is one of the most important fundamentals of digital technologies. It makes no sense to be a maximalist at the technology level. If someone needs a store of value and bets on bitcoins, that’s perfectly fine. That same person may want a reliable and financially accessible transaction system, leverage a decentralized identity on the blockchain, or take advantage of a DeFi service’s convenient interest rate on their wealth.
Cardano will enable the creation of a decentralized banking system that will provide micro-loans to people with no credit or transaction history. In countries where there are civil wars, it is difficult to prove that you own property because the infrastructure is either non-existent or easy to manipulate. The only solution is blockchain, which will ensure that no one changes the records after taking power in the country. Services that we take for granted in the West are difficult to build in a conventional way in developing countries and blockchain seems to be a suitable solution.
We can certainly consider it a success if the population agrees that bitcoin is a good store of value. This is not mutually exclusive with the fact that Cardano can be a very good social and financial platform. If Cardano fulfills its mission and technologically supports the growth of the economy in developing countries, it will be a considerable success.
Each individual considers success something different. Some of us, perhaps most of us, primarily pursue our economic benefit. However, humans do not live in isolation and our happiness depends on our surroundings. We live in a globalized world. While our immediate surroundings are most important to our well-being, we are essentially dependent on the whole world. Social unrest, famine, and wars literally affect the whole world.
People should understand that modern technology can improve the functioning of our world. Blockchain is considered a disruptive technology that will have the same impact on society as the advent of the internet. People should see blockchain not only as a means of self-enrichment but more importantly as a technology that can play a significant role in transforming our society. It is understandable that people come to cryptocurrencies for personal profit, but they should stay for the mission that the projects offer.
Let’s distinguish success on a personal level from the potential that blockchain technology has. Let’s accept that individual people have different preferences and will prefer different technologies for their own personal reasons. Let’s think about what success is in the context of society as a whole and what is in the best interest of our planet. Let us not always think only of ourselves, but let us go further in our thinking.
The utility does not require speculative character
Most people on the planet use digital services and social networks without being shareholders in these companies. Facebook is the most used social network with almost 3 billion active users. Do you think all users have to be Facebook shareholders at the same time? They certainly don’t have to, and I can assure you that the vast majority of Facebook users do not hold any shares in the company.
People use digital services because they are useful to them in some way. People don’t need to care who created the services, how much money they made, who holds the stock, or what the market capitalization is. I’d be surprised if more than 1% of Facebook users know what a company’s stock is worth. The utility of social networks is not linked to financial speculation.
Banks are the same case. People are primarily interested in the features associated with using the service directly, such as fees, reliability, security, etc. If transaction fees or account maintenance were too expensive, people would naturally look for an alternative. A competitive environment has a positive effect on the quality of service.
The first generation of cryptocurrencies has one characteristic ingrained in its DNA, namely the need to accept volatility. This can be seen as a particular characteristic that may be suitable for a particular use but quite limiting for others. For Bitcoin as a new candidate for a store of value, this is an appropriate characteristic. If you think about other uses of decentralization, whether in the financial or social sphere, you will find that volatility prevents the building of useful services.
The “buy, hold and wait” strategy is luckily not the only possible use of decentralization. This is good to remember. Not everyone on the planet is willing to take the risk associated with volatility. Most people on the planet do not invest in either gold or equities, preferring to rely on third parties to intermediate their investments. People in developing countries do not have the capital to invest and cannot afford the risk of losing their wealth. That is the reality, and let us not expect every citizen of the planet to buy volatile cryptocurrencies. That is a very naive expectation.
Fortunately, it is possible to create decentralized services that do not depend on volatile assets. The success of the Cardano project is not dependent on the growth in the value of ADA coins. Even if the value of ADA coins declines throughout the next year due to, say, a bear market or negative geopolitical events, it doesn’t matter. Cardano will be successful if interest and user numbers grow, if adoption by states and business grows and new DeFi services are created, etc.
Each person can decide for themselves if they want to hold ADA coins and stake them. The important thing is to build a system in which users pay fixed and consistently low fees for services. Volatility is a utility killer and it starts with transaction fees. Long-term predictability of fees will allow for the creation of workable economic models. Few people are willing to admit that most current economic models fail precisely because of token volatility or speculation on the rise or fall of value.
Creating a useful and, more importantly, sustainable service requires that people accept the economic model. This means that they are willing to pay for the service and that the fees are distributed in a fair way between the team and any stakeholders. If the team is forced to sell the tokens due to a market downturn and to create a financial reserve for further development, the tokens lose relevance. Once people lose faith in the token, the service will suffer. Part of any service should be the price stability offered by a stable coin.
Blockchain is not the magic answer to all the world’s problems. Developers of DeFi services should think more about the economic model. The service must be attractive not for speculation reasons, but for its benefits to the user and, consequently, to society as a whole. Those who understand this will succeed.
How to have a great network effect
Cardano is a smart contract platform, so it will be much easier to gain a large network effect than in the case of Bitcoin. This is mainly because the platform can be used without exposing the user to asset volatility.
People who will have their decentralized identity on Cardano will not need to hold ADA coins. When the Babel fee upgrade is deployed, you will be able to pay for Cardano services with all tokens issued on Cardano. This will allow users to keep only stable coins in their wallets and spend them as needed. The fee is paid directly from the stable coin. If they use the second layer called Hydra to do this, the fees will be very low.
Common financial services such as loans or insurance need stable assets. If DeFi services are to be an alternative to traditional financial services, they need to be as similar to them as possible. Decentralization will ensure automatic contract execution, reliability, immutable terms, transparency, lower costs, global availability, and other features. All the features of blockchain that are important to people are useful with volatile assets as well as with assets that are stable or that replicate the value of traditional financial assets such as stocks.
Building an alternative financial system is not an investment from the users’ point of view. It has to be primarily a service that will have some real advantage for users over traditional services. The service will attract new users and promote network effect growth only if it is actually useful compared to competitors. The network effect is a huge value in itself, which will primarily be reflected in the market capitalization of the Cardano project.
Many people are concerned that if transaction fees are not paid in ADA coins that the coins will lose value. We certainly don’t think so and it will be just the opposite. ADA coins will always be linked to the utility and services that are built on the Cardano platform. Remember, every time users pay a fee, it is the Cardano network that collects it in the first place. Secondarily, a portion of the fee may go to DeFi services. The project treasury and stakeholders of Cardano will always be rewarded through staking.
Staking is an important part of the economic model of Cardano. Holding ADA coins can be considered financial speculation. The advantage is that in the case of Cardano, anyone in the world can hold ADA coins and staking is accessible with literally just a few coins. However, the important thing is that users can use the platform without having to undergo speculation. In other words, the growth of the network effect is built on speculation by ADA coin holders, but it is also dependent on the utility of a platform that is completely insulated from volatility.
Cardano is versatile, so it will offer more options over time. Just as the Internet has evolved and new services have emerged, the Cardano ecosystem will grow. Stable coins are a perfect example of how to push the value growth of volatile assets like ADA while insulating users from volatility. Djed users may not be the ones minting stable coins. The Djed algorithmic stablecoin will use ADA coins as the underlying asset. The more successful the Djed, the more coins will be locked in the system. A declining supply of ADA coins in the market may affect their value. It is a basic economic rule that increasing demand raises the value. Minting Djed requires ADA coins, so the demand for stablecoins will essentially increase the demand for ADA coins.
Currently, there are two stablecoin projects in the top 10, namely USDT and USDC. Both of these projects use real dollars held in the bank as the underlying asset. There is a lot of trust in third parties that control the minting of digital dollars. The Djed algorithmic stablecoin will be more decentralized as the underlying asset will be on the blockchain. So anyone in the world can be an auditor. What is worth paying attention to, however, is the market capitalization of the projects. The two together have a capitalization of over $125,000,000,000, which is about a quarter of Bitcoin’s capitalization. There is huge interest in stablecoins and they are an integral part of the decentralized space. Hopefully, algorithmic stablecoins will take over the role of USDT and USDC despite the failure of the Terra project and the UST stablecoin.
The Djed will be automatically a global digital currency that is stable, unlike the ADA. This means that people can use it immediately for payments without the risk of losing purchasing power. For the West, this is an option. For developing countries or countries with high inflation, an immediate solution to a current problem. Solving real-world problems is exactly what people expect from technology and what you might think of as a useful platform.
Note how the utility of the platform indirectly increases the value of ADA coins. The more useful the platform, the greater the network effect. A growing network effect will have a positive effect on ADA coins. A higher value of ADA coins increases Cardano security and at the same time increases demand.
The network effect can be influenced by narrative or belief in the project. Utility, real impact on the economy, use in industry, adoption by states, creation of an alternative banking system, decentralized infrastructure to create or improve social networks, and other things can have a much greater influence on the network effect.
We are still early
The entire cryptocurrency industry is still in its infancy. Even though the whole world is talking about cryptocurrencies and blockchain, we can’t say that we commonly use services built on decentralization. In our opinion, we are somewhere in the phase of accepting new technology, finding uses, and implementing new services. Adoption is higher in some parts of the world and it is lower elsewhere. The traditional financial system has used the new industry in its own way and is looking at it as an investment opportunity. Banks are opening up to cryptocurrencies and new crypto funds are being created.
From the government’s perspective, we are at the stage where the new industry is accepted and the regulators are coming in with their agenda. This is also a necessary part of the change. Once the regulators set the rules of the game, the revolution can continue.
From our point of view, it is not important that the big players want to hold cryptocurrencies. It is absolutely critical that the infrastructure changes, that people start to think differently about money, and that legislation allows alternative financial systems to exist. If banks invest in cryptocurrencies for us and we continue to use fiat currency bank accounts, nothing fundamental will change in society. If cryptocurrencies end up as an investment, we’ll consider it a waste of potential.
Decentralization is a disruptive concept that has the potential to change the way our society functions by putting power back in the hands of individuals. Such a fundamental change cannot be quick in principle. It must be gradual. Do not expect something to change in a year or two. The decentralization of society will take decades. It is okay that at this stage we have a lot of questions about the future and that many projects have failed to implement their ideas. It is the direction that is important, not the details.
It is important to understand that decentralization is a fundamental revolution at the level of trust. In today’s world, whoever has power has control over others. Control can often be used for personal gain. The richer an individual is, the more he or she craves power, because this gives them more control. In other words, power generates wealth.
In our society, we can see this principle in many places. Central banks, commercial banks, governments, authorities, big businesses, social network owners, local authorities, etc. have power. Decentralization has the potential to take some power out of the hands of the current holders and put it back into the hands of individuals.
In many cases, it is not necessary to completely replace specific authorities. People are used to living in a hierarchical society, so this may not even be possible. There will always be some groups or separate entities that will have representatives. There will always be successful entrepreneurs who will be more successful than others.
Decentralization aims to rid us of inefficient middlemen who abuse their position. In other words, if individuals have more control and choice over their lives, it will be more difficult to abuse powerful positions. If we incorporate decentralization into existing processes, it can be much more difficult for high-profile individuals to change records, unnecessarily drag out processes, manipulate negotiations, ask for bribes, and more. Many current activities can be automated, and decentralized algorithms can be much more reliable partners for interaction.
Algorithms can theoretically take care of the monetary supply of coins in circulation, the stabilization of the value of currencies, even the rate of inflation, micro-loans, insurance, the protection of private data on social networks, identity verification, access authorization, and many other things.
The use of decentralized algorithms in society is at the very beginning and it will take a long time for the concept to gain the trust not only of enthusiasts but also of the mass population and the people currently in power.
No one can predict which direction the adoption of decentralized technologies will take. The technology has to prove to the world that it can work reliably, and this will not happen overnight. As adoption progresses, people will have new requests for enhanced capabilities and teams will deliver new features. It will be a repeat of exactly what we saw in the adoption of the Internet. In the first phase, we just read the documents. After that, we could post pictures. After some time, we met on social media. Today we order and pay for goods online and stream videos. And you know what, this is not the last phase either. Everything will go on, and few can predict what we will be doing on the Internet in another 10 or 20 years. Decentralization will change the Internet. If it’s true that the Internet changed the world, decentralization is just an episode in the evolution.
Conclusion
Bitcoin came up with the idea of replacing fiat currencies. But you can’t replace money without changing the entire banking system. You cannot replace the banking system without changing governments. It is very naive to think that bitcoin will displace fiat currencies and everything else will remain as it is. The current systems would not absorb such a change without social unrest.
Adoption will occur at different speeds in different countries and the volatility of all cryptocurrencies will prevent people from actually using them for payments. This will be true for several decades, perhaps forever. People want to live in a stable financial environment, so stable purchasing power is a prerequisite for the adoption of decentralized financial services. This also applies to the economic models of DeFi projects. If a DeFi service has a fee of 0.5 ADA, it could be $0.10 in a bear market or $5 in a bull market. Can you see the difference? 0.10 USD may be an acceptable fee, 5 USD is not. Fees must always be acceptable regardless of market sentiment.
Djed will be an important project for Cardano as it will be a reliable and stable asset in the ecosystem on which to build financial services for the mainstream. However, don’t expect miracles tomorrow in the case of Djed either. It will take a few years before we can be sure that the algorithms work as they should. Adoption by merchants will also take a long time and will definitely require regulatory approval. It is important to look at cryptocurrency adoption objectively and not underestimate the ability of the traditional world to accept fundamental change. Let’s not just look at cryptocurrencies as an investment, but let’s think about their real use and impact on society. The Cardano project is all about the mission.