Media reported that Cardano became the most decentralized network in the crypto world. It happened half a year after the launch of the main-net. Let’s have a look at the details.
The launch of the main-net
The Cardano Shelley main-net was launched on the 29th of July 2020. It was the day when many pool operators have registered pools and people can stake their ADA coins. There was a Friend&Family group of pool operators that tested the main-net for some time before other operators could join.
The launch of the main-net was a big day for the IOHK team that has been working on the Cardano protocol 5 since 2015. Another rewarding moment for the team is the news that Cardano becomes the most decentralized network in the crypto world. It means a lot since people care about the project. Decentralization, but let’s not forget security, is linked with the interest of people. Only the interest of people and financial involvement can decentralize a public network.
How to ensure high decentralization and security of public networks
We do not go deeply into the details in this article. We will have a look at the interest of people. Having said that, some background is needed to understand the concept. Let’s explain the basic mechanics.
You can create the best-decentralized protocol in the world from the technological perspective but if people do not adopt it then the network will not be decentralized. It is necessary to attract people’s attention and motivate them to participate in the decentralization and security of the protocol.
Cardano uses native ADA coins for the distribution of power. Put it simply, the more independent entities own ADA coins and participate in staking the more decentralized will be the network. It is also important to be aware of whales. It is better when coins are equally distributed among a big number of smaller individuals than held by a few big whales. We can observe the combination of both in the real world.
Decentralization depends on the equal distribution of coins. The security is related to decentralization to some extent but it depends also on the price of ADA coins. Attack on the network must be as expensive as possible. It is similar to PoW networks where an attacker needs to have more than 50% of hash-rate. In PoS networks, an attacker needs to own a certain number of coins that are used in staking. In the case of Cardano, it must be more than 50% of coins that are used in staking. However, there are PoS projects where it is sufficient to have approximately 2/3 of coins.
The number of coins used in staking will be lower than coins that are in circulation. People are not forced to participate in staking. They can trade ADA coins or use them somewhere else. For example, in some DeFi projects. Generally speaking, the more coins are used for staking the better for the protocol. On the other hand, it would not matter that for example only 50% of coins in circulation are used for staking. The rest can be locked somewhere else. It is important to ensure that people are motivated to hold coins and do not sell them cheaply.
People will like holding coins when they can stake them, use them, or expect a higher future price evaluation. Staking can be very attractive since it ensures passive income. In the case of Cardano, delegators can earn roughly 5% a year. Rewards are paid every 5 days. In comparison with other projects, the Cardano protocol does not need to lock staked coins. Delegators can always spend them. Usage of ADA coins in DeFi services will be possible with the release of smart contracts. It is not the case right now and it can be a reason why so many coins are used in staking. Regarding the market capitalization of the project, it depends mostly on the quality of the protocol, partnerships, the community, market mood, investors, and many other things.
All that is not directly in the hands of the team. The team is responsible for technology. The quality of the protocol is critical. It influences the interests of developers to build on the platform and also investors that might decide to buy ADA coins. People from businesses and representatives of states or banks want to use the best available technology for their needs. Crypto-space is a competitive environment and partners can consider other projects for building their decentralized services. People might not be capable of evaluating the quality of different projects. They can be influenced by many factors and discussion with teams can be one of them.
A correlation between market capitalizations and the technological qualities of projects might not be equal. It can be naturally expected that the best projects could have the top market capitalizations but we cannot take it for granted. Narratives, the length of existence, and network effect also play important roles. It can be difficult to overcome projects that have a first-mover advantage. Anyway, in our view, the whole crypto movement is in the beginning, adoption is relatively low and nothing has been decided. The best days of cryptocurrencies are ahead of us.
As you can see, being the best is a matter of many factors. Did you know that there are over 790 academic citations of Ouroboros’s first conference paper? No other projects in the crypto-space can boast by that. Not even Bitcoin or Ethereum. It is something that can be easily verified and what users, business partners, and investors see. It attracts people that want to become pool operators and many others that want to buy ADA coins and delegate them to a pool. Many people believe in the Cardano project. It is the main reason for being the most decentralized and secure project.
Let’s have a look at numbers
First off, remember that we talk about numbers that are dynamic and change every day. It is smart to check the current state regularly. You can use data from the StakingRewards website.
If we have a look at the 5 projects then we can see that Cardano is in the first place, the second is Polkadot, the third is Synthetix Network, and follows Ethereum and Tezos.
At the moment of writing the website has calculated that the staking reward of Cardano is 4,33% a year. It is amazing that Cardano sits in the first place despite the fact that other projects offer a higher annual yield. Polkadot offers 13,68% and Ethereum 10,97%. The highest staking reward in the top 5, 37,44% a year, offers the project Synthetix Network.
The IOHK team cares about the long-term sustainability of Cardano. It is planned that the protocol will be here for a few decades. Thus, yields cannot be so high in order not to be depleted too early. The yield of 5% a year is more than a common commercial bank can offer you at times of economic stimulus. Moreover, it does not depend only on the yield but also on the stability of market capitalization and its potential rise. Nothing can be predicted in advance but Cardano has been in the top 10 for a longer time. Ethereum still uses PoW consensus and PoS runs only on the test-net. It can be said that Cardano is a PoS project that has the highest market capitalization. As we said, it can change tomorrow. On the other hand, it doesn’t matter where we are now when the market fluctuates. It is important when Cardano will be in a few years when smart contracts are released and developers start building the first decentralized applications. Many projects have announced that they will migrate to Cardano. Many others consider that. These decisions, successful migrations, and plenty of satisfied users will be the most important price drivers.
As we have explained above, the market capitalization of the protocol and the number of staked coins influences the security of PoS protocols. It is harder to try to commit an attack on the protocol when the price of native coins is too high. So, it can be said, that Cardano is a very secure protocol at the moment. At the moment of writing, the 21,8B ADA coins are staked. It makes nearly 70% of all coins that are in circulation. In USD value, it is 5,77B.
An attacker would need at least $2,88B for buying ADA coins in order to commit the 51% attack. Moreover, the attacker would make ADA holders very rich since when he would start to buy coins the price on the open market would rise. In the end, the attacker would find out that he or she would be attacking their own wealth.
The economic mechanics are set quite well. When 70% of coins in circulation are staked then it is impossible to buy them on the open market. If the price would go up then delegators would enjoy the rewards and would not be motivated to sell their coins. Many of them would probably sell only coins that they got as a reward. Rising price of coins would attract new people that would like to participate in staking. Thus, the attacker would not be alone who would wish to buy coins. The shortage of coins on the market would make the attack very expensive.
Let’s have a look at other projects. Polkadot’s staked value is $4,8B and nearly 61% of coins in circulation are staked. Synthetix Network’s staked value is only $1,9B, but it is staked over 75% of coins. It is a relatively old project so we are not surprised by the high amount of staked coins. Ethereum still uses PoW consensus so it is not a surprise that only 1,6% of coins in circulation are used for staking. The value of staked coins is $1,8B. It is not much and if an attacker would be willing to lose such wealth it could be relatively easy to buy ETH for an attack. We do not expect that it is going to happen. Once the Ethereum main-net is launched then the percentage of staked coins will increase and Ethereum will be sufficiently secure. Tezos is a champion regarding the percentage of staked coins. Nearly 79% of coins in circulation are staked in the Tezos ecosystem. However, the value of that is only $1,6B.
The StakingRewards website does not provide detailed information about the number of pools and delegators. This information is also critical regarding decentralization.
In the case of Cardano, there are over 1500 registered pools. From that amount, however, approximately half of pools are able to produce blocks regularly in every epoch. There are whales operating many pools. For example, the Binance exchange operates pools that altogether hold a 12,7% stake. The stake of 22% consists of single pool operators. You can check the ADAPools tool to see the current statistics. There are many operators that operate more than one pool. This group also contains the IOHK team that has a 10% stake.
The number of Cardano delegators is awesome and rises every day. At the moment of writing the article, there are nearly 130K delegators.
In the Polkadot ecosystem, there are 286 validators and 23K nominators. In the Tezos ecosystem, we have found 408 active bakers and over 85K active delegators. Let’s skip Ethereum since it is only a test-net and also Synthetix network since it runs on Ethereum.
As you can see, Cardano, as the youngest project regarding staking, is the best project nearly in all categories: the value of coins that are used in staking, the number of delegators, and the number of pools. All that despite the fact that rewards are the lowest in the top 5. If you have a look at the top 10 then you can find EOS, which has rewards of 1,6% a year, and Tron, which has rewards of 3,1% a year. The rest of the projects in the top 10 have higher rewards than Cardano. We expect that the number of coins that are used in staking will increase in the case of Cardano. This statistic improves nearly every week and as we said, Cardano is the youngest project regarding staking, and the difference between Cardano and Tezos is only ~9%.
It is not only about numbers
Well, it was the statistics. Decentralization and security are not definitely only about numbers. We need to consider also the quality of the protocols and their properties. It is a quite different topic that we are not going to cover in the article. We can just remind you that Cardano has undergone a source code audit that has been done by a well-known company Root9B. The audit proves that the key parts of the Cardano protocol are secure.
Cardano is built as a mission-critical protocol. The IOHK team decided to take a similar approach that is used for building software for NASA, airplanes, atomic-plants, etc. The software that is used in the financial world is similarly important. Imagine that your wealth depends fully on a blockchain protocol. Which one would you choose for that? Probably the one that is built carefully and ready for the mass-adoption. Do not take us wrong. All major protocols are built to operate without interruption and nearly all projects run quite well. Only a few blockchain projects had some minor troubles. We have mostly seen successfully committed 51% attacks on small PoW networks. We also remember that some DPoS networks had troubles with a short interruption since a node crashed and the networks were not prepared for that case. All networks including Bitcoin and Ethereum have low adoption. The mainstream is ahead of us and when the adoption will cross 10–20% then the quality will show.
At the end of the day, people will decide about adoption. The adoption strategy, partners, business, and states, all will participate in the adoption and influence it in some way. One big partnership or success can influence the destiny of any project in the crypto world. Adoption is a slow and iterative process. Being declared as the most decentralized and secure network is a great success for Cardano, but at the moment, it is not sufficient for the adoption. The project needs to attract developers that will use the platform for building useful applications. Companies and banks must come and issue new tokens that will be used by people. People must be sure that investing in Cardano is a good idea. Maybe they can consider Cardano as a store of value or money. Everything is possible.
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