Cardano, a decentralized smart contract platform, has seen massive gains over the past week. This is mainly due to growing excitement about the release of smart contract functionality and the potential for the project to overtake Ethereum. Given its current market capitalization, it may be overvalued, but only if it fails to live up to its promise of being an “Ethereum killer”.
In the cryptocurrency markets, it isn’t uncommon to see a coin increase by double digits in a week, or even in a day. However, it is incredibly rare for a top 5 coin to double in less than a month, which is exactly what Cardano has done in the past 4 weeks, and it is now nearing a market capitalization of nearly $65 billion. Let’s take a look at Cardano, what it offers, and determine if it is now overvalued.
Cardano is a smart contract platform created by Charles Hoskinson in 2017. It promises the capability to change the world through their decentralized technology, and offers the potential to revolutionize governance, finance, education, and even agriculture. One of its main competitors is Ethereum, which is the first smart contract platform ever created. In order to set itself apart, Cardano has taken a unique approach to development, where they focus on peer-revision and publishing research papers to ensure their technology is ready for use before deploying it. This means that development of the Cardano platform has been painstakingly slow, but promises to be secure and ready for real-world use.
Cardano uses a proof of stake consensus model, which means users can stake ADA, the native asset of the Cardano blockchain, to help secure the network and receive transaction fees. At the moment, staking yields around 5–7% and is a no-brainer for anyone holding ADA. It can be done through a wallet such as the Daedalus Wallet or Yoroi browser extension.
One of the main drawbacks of Ethereum is its high fees and slow transaction times. Cardano boasts fees as low as 10 cents, and can handle 2,000 transactions per second today with a theoretical maximum of 1,000,000. For reference, Ethereum can currently handle 13 transactions per second.
Cardano’s most important upgrade, the Alonzo hard fork, was recently scheduled for release on September 12. This upgrade, which is part of the Gougen phase on Cardano’s roadmap, will finally bring smart contract functionality to the Cardano blockchain, which up until now has only been useful for transferring ADA and staking. This will finally make Cardano capable of having tokens, decentralized applications, and DeFi protocols on their blockchain, which will make it a true Ethereum competitor.
On the surface it may seem like Cardano has a massive edge over Ethereum, due to their more efficient transactions and better technology. Thus, Cardano deserves the market capitalization of Ethereum, if not higher, which would give ADA a price around $12 or more. However, this is not exactly the case, and there are many other variables to consider.
First, just like Bitcoin, Ethereum has a first mover advantage. This means that even though Ethereum’s technology is not as good as Cardano’s, there is already a developer community of over 100,000 on the blockchain and millions of users of Ethereum’s decentralized applications and tokens. This same phenomenon can be seen with Bitcoin: even though it is slow and expensive, it remains as the largest cryptocurrency due to its name recognition and reputation as the main cryptocurrency. Any Ethereum developers would have to learn an entirely new programming language to develop on Cardano immediately, or wait an indefinite amount of time for tools that let them use Ethereum’s programming language on Cardano. Additionally, anyone who uses popular Ethereum apps like Uniswap, Aave, and Compound will have to learn an entirely new wallet and ecosystem. This may be a huge barrier to adoption for Cardano, and is the reason the vast majority of other “Ethereum killers” have failed in their goal.
Cardano’s plan to mitigate this threat is by creating partnerships and generating hype around their ecosystem. Unlike the Ethereum Killers who have come before, Cardano already has significant partnerships, such as one with the country of Ethiopia, and seems to also be garnering corporate interest.
Another risk with Cardano is Ethereum 2.0, which is slated to release sometime in late 2021 or early 2022. This upgrade will be incredibly monumental and fix the high transaction costs and slow speeds that currently plague the blockchain. Cardano needs to convince both developers and users that its blockchain is good enough to warrant a migration, or build up their own partnerships and user base that would rather use Cardano regardless. Of course, if there is a problem with Ethereum 2.0 or it gets delayed again, Cardano will have more time to build a following. On the other hand, if Cardano’s smart contract release fails to live up to expectations, Ethereum will seize the opportunity to grow its reach even more.
Given the recent ADA price action, it is hard to determine whether or not ADA is overvalued. If it is truly capable of competing with Etheruem, both in terms of technology and users, then it is incredibly undervalued at its current price, and could overtake Ethereum in terms of market capitalization. On the other hand, if it succumbs to the problems of other smart contract platforms and fails to create a developer and user ecosystem, it will become a zombie blockchain and not gain any traction. At its current price, it is valued higher than any other Ethereum killer which has come before, which means the market believes it has the most potential to live up to its promise. Nonetheless, only time will tell, and the future of Cardano could very well be decided in the next several months.
By Lincoln Murr