The Two Big Problems Facing the Cardano Cryptocurrency
Solely in terms of its design, Cardano (CCC:ADA-USD) has a case for being the most attractive cryptocurrency out there.
Crypto adherents talk up the brilliance of Bitcoin (CCC:BTC-USD) and its pseudonymous creator Satoshi Nakamoto. They’re not wrong. Ethereum (CCC:ETH-USD) has the potential to revolutionize finance. Myriad other “altcoins” have tantalizing use cases.
But Cardano bulls, with some justification, would argue that their coin can stack up with any out there. Its development came via an organized, logical process. Cardano has significant advantages relative to other cryptos.
There are two big potential stumbling blocks, however. Cardano will have to clear those stumbling blocks in order to get to where bulls believe it can go, and should go.
The Case for Cardano
At its core, the argument for Cardano is that the protocol and the platform simply are better.
Relative to Ethereum, Cardano is cheaper. Ethereum’s “gas fees” continue to be a problem, particularly as ETH soars in value.
Relative to Bitcoin, Cardano is far better for the environment. While Bitcoin’s electricity usage continues to be criticized, Cardano’s footprint is far smaller. As a “proof-of-stake” rather than a “proof-of-work” mechanism, Cardano uses “forgers” instead of “miners.” Forgers “stake” existing holdings for the opportunity to win transaction fees.
The end result between PoS and proof-of-work is essentially the same. But PoS is virtual, and far less energy-intensive. Indeed, Ethereum itself is moving to the PoS mechanism.
So if a crypto bull is looking for decentralized finance (DeFi) applications, Cardano should have the edge. If bulls are uncomfortable with Bitcoin’s significant environmental footprint, Cardano’s PoS mechanism should be more attractive.
Going forward, Cardano claims to be both more adaptable and more secure as well. It’s managed by three separate organizations that focus on what the platform calls “evidence-based development.” The immutable underlying blockchain records every transaction, boosting security in a crypto ecosystem that has had multiple high-profile hacks.
These features create an adaptable platform with myriad use cases. Last month, the Cardano Foundation’s chief executive officer argued that the Cardano blockchain could be used for settlement of stock trades. This would have avoided the now-infamous restrictions that broker Robinhood placed on GameStop (NYSE:GME) and other “meme stocks,” restrictions driven by Robinhood’s capital requirements.
That’s just one example. In theory, Cardano literally can revolutionize multiple aspects of the financial system. But there are two big problems in its way.
The Adoption Problem
The first problem is that a better ecosystem may not be enough.
Simply put, that’s the way of the world. Betamax was reputedly better than VHS, and it cost Sony (NYSE:SNE) billions of dollars to make Blu-Ray triumph over HD-DVD. Few consumers believe McDonald’s (NYSE:MCD) makes the best hamburgers, even among fast-food chains.
That issue is magnified for a cryptocurrency. The so-called “network effect” is paramount. More users and more owners means more developers. That in turn means more projects, more use cases, and thus more users and more owners, and so on.
Bitcoin’s move to a “store of value” concept perhaps makes it less of a direct competitor to Cardano. The two cryptos can co-exist. But Ethereum has a big lead, and Ethereum 2.0 will add some of the features that make Cardano attractive.
Obviously, the huge rise in ADA-USD, which has risen more than fivefold just in 2021, ameliorates this problem somewhat. But Cardano still has a market cap of about $40 billion, against $204 billion for ETH and a cool $1.03 trillion for BTC.
The difference in users and volume means that developers may choose even a lesser platform if that platform has greater reach.
Building Out the Capabilities
The second problem adds to the import of the first: Cardano is still lacking many capabilities.
As Bloomberg noted this weekend, Cardano “is still a work in progress.” Even its founder admits as such. Smart contracts should arrive later this year. Ethereum already has smart contracts. Ethereum 2.0 will make programming those contracts even easier.
Indeed, one industry observer told Bloomberg, “I am not aware of a single popular application deployed on Cardano.” In theory, the platform is enormously attractive. In practice, there simply isn’t much there yet.
To be fair, both problems are massive opportunities. ADA-USD’s market cap is less than one-sixth that of ETH-USD. The fact that it’s less well-known in theory creates a larger pool of buyers who can bid the price up. And what Cardano looks like in 2022 and 2025 is not what it looks like now. Improvements to the platform, too, can attract more optimism and more buyers.
Cardano can be a huge winner in crypto. In the absolute best-case scenario, it could wind up being the biggest winner in crypto. But the developers and the ecosystem have a lot of work ahead, and big stumbling blocks to clear.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.