The DeFi ecosystem is like moving water in a bathtub

The decentralized finance (DeFi) ecosystem is a constantly evolving environment with application-specific blockchains (appchains), layer 2 (L2) blockchains, new virtual machines, etc. In this scenario, users wonder how a blockchain like Cardano can compete with this optimized infrastructure.

Charles Hoskinson, CEO of Input Output Global, said during Blockchain Rio that everything Cardano has built so far is about preserving and protecting blockchain value. To achieve this goal, it’s more important to make calculated moves than the typical “move fast, break things.”

“There’s no better example than Bitcoin, which by definition is the least capable of all cryptocurrencies. Right now, Bitcoin doesn’t have smart contracts. It can’t issue assets. And yet it’s worth over a trillion dollars. Why is that? Because Bitcoin’s core value proposition is its relentless commitment to never breaking the principles it was founded on, and that’s what makes it valuable in the marketplace,” Hoskinson shared with Crypto Briefing.

He added that in a competitive environment like crypto, teams move quickly and accept what they know to be mistakes in order to gain market share. But protocols try to correct these fundamental mistakes over the next 10 to 15 years.

“JavaScript is the greatest example of all time. It’s a bad programming language. It was created in 54 days. We spent 20 years fixing a really, really bad language. That’s why Ruby, TypeScript, and all these other things emerged, because JavaScript wasn’t fit for purpose. That’s what Solana and others are doing. They’re focused on adoption, on user acquisition, on speed, on transaction costs. They don’t care if the network fails. They don’t care if they have to roll back and start over. They’re just going crazy trying to get users.”

While this works for retail holders seeking short-term gains, it doesn’t last long because “protocols aren’t companies,” Hoskinson said. Unlike a company that can take a dominant position and “own the protocol of the people,” the same thing can’t happen with cryptocurrencies.

“Imagine what Wi-Fi would be like if it was always dropping out and not working. A competing protocol would destroy it,” Hoskinson said, noting that previous platforms and hardware such as Nokia phones, MySpace and Yahoo had up to a billion users before losing significant user base or disappearing altogether.

So Hoskinson isn’t thinking about how to catch up with competitors, he’s thinking about how to preserve what people who trust Cardano have signed up for, and how to add features without going beyond those basic principles.

“Rollups are a great example of that. Because of extended UTXOs, because of Cardano’s accounting model, and what we’re doing in Plutus V3, not only can we have rollups, but because of the way the system works, we can have best-in-class rollups. It’s much harder to implement rollups on Ethereum or something else. So they were first to market with this feature, but we’re going to be best-in-class with it. Same thing with Hydra. It promises everything that Lightning and Plasma were trying to do. Yes, they had rollups years ago. Now we have rollups. And over time, it’s going to be best-in-class.”

The CEO of Input Output Global compared Cardano to Apple, saying that Apple has maintained a winning strategy in other endeavors, such as its recent venture into large-scale language models for artificial intelligence. While Apple has had trouble sticking to its strategy in the short term, it will become “very strong” in new ventures over time.

“And you know, another thing that I think is unfair is that people have unrealistic expectations about growth. They say, how is Cardano going to catch up? And our TVL (total locked value) is up 300% in a year. And people say, ‘Yeah, but it’s not 1,000%. What’s going on?’ Do you understand that 300% year-over-year growth is unprecedented compared to what we’ve been talking about?”

Reliability and Compliance

Hoskinson estimates that the next billion users to adopt blockchain technology will come from governments and large corporations, such as companies on the Fortune 500 list.

“Do you really want to look at the fact that the government or the Fortune 500 has spent a billion dollars on marketing and has acquired all these users? No, they’re going to ask the fundamental questions of control, governance, uptime, reliability, security, because at the end of the day, if they make a mistake, they lose their job and they don’t get paid for implementing system A or system B.”

This makes blockchain adoption a “long-term game” that Cardano is currently aiming for, developing infrastructure that entities can build on without worrying about putting current users at risk.

Moreover, when it comes to being competitive, Hoskinson believes people rely too much on current applications rather than focusing on what will be useful in 2030. “If you make all the right decisions, if your competitors don’t, you’re either the only option or the best option. So where does the puck go? How do you get regulated entities into crypto?”

He also stressed the need for proper tools to follow blockchain development when delivering products, and criticized the lack of solutions to decentralize the blockchain ecosystem.

“The project says they’re going to do real assets, tokenized real estate, this and that, this and that. But how do you make it work on a blockchain system? Well, it’s going to be on the blockchain, but all the private, personally identifiable information is going to belong to a centralized entity. Okay, so isn’t that a centralized asset? It’s not actually the blockchain. You’re doing it the wrong way. So I think there has to be a basket of solutions for where to go because everything else is commoditized.”

Hoskinson also sees features like high throughput as a differentiator, since all blockchains will eventually be fast. He adds that the differentiator will be not being sued for deploying noncompliant applications.

“Can Solana deliver this now? No. Neither can Polygon, Ethereum, Bitcoin. They didn’t envision or think about it because they were fighting the DeFi degenerates to move water from one side of the tub to the other. We don’t add water to the tub. We just move water from one side to the other, and they pretend that this is a huge success in terms of growth,” Hoskinson concluded.

In June 2024, Cardano will prepare for the Voltaire upgrade, which signals significant progress in blockchain governance as it enters the final phase of its decentralization roadmap.

In early June 2024, Charles Hoskinson expressed his opinion that Cardano is undervalued, citing Cardano’s leadership and future improvements such as the Windows hard fork and Hydra as growth catalysts.

In April 2024, Paul Frambot of Morpho Labs suggested that mainstream adoption of DeFi would come through collaborations between fintech companies and centralized exchanges, leveraging new infrastructure like Coinbase’s Base.

In March, a report from Exponential.fi found that the DeFi ecosystem was maturing and that there was a shift towards less risky protocols as Ethereum transitioned to a proof-of-stake model.

In January 2024, Aquarius Loans launched a cross-chain lending platform that aims to reduce liquidity variance and empower users with an $ARS token governance model, ushering in a new era in DeFi.