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Hi everyone, this is Charles Hoskinson broadcasting live from warm, sunny Colorado. Today is April 10th, 2024, and we're making a video to talk about some topics that are near and dear to everyone in the industry's heart, whether they know it or not: liquidity and value.
So, what do we mean by that? Many of you enjoy going to CoinMarketCap or CoinGecko, where you see all these numbers and ecosystems. Unfortunately, we have narrowed the view as an industry to say that the entire worth of a project is basically the token price and its position on CoinMarketCap—not what it does, not who’s using it, not the mission, vision, or philosophy, or the progress of the project. It’s just a vanity game. That’s because if that’s the only way you can measure it, you can’t really make much of it. When people are winning the token price game, they brag about it, saying, "Oh, look how special we are, look how magical we are." When people are losing the game, they say, "Oh, we need to play a different game."
But if you take a step back and ask yourself what that number actually means, do we even understand as an ecosystem or community what that number is? Is there some form of analytic framework where we can dig into a protocol, its community, its ecosystem, and get a notion of value? It’s a very interesting macroeconomic question. Everything that’s new is old, and everything that’s old is new.
There was a gentleman who thought about this way back in the day—his name was Benjamin Graham. Born in 1894, he was a professor and is considered the father of value investing. He wrote several books. When I was a kid, I actually read "The Intelligent Investor." His claim to fame was his analytics framework for valuing things. One of his students, Warren Buffett, took it to heart and used it as the foundation of his thinking with Berkshire Hathaway, leading to the creation of his colossal fortune.
At the end of the day, Graham was trying to come up with a framework that allowed you to carefully understand and consider the value of an asset. In his case, he was thinking about securities, but one could follow the same discipline for commodities or other exotic assets as well. This concept of value investing is crucial.
The problem is that in the cryptocurrency space, we don’t have a well-understood notion of value. What does it mean, honestly? You have this token price in dollars, but that token price is always connected to other attributes, for example, liquidity. What if I say to you, "Hey, I’m going to give you this token, and it’s worth a million dollars"? That sounds like a lot, right? But you can only sell $1 a year. Does that really make any sense to you? It’s kind of like that Simpsons episode where Bart writes a check to Milhouse and says, "You can cash it in 100 years." Is it really money? Probably not.
So, liquidity seems to matter. How much can you sell, and at what price can you sell it? This is just an aggregation where the market, for some reason, is saying it’s valued there, but it doesn’t tell you anything in that story. There are other factors connected to this. You have liquidity connected to token price, but then you have other things like the fairness of data. Where did you get that million dollars from? Oh, I got it from an exchange. But what if the exchange is manipulated? What if the price feed you’re getting is wrong?
For example, what if a small exchange lists an asset, and that small exchange is connected to that layer one or layer two or token, whatever it is? They make an incestuous deal where the exchange manipulates the data feed to make this token look super valuable. According to CoinMarketCap and these other platforms, it’s a very valuable token, and they may even cook the liquidity numbers and say, "Oh, look at all this trading that’s happening." But it’s not real; it’s just bots, and those fees are being absorbed by the exchange because it costs them nothing to do that. It’s just moving from one account they own to another account they own.
We see this in auctions; it’s called shill bidding, and these types of things are generally illegal in most markets. You better believe it happens in the cryptocurrency market. There’s also a question of distribution of ownership. For example, Cardano was just passed on CoinMarketCap by a project known as TON. It has a centralized issuer, and our understanding is that greater than 90% of the supply is owned by the top 100 wallets, compared to 21% of ADA. You have a very small group of people that seem to own the entire supply.
So, when you look at TVL and other factors, what’s to stop insiders from cooking their TVL numbers and economic activity? What’s to stop insiders from these types of arrangements? Now, I’m not saying that’s happening here, but these dynamics certainly could invite or promote these things. The question is, is that a real reflection of value inside the ecosystem?
Graham developed a framework for thinking about pricing securities, and these are analogies you would think about when trying to figure out the real value of something. The problem is, as an industry, we just don’t know. That means we have to invent something. It was the same with decentralization; we sat down and said we don’t really have a good definition of it, so the EDI was created. Now there’s a debate about whether it’s legitimate or not, and papers are being published.
We as an industry now need to do an EDI for value. We need to come up with a macroeconomic view of value. We need to understand the inputs and principles because this is by no means exhaustive. There are hundreds of factors that go into letting you know if the price you see is the same as the price in terms of the market’s ability to measure this. That’s something we’re quite interested in as an ecosystem—different metrics of value.
Here’s the truth: if there’s a big delta between market value and measured value, that tells you that you’re going to have a correction at some point. Something has to correct; it moves in one direction or the other. But always, in the long term, your measured value should converge to the market value; they should be roughly equal to each other. Value investing is all about that. We don’t have a macroeconomic view of these things; we have no way of measuring them, so it’s just a guestimate.
Oftentimes, short-term things come in and manipulate the data feed, creating a reality where people say, "Okay, well, what are some of the things that Cardano could do to improve its liquidity?" One of the big problems that Cardano has—people ask me all the time—is where this beautiful island is. I grew up in Hawaii, so I’m familiar with islands; I love islands, and it’s absolutely stunning. Then you have the continent that is crypto—call this CryptoLand.
While there do exist plane flights back and forth between these islands and CryptoLand, the travel is a little slow and inconsistent. The problem is, people in CryptoLand go to spaces and I talk to them. I say, "Have you heard of Cardano?" They say, "Well, we know that the island exists, but we’ve never been there." All the projects on Cardano, all these amazing things you guys are doing, the projects that live there, would be super exciting to a lot of people in CryptoLand, but they don’t really get a lot of exposure and visibility.
Understandably, what the projects want to do is realize that there’s this thing called centralized exchanges (CEXs) that everybody goes to, no matter if they’re on our island or in CryptoLand, and they want to get listed. That would then expose them. If you see trading activity in these types of things, people would very naturally ask, "What is this project here? What’s this about? What’s this Sunday Swap thing about? What’s this World Mobile thing about?" When they read about it, they start buying it, take a position, and then they start visiting the island. These things get closer and closer to each other over time; they actually start converging.
To get listed on CEXs, unfortunately, it’s been a very predatory relationship. Talking to some of the projects, I’ve heard exchanges asking for 7 to 10% of token supply. I’ve heard them asking for a lot of user stuff, and there are a litany of regulatory, business, and technical considerations and concerns. What needs to happen is the island as a whole needs to go to a collection of CEXs that are willing to be fair and have an island-wide meeting—all the Cardano projects that want to get listed, all the citizens of that island—conversing with the CEXs.
We need to systematically start going through the tech, the regulatory side, and the business side of the relationship, creating a series of graduations between tier three, tier two, and tier one CEXs so people can have a fair consideration. I would call that a mid-term priority; it’s already starting to happen, and there’s a lot of work occurring this year for it. However, it is something that will likely take more than 12 months to fully realize, meaning there’s a very easy path for that to occur.
Then there’s a natural question: what are the short-term things that can be done? The community could do some interesting stuff to help this out. There already are competitors to the CEXs, and we call this the DEXs. The DEXs in CryptoLand are starting to have billions of dollars of volume every day. They’re big things, and they’re usually permissionless. The whole point of a DEX is that if you want to create liquid trade, you can do that.
Now, there might be high fees or other considerations, but usually, you can trade on the DEX; it’s not super hard to ensure that that occurs and create markets for these types of things. The problem is, if these are doing that individually, it’s a little difficult. There’s a world of difference between loving something that lives on the island and knowing the island.
Imagine if you’re sitting in CryptoLand and you hear that Cardano is doing some interesting things. There’s a lot of interesting stuff, but you just don’t have the time or interest to really drill into it, do due diligence, and randomly pick everything. In finance, we have something called an index. An index basically takes something of concern, lists them all together, and says you just buy the index, and now you have exposure to basically everything.
One of the things we could do in the short term is create an automated, self-balancing vending machine that is an index of, let’s say, the top 50 tokens. If you go to TapTools, you can see the top 50 right here.
Here’s how an index would work: a self-balancing automated index would have weights and assets, and the sum of all of those equals one index token. You would connect a smart contract that acts as a custodian, purchaser, and rebalancer. A user, let’s say Bob, sends ADA to that smart contract, and it would auto-purchase on DEXs in Cardano a weighted index. Those tokens would then represent that, so Bob can just have one index token. Whenever Bob wants to redeem it, he can redeem it for the underlying weighted assets, or he can simply sell that index token.
Those weighted assets usually generate a yield, so the yield also aggregates to the contract, and the token allows you to withdraw that yield upon demand. The liquidity component is important. If a smart contract can generate that, the index token could then be listed on DEXs in CryptoLand, and people could purchase them for SOL, ETH, or other such things.
What that effectively does is say, "Okay, I heard this island’s really nifty. I don’t really want to understand much about it, but I’d like to take an index position on the top 50 projects here." It’s a way that I have exposure without having to pay too much attention, but what that does is bring value into the island. When you create that token, it creates demand for those projects.
You send that token over; people have purchased it, creating a loop, and more and more demand occurs. A significant portion of this could likely be automated, which means it could exist completely within a smart contract. Being a vending machine, it’s actually on demand and initiated in a decentralized way. It’s not a regulated financial instrument where there are all these issuers; it’s just people interacting with a smart contract to auto-buy a proportion of the top 50. Those weights are public, and there’s a rebalancing algorithm for it.
These tokens exist, and they get listed on DEXs; people trade them. I think that’s a short-term thing that the community could think about. If someone in the community is adventurous, they could come up with a way of doing that.
Now, you’ll notice that one of the pillars of the roadmap is partner chains. I have to tell you, it’s been difficult at times when people say it’s an abandonment of Cardano or a deviation from Cardano, or they just say some crazy stuff. The entire raison d'être of partner chains, also known as Cardano CL or the Cardano service layer, which we’ve been talking about since 2016, is to give Cardano the ability to connect to the broader CryptoLand and sell services to it.
For example, Midnight sells privacy services and computational privacy to dApps that exist here. You can sell those services in the native currencies, whether they be ETH, SOL, or whatever is connected, and then somehow it gets sorted out at the partner chain level. This is just a special case where assets would be generated, flow over as a wrapped asset, and people can purchase it. They can then interact with the Cardano blockchain to either redeem it, resell it, or collect whatever yields are for the things that are here.
What does the partner chain framework do? It builds bridges. For this to work, you need a DEX on both sides, smart contract capability—which we already have—you need community members with enough financial acumen to produce this, which we have as an ecosystem, and you need good bridges to connect Cardano to other cryptocurrencies, making it relatively latency-free and seamless to initiate these things on demand.
This doesn’t have to be Bob on the Cardano network; it could actually be a placeholder on a DEX. As they are purchased, they are generated just like a vending machine. That’s a very important and powerful point: that demand on this side could suddenly create demand on this side. It accomplishes the very same thing that many of you in the CEX world want. There’s enough volume here to produce a lot of value inflow.
Another short-term thing is the stablecoin side. Stablecoins are absolutely essential for efficient marketplaces, and I absolutely agree, which is why we designed a protocol called Jed. Cody took that protocol and launched it, and Jed is being versioned. New versions are coming out all the time, and Jed is building up a whole corpus of functionality. It’s starting to climb and get where it needs to go.
As you can see in TapTools, there are a few million dollars floating around in the stablecoin that have been minted. I believe SHEN, which is associated with Jed, is about 14 million. There’s definite progress being made there, and as it climbs version numbers, Jed is getting more useful and able to create significant volatility dampening.
Most of you care about asset-backed stablecoins. I view this as the "When Coinbase?" conversation for a long time. "When Coinbase? When Circle?" This is an inevitability because there’s a lot of ecosystem value that exists here. There just has to be the right people, processes, and procedures to make this happen.
There are also a lot of interesting homegrown projects, like USDM, that are growing rapidly and have great potential to satisfy the needs of the ecosystem as a whole. Cardano does not necessarily need Circle to come in and save it; it can generate comfortably an asset that can serve this role and be interchangeable through these very same mechanisms to other things that are listed. While the transaction fees may be a little higher, that’s okay.
Jet fuel to fly from the mainland to Hawaii and back is certainly expensive, but it doesn’t stop people from going because the island is good enough, and there’s enough to justify the trip. There are both short-term, mid-term, and long-term strategies—an all-of-the-above strategy. Some of the things are homegrown, some are innovations like algorithmic stablecoins, and some are just good old-fashioned commercials. Various people in the ecosystem are working very diligently here, and it’s an inevitability.
At scale, you usually need about 1/4 to 1/8 of your TVL for your stablecoin. You need around $150 million of distribution of stablecoin for the entire turnaround. Where we sit right now with TVL, this grows with CEX listings, and over time, things converge together. It’s important to understand that none of these pink things existed in 2021; they were ideas. There were certainly adherents, but smart contracts came out, and in a very short period of time, we saw greater than half a billion organic TVL with no VC support and no insider support.
It’s very easy, by the way, when you live in a world where insiders give themselves a gargantuan amount of premine to create a high TVL. If the foundation or other entities can hold $10 billion of the asset, it’s very easy for them to dump all of that asset into dApps in the ecosystem, and then it synthetically looks like your TVL is huge. It’s like the meme where Obama is giving a medal to himself; you’re just moving water from one side of the bathtub to the other. There’s nothing organic about that.
A good value metric, macroeconomically speaking, would be able to detect the difference between self-serving TVL and TVL that’s organic. To go from nothing to over $600 million in TVL is a big deal if it’s completely organic, with not a lot of CEX support and no premine support. That’s real growth, and that value looks very different, especially given that it’s growing considerably every single year. I’m confident it will break a billion at some point, and the ecosystem metrics are looking that way. It will just continue to grow.
What we need to do is start thinking about bridges and these types of things. There’s a beautiful plan for how to make this island the best island in the world to live on and make the island a little bigger. The island is reclaiming land from the sea
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