Cryptogram-10MAY2022

Is your favourite crypto ‘decentralised’ enough?

10 June 2022

In this issue

Hello, When we started this newsletter, we promised you that it shall be our constant endeavour to help you become a better long-term investor in the crypto ecosystem. This means, getting your fundamentals strong: the better your basic understanding of crypto assets is, the better you are likely to perform as a crypto investor. And towards that, today we will discuss decentralisation, one of the key tenets of blockchain technology, and how understanding crypto projects from this perspective can help you in the long haul as an investor. 

The newsletter is put together by Giottus Crypto Platform and The News Minute’s Brand Studio. Subscribe to the newsletter here, if you haven’t already.Find this newsletter useful? Forward it to others you know in the crypto ecosystem and get them to subscribe!

THE BIG STORY

Scale, stability, and decentralisation

If you’ve been a part of any startup or tech project, you would know that scalability is considered an urgent metric of success and profitability. Scalability is not only necessary but also should be swift. That’s why Solana is very popular. It is already fast and cheap, translating into significant adoption and high market cap. It can handle over 50,000 transactions per second (TPS). Solana's Defi ecosystem is the sixth-largest, with $8.7 billion value locked in the blockchain. It hosts over 1300 projects, dApps, Defi platforms, and NFT marketplaces. Solana (SOL) token did 140x intra-year in 2021 (although it lost some value later that year).

Now compare that with Cardano, which is considered one of Solana’s competitors. Cardano can do only 250 TPS. Its growth has been pretty slow. It supports a few hundred apps and Defi platforms. Cardano (ADA) only managed a modest 16x or so intra-year in 2021.

Compared to Solana, you would think Cardano is meh, right? Not quite.Because, and here’s the catch: Solana is a lot of fun until a bug (exploitation by bots) comes along the way and stops the fun. It is particularly vulnerable because it is more centralised. Solana has suffered multiple outages (7 times or so) in the past year and each time its developers switched off the network for a few hours to decode and resolve the bug. This has garnered widespread criticism about the centralised nature of its blockchain. (For context, right from inception in 2009, the Bitcoin network has NEVER been switched off even for a minute).You gotta scale quickly, but you also need stability. Why decentralisation is goodDecentralisation refers to the transfer of control and decision-making from a centralised entity (individual, organisation, or group thereof) to a distributed network. Decentralisation avoids a ‘single point of failure’ – a risk that a single person or entity in control of blockchain can act in their own favour instead of what is good for the network or the wider user base. In a highly decentralised network, there are a high number of nodes which validate each transaction.

Decentralisation: An illustration

Speaking specifically about blockchains like Solana or Cardano – both are decentralised, but Solana is more centralised than Cardano. Solana has about one-third of nodes validating transactions, compared to Cardano. Decentralisation has three other key benefits: one, creation of a trustless environment (a network can flourish without trusting anyone else by keeping data open); two, optimised resource distribution (ensuring no concentration of power), and three, addition of stability and consistency to the network.In a centralised network, unless you are the leading authority, you are always looking up to the leading authority to measure your progress. In a decentralised network, every stakeholder, irrespective of their share, benefits equally.

However, decentralisation also means that scaling of projects does not happen efficiently enough (or quickly), given the degree of governance involved. Cardano, structurally and philosophically a decentralised blockchain, uses an evidence-based approach and mathematically guided model for all its product updates. It is one of the few networks to frequently publish peer-reviewed research about the technical details of the blockchain and the roadmap is well defined into distinct phases. Cardano has not faced outages like Solana. However, Cardano takes a lot of time to deliver its product timelines. From a trading perspective, centralised projects scale quickly during a market bull run as services are adopted fast but they tend to suffer considerably during a market bear run. Getting down to brass tacks: a decentralised project is good in the long-run. But if your project is in the early-scale phase and it is centralised, then it is ok, investing in it is a good option. But if they don’t move towards a more decentralised model soon enough, the blockchain’s stability can be brought to question. 

  THE TOP FIVE 

Stories from this week you cannot miss

1.  Chainlink releases its updated roadmap for the implementation of staking - a new feature that would introduce a system of rewards and penalties for the proper operation of the system.2. The Mercedes-AMG Petronas Formula 1 team has partnered with FTX to kick-off a series of NFT drops, giving fans a chance to own limited-edition NFT ticket stubs.3. Brazilian soccer club São Paulo FC now accepts Shiba Inu (SHIB) as a payment method for ticket purchases.4. PayPal now allows users to natively transfer, send and receive digital assets between PayPal and other wallets and exchanges.5. Fintech giant Checkout.com has enabled customers to use stablecoin USDC as a payment method, partnering with crypto security firm Fireblocks.

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

This week, we explain Smart Contracts.

Image credit: Cryptotips.eu

Let’s first get a few things straight. We often think that we take loans from banks, and that the money being lent to us actually belongs to the banks. Not quite. Banks use deposits from other people, or loans from other larger banks or a central bank, to loan us the money we need to buy homes and cars and whatnot. Basically, if you take a home loan from SBI, and I have a few lakh rupees deposited in SBI, some of my money goes to your loan.Now it’s hard for this system to work without SBI, because how many small amounts of money can you take from different people and keep track of interest and payments? SBI does this job, and that’s why SBI becomes an important intermediary. Someone has to police the transactions and ensure no one is cheated. Now, imagine all of this happening in a network – a blockchain, where all of us are interacting with each other digitally, and multiple transactions can be tracked and executed. Who will police these transactions? This is where a Smart Contract comes handy. Smart contracts are programs stored on the blockchain that execute certain actions when predetermined conditions are met. They ensure that all participants can be immediately certain of an agreed-upon outcome, without an intermediary’s involvement. So, if I have kept an asset as a collateral in lieu of a loan, the smart contract will ensure that your collateral is released as soon as you pay back the loan. No need for a bank to execute it. You can read more about them here.

So, that’s it for this week’s newsletter, see you next week!If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.