Last Updated: 04/27/2022

Predictions by Osprey Funds were made as of April 2022.

Key Takeaways

  • Smart contracts and custom tokens are now possible.
  • Each new feature is incubated at academic institutions and voted on by the community before implementation.
  • 4 million NFTs minted on the network.
  • Cardano is focused on enterprise/corporate users which can prove fruitful.
  • Cardano has a lot of network upgrades to fulfill before it can progress.
  • Pool operators must contend with advertising their staking pools to get it off the ground.

We’ve all heard people taking jabs at Cardano (ADA) over the past year, but this coin could very well become a leading investment in your crypto portfolio.

We assume a circulating supply inflation rate of 3.84% per year with ADA. We also assume that transaction fees distributed are distributed to all pools that created blocks during an epoch. We consider the Cardano hardcap at 45Bn ADA.

There is no token burn mechanism built into the network and while there may be a movement to eventually add a burn component to the protocol, it does not currently exist.

DEEP DIVE: An Initiation on Cardano

Cardano is a two-layer system split into a settlement/payment layer and a computation, smart-contract layer. Cardano recently launched the smart-contract aspect of the network in late Q3 2021. While other layer 1 networks have primitives that are still coming up to speed, many have had smart contract capabilities since launch. This has allowed projects in other ecosystems to build for longer periods of time and foster a base of dApps, connectivity and users.

An upgrade to the network in March 2021, the Mary hardfork, was also released that provides users the ability to define custom tokens. This functionality is like creating unique tokens for parachains ecosystems on Polkadot or for subnets on Avalanche, albeit still limited when comparing to depth of customization when designing full ecosystems on other protocols. Since the beginning of February 2021, the Cardano network has seen a large burst in 90-day average transaction activity coinciding with the upgrade by 2.4x YoY to $15Bn.

Jump in and Stake – The Water is Lukewarm

Cardano is a proof-of-stake network which Cardano calls the Ouroboros protocol. Staking pools are the main reward concept that the protocol revolves around. Staking pools offer diminishing rewards based on user/delegator saturation, which are designed to prevent centralization by limiting pool sizes.

As more participants join, staking rewards will fall.

Pool operators can also optionally pledge ADA – depending on how much they pledge, their pool rewards will be higher. Operators can use this as an incentive to boost the rewards for their pool to make it more attractive to potential delegators.

Ultimately they are rewarded with a slice of network transaction fees and via inflation of the network supply. Operators can also set a price for their service when they configure the pool which they get to keep. For the while, the network is designed to reach equilibrium when it approaches 1k active stake pools for decentralization purposes.

Marketing is usually required when first attracting delegators to join staking pools, and while the biggest drivers are node reliability and reward percentage, pool operators are initially instructed to tell their friends and family as part of the marketing strategy as an example. Running a pool quickly becomes like running a business and the pool is constantly competing with the rest of the nodes on the network to boost staking rewards.

To run staking pools, technical knowledge is also required, and operators must be familiar with managing and maintaining servers, backups, etc.

Cardano Has a 5-Phase Plan

Cardano is broken down into 5 main phases related to the foundation, decentralization, smart contracts, scaling and governance. The decentralization and governance phases are still underway – smart contract functionality has recently been released. Plutus is the smart contract scripting language and utilizes a modified version of the Haskell language.

It may be somewhat of a barrier if developers, who aren’t familiar with the language, want to jump into the ecosystem and start development. Compare this to WASM on Polkadot which allows for common languages to be used for development and lowers the barriers to entry on the platform.

Keep on the Lookout

Smart contract functionality and custom token creation is very new on the platform, especially when compared to the rest of the layer 1s. New features can encounter issues even if they’re thoroughly tested before launch. Issues related to newly released critical network functionality, especially what many would consider layer 1 table stakes, is something all users should be paying attention to.

In addition, pool operators must contend with advertising their staking pools to get it off the ground as opposed to a quick process to spin up some servers and begin. They are initially encouraged to pitch friends and family and pour money into the pool. This process feels inauthentic and similar to a marketing ruse.

While active address count was on the rise in the beginning of 2021, the growth in active addresses has stalled since September/October of 2021 at around 177k. This could be a negative network adoption signal as similar statistics for other L1 networks have been growing during this time. Total value locked (TVL) is also quite low and only ranks 32nd in TVL (compare to Avalanche @ #4) when considering other chains and may be a sign of network woes.

Time will tell – count by the epoch.

Get the Full Cardano Analysis Here

The aforementioned information is based on a study conducted by Osprey Funds’ Research Analysts. Any numbers regarding future events are outcome predictions, not factual data. We are not recommending that you invest in Cardano (ADA) based on the information contained here. Please use this data and information as assumption only.