We have all exchanged our cash/assets to acquire ADA because we fundamentally believe/understand that Cardano can become one of the most valuable DLT projects in the world. Therefore, as an ADA holder, one of your objectives is to maximize the purchasing power of the coins you hold.
Cardano has been built out in a methodical way using best practices to deliver technology that ensures stability and reliability. Stability and reliability are of paramount importance when vast amounts of economic value is being transacted on the network or being created by using the network. This is one of the reasons why Bitcoin is the leader in the crypto world by market cap.
Stability and reliability not only comes from the code that is being run, but will also be created/destroyed by ADA holders and how they participate in the ecosystem. Therefore, the next big challenges for ADA holders after the Shelley mainnet launch will be to:
- Keep the network secure
- Create value for the network
- Navigate through problems to find the best solutions
#1 Keeping the network secure
As an ADA holder, you may decide to delegate your coins to a Stakepool operator or many Stakepool operators. So the question you will need to ask yourselves (assuming you are acting in the best interest of the network) is how you can delegate your coins in a way that will help keep the network secure. Listed below are a few ways of achieving this. I am sure this will be an on-going discussion and I encourage it because it is an important one.
- You want to choose Stakepools that are run by people that understand how to run them, ideally, they should be strong IT/Programming professionals first and foremost. You do not want someone without the raw technical understanding to start running these things because problems can arise, and you will need to get your Stakepool back up and running fast should the worst happen.
- Expanding on point 1, pools should ensure maximum node uptime. Stakepool operators can take further precautionary measures such as backup nodes, multiple internet connections, external power supplies and enhancing security measures.
- No one person can do everything so maybe there are a group of people with complimentary skill sets running the operation. This could be ideal in case one person is not around anymore to operate the Stakepool.
- Do some research on what pools are out there and how they are running the Stakepool, perhaps there are too many nodes running in one area or on one cloud service provider which is a risk to the network. Ideally, we should have a diverse and well distributed network for optimal security and functioning of the network. After all, this is about decentralization.
- Expanding on point 4, maybe adapools.org can make a list of how each pool is running operations (e.g. local hosted / cloud hosted and the location hosted) or we could do this on our end as we have a full-stack engineer. Maybe this may hinder privacy… this can be discussed further to decide if it is needed.
- The Stakepool operator should pledge some of their ADA to prove they have skin in the game and to help protect against Sybil attacks. It would be great if a Stakepool decided to publicly declare how much ADA they will keep pledged in perpetuity. Adhering to a perpetual pledge would greatly protect against Sybil attacks and it shows a good level of commitment by the Stakepool operator.
- There must be some evidence that the Stakepool operators are around for the long term and not just for a few months. Are they committed to adding value other than just running the Stakepool? Can they add value? This could be in the form of contribution to important discussions, building out web/app solutions, improvement of the protocol and general re-investment of proceeds to fund long term value creation for the Cardano network.
#2 Creating value for the network
Besides ‘keeping the network secure’, which is a form of value creation for the network, we should ask ourselves, how we can as a Stakepool operator, or a Delegator, add additional value to the network. Given that Stakepool operators and Delegators will be earning rewards, we ideally want these proceeds to be reinvested into the Cardano ecosystem in a way that will make the network more valuable as opposed to having resources being idle.
So, how do you define creating value for the network? To do this, we must create sustainable and long-lasting demand for ADA by investing in strong projects that use the Cardano blockchain. If we are financing projects using ADA, then the ADA demand generated should be greater than the initial supply of ADA being sold off to finance the project and should also generate returns relatively quickly.
For example, the initial ADA outlay to finance a project would be 6m ADA and that would create ADA demand of:
1m in Year 1
5m in Year 2
10m in Year 3
15m in Year 4
Run-rate of 17m reached in Year 5
As you can see from the example above, more ADA is generated within the first 3 years of the project with sustainable demand of ADA forecasted going forward. By generating long term sustainable demand for ADA, you help create value for the network.
The ideal way of doing this would be to create a circular economy using ADA where minimal amounts of ADA will leave the ecosystem and be converted into other assets. Here is a brief example of a strong circular economy in the DLT space (full disclosure that we have invested in the token and equity of the business). Celsius.Network are doing phenomenally well in terms of token price appreciation, the fundamental growth of its core business and is also free cash flow positive. The CEL token stays in the Celsius ecosystem because people need to hold CEL to get significant discounts on paying back loans and people need to hold CEL to get a significant boost on their interest earned. As the business grows, so does the value of the token. The circulating supply that is held within the ecosystem is increasing and the supply will run dry within a few years with the current growth trajectory (assuming a flat price). The shrinking of supply and increased demand from fundamental growth translates into increased sustainable purchasing power of the CEL token.
Therefore, we need to create more demand for ADA through investing in valuable and scalable projects that can be built on top of Cardano which makes use of a circular style economy like the Celsius model.
We modelled out various projection targets for the Celsius Serie A equity raise. One of the scenarios we have made publicly available is the upside projection target returns:
We expect to see an acceleration of what we call ‘category killers’ emerging which will be available for the public to invest in at the early stages. Follow us on twitter to stay posted on interesting opportunities like this.
Choosing Stakepools that are happy to re-invest into the Cardano ecosystem will benefit every ADA holder in the long run. But keep in mind, it requires key skills and experience to help select strong projects that will flourish as opposed to weak projects that die.
There are a few ways to do this:
Either the Stakepool Operators and ADA holders have the skills and resources to do this individually
The Stakepool Operators and ADA holders can contribute to someone who does.
Other ways to create value is through improving the UX/UI of sending/receiving ADA/Tokens and improvements of the protocol itself. That can be done through delegating to the IOHK and other related nodes that work on these areas so they can finance the projects themselves by using Stakepool rewards.
We may come across delegators who have short sighted objectives which would be to delegate to extremely low fee pools that maximizes the delegators RoS (return on stake). This would be the wrong thing to do if we want to create a secure and valuable network. If as a delegator, maximising our own RoS is our primary concern, then we will be significantly slowing down the growth of Cardano as key Stakepool operators who are committed to creating a secure and valuable network may be forced out. If we delegate with the primary objective to create a secure and valuable network, then we will all be rewarded x1000 more in the long run.
‘Lucky’ from the Cardano forum mentioned that the paragraph above may be implying that high fee pools ARE somehow ‘committed to creating a secure and valuable network ‘, and low fee pools AREN’T. That is not the case. We think that low fee or high fee pools do not matter as long as we all have the core objectives in mind, which is to create a secure and valuable network. https://forum.cardano.org/t/creating-a-secure-and-valuable-network/35174
Amazon did not become the behemoth it is today by continually paying out dividends, they continually reinvested their money until they became the dominant force in the market.
We will expand on value creation activities further in subsequent posts which should help drive ADA to a +$1 trillion market cap, so feel free to follow us on twitter if you are interested in these topics (details at the bottom of the page).
#3 Navigate through problems well and find the best solutions
We believe that problems should be solved in a meritocratic fashion which is based on the idea that the best solutions should win.
People with relevant skills and experiences should have more favorable weight on the possibility of their solutions being implemented as their ideas are likely to be more suitable than the layman’s suggested solution. However, if someone else wants to contribute an input, that can be taken note of as well and assessed. If the solutions presented are indeed well thought out, reasonable and will work, then they should be implemented.
One must be mindful of one’s own strengths and weaknesses as well as other people’s strengths and weaknesses and then see how they relate to a problem. So far, we have seen some mixed opinions on the continuation of the ITN which is fine, but everyone should keep in mind that the best ideas should win if we are to make progress.
The Cardano community is extremely thoughtful and talented which is one of the reasons why the project is the success it is today and will continue to be. However, this will need to be maintained going forward and that can be achieved by ADA holders making consistently good decisions for the benefit of the network.
Stakepool operators and Delegators will directly influence the direction of the Cardano project. As a Cardano holder, we ideally want to maximize the security of the network and the value of the network. To do this, we must make well informed decisions which are backed by good research, facts and well documented plans. We should reinvest proceeds into financing projects that generate a high amount of demand for ADA within an appropriate time period that is above the initial financing costs. There are multiple ways of organizing how best to reinvest proceeds to make the network more secure and valuable which can be done by funding the people who can make these objectives a reality. We should act in a meritocratic fashion and let the best ideas win to ensure that Cardano continues on its successful trajectory.
Thank you for reading and I hope this has helped give you a better understanding of how you can help create a secure and valuable network.
ICO Research Group is a team of IT and Finance professionals with over 10 years of experience that have been working in the DLT sector since 2017.
With regards to Finance, we have been actively involved in Investment Financing and have also worked in traditional Corporate Finance Management. We believe that these are two key industries that are ripe for significant disruption over the coming decades due to the emergence of DLT.
With regards to IT, our team possesses vast experience in developing scalable software and web solutions covering the full stack to a production ready state by adopting the most cutting-edge technologies that exist. Technology is one of our passions and we ensure that we keep on top of new developments in this space and adhere to good software development practises.
We use our knowledge base to find industry shaping projects, invest in them and actively support them using our resources. The projects must help create a fairer and more inclusive world for us to support them.