Is Cardano undervalued?

As I write this in the first week of spring, there is much hand wringing amongst the Cardano community over what is going to on with the price. For those of you reading this in the future, welcome time-traveler, we hope you look back with amusement over the days when Cardano was at 0.86 dollars, 2,101 satoshis and 0.00031902 Eth.

So is Cardano over or under valued? Neither. I’m much more sanguine about Cardano’s price than I was a week ago. The price (relative to BTC and Eth) reflects the need for investors to see momentum. Here is what needs to be done to ensure that momentum is in the right direction.

  1. TVL

For those who don’t follow crypto as much, TVL stands for total value locked and its a measure of how money has been locked up in various Dapps running on different blockchains. Given that most of this is driven by DeFi, one can say that TVL is a measure of how popular Defi is on different chains, and given that DeFi is the biggest use case for cryptocurrencies, one can argue its a measure of just how much a blockchain is being used overall.

Here’s the TVL ranking taken from DeFiLama:

We see all the big names on there right? Well almost all. .there’s no Cardano. You have to scroll much further down to position 33 to find it, nestled beneath Bitcoin which doesn’t even have smart contracts (however it does have the lightning network which is where it’s TVL is coming from). Now see this.

How long did it take you to spot it? No, not the blue circle, but the +22.49% to its right. This is the 7d change value. Cardano has only really had Dapps for a month or two so it’s having to play catchup with the other big boys. It’s TVL is far smaller than that of Avalanche, which is currently one step below Cardano on the market cap rankings, yet Avalanche has a much higher TVL. One could therefore argue Cardano is overvalued. However, provided Cardano can continue storming up the TVL charts then one can make the argument that it’s only a matter of time before Cardano is in the top 10 of the TVL rankings.

2. Stablecoins

The really eagled eyed amongst you would have spotted something else in that last image. Oasis – a coin with a much lower market cap (ranked #101) sits above Cardano in TVL and has seen it’s TVL surge 47% in the last 7 days. What gives?

Digging into it further we find that it’s driven primarily by ValleySwap, a DEX that appears to have been launched around the same time as Sundaeswap but has a much lower social media following. Something just didn’t seem right there. Digging a little further I found that the majority of the liquidity locked in its network was in Stablecoins, specifically USDT. This makes sense. Stablecoins in the yang when it comes to the yin and yang of trading. It’s what traders jump into to lock in their profits during times of uncertainty (and with the currtent Russia-Ukraine war that’s raging, this certainly are uncertain times).

This highlights the need to have stablecoins being traded on Cardano. And more than one. Djed – an algorithmic stablecoin is being launched soon but will need time to prove itself (for those of you that think algorithmic stablecoins don’t come with any risk (to those providing liquidity to fund the stable coin) should read the Bearwhale saga). It could well be that Djed is hugely popular upon launch but needs to restrict the amount of Djed that is minted in order to maintain it’s reserve ratios.

Therefore having a second and more established stablecoin such as USDT or USDC will also be vitally important to boosting the Cardano TVL coffers.

3. When ERC-20 converter?

Which brings us on to the next question – when will it be possible to convert ERC-20 based tokens into Cardano native tokens? Last I heard the AGIX ERC-20 converter (for converting the ERC-20 AGI token) was live on testnet about 3 months ago but I don’t believe I’ve heard anything since. And what about a more general ERC-20 converter that can handle any token? In fact there’s only 9 functions and 2 events that need to have a Cardano equivalent – how hard can it surely be? (I say this as an ignorant bystander).

Having an ERC-20 converter would be the equivalent of releasing a dam and allowing vast quantities of water to flow down.

4. Speed

TPS, finality, megabits per second, however you want to measure it we all know what we mean. We want to see our transactions complete quickly when we are using our favorite Dapps or claiming our favorite token.

The chart below shows the Cardano transaction count (in blue) over the last 9 months. The peak in January is due to the infamous Sundaeswap launch when people were waiting days and days for a transaction to go through.

Cardano Blockchain Insights

You’ll notice that we haven’t returned to the levels of Sundaemania since Jan, so the blockchain has not had to experience the same level of demand. Various performance optimizations have been made to Cardano since then so we’d expect it to perform a lot better but the real heavyweight scalability improvements are coming later this year. Cardano needs to prove itself in two ways: That it can easily cope with Sundaemania were it to happen again today, and that it can cope with Ethereum level of demand after the June and October hardforks. Now I know there’s the famous table from Messari showing that Cardano has 6.5x more transaction volume than Ethereum and other chains combined but this article gave me some doubt about how accurate those statistics are so I won’t repeat them here until I know more. But in short Cardano has to show it really can scale up to similar performance levels as other chains this year.

Conclusion

As ever with Cardano it seems like a never-ending game of waiting for “one more thing”. However as I said at the start. I’m feeling rather sanguine about it all. A lot of this is to do with my belief that EVM is outdated and ecosystems that are built on top of that will fall by the wayside.

And putting TVL to one side, one of the most important metrics Cardano can have is “number of days without a security incident”. I’m sure it’s likely to happen sooner or later but generally I expect Cardano and the DApps built on them that have been properly audited, to be more secure than those on other chains.

The near term challenges for Cardano are very much surmountable, and the update cycle has significantly shortened indicating that the solid foundation is paving the way for faster upgrades.

With scalability issues out the way this year, a stable coin in place, the ERC-20 convertor out, and Hydra coming out either this year or next, it’s really hard not to see a very bright future for Cardano.

Published by ReddSpark

Follow me on Twitter: https://twitter.com/Reddspark1

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