Witrh recent announcements around Midnight, is Cardano TVL going to go up in flames?
It's been a while since I've posted and to be honest I've largely moved on to AI. However I thought I'd put together my thoughts on Cardano and Midnight after Charles Hoskinsons presentation at the Cardnao Summit 2023.
As I do not wish to to spend too long on this post, I shall document my views in a brief as way as possible.
The Cardano blockchain severely needs a scalability solution to avoid it coming to a grinding slow-down any time there is a whiff of demand. However it's scalability solution is still in the research stage with no clarity of when it will be ready by, or even if it will be ready in a form that delivers on its promises of very high throughput.
There is a significant upgrade coming in the form of Ouroboros Praos which will bring instant finality to Cardano and I believe is based on this research, and from recent tweets it sounds like this needs to be in place before the research can be finished off. I guess it helps test out some theories.
It's therefore an unknown question how long it will take before a good scalability solution is in place on Cardano, and that's not surprising. If as I suspect the idea behind Input Endorsers stems from this paper and this video, then the upgrade is a significant and extremely complex with a high potential for things to go wrong if not researched, implemented and tested correctly.
Governance
Handing over control of Cardano to the community is important from an optics perspective. It makes it harder to claim that Cardano is a controlled by a central entity. Control will effectively be handed over to another entity, Intersect. Putting aside the on-going debate within the community on whether intersect represents true decentralised governance or is just another centralised entity with control of it influenced by the large Ada holders, of which one imagines must include the founding entities; one of the first orders of business for Intersect will be deciding whether to fund the remaining work required for scaling Cardano.
Despite not knowing how long scaling will take, Intersect will have no choice but to approve paying IOG to continue to work on scaling. There is no other company wthin the Cardano ecosystem that could implement input Ouroboros Leios (partly for the fact that no research paper outlining what it should look like has been released) and IOG would be the only company Ada holders would trust with continuing this work.
Not that there is nothing wrong with IOG expecting to be paid for their work, but it means its in their interest to not make too much progress on it prior to governance, and throw resources at it post governance once their time is being paid for.
Instead the biggest priorities are governance, Midnight, and Lace.
Midnight
Midnight is a new chain that seeks to be the one chain to unite them all.
"Cardano is designed with a separation of the Cardano Settlement Layer (CSL) from the Cardano Computation Layer (CCL). The CSL has proven to be robust and scalable, forming the ultimate cross-chain settlement layer. With partner chains, networks will have the power to build their own computation layer leveraging a modular framework and existing components, yet still leveraging the CSL for settlement across chains. Midnight, the recently announced IOG data protection-focused blockchain as a partner chain to Cardano." - blogpost
Here is how I interpret that:
Cardano is designed with a separation of SPOs from Cardano smart contracts. With partner chains (partner is being used here to suggest that other chains are a partner to Cardano), other chains will be able to use their own smart contract layer, but use Cardano SPOs, masqurading as Midnight SPOs, to validate the transaction.
"We would like to leverage the ecosystem of Cardano to help us go-to-market and get to decentralised fast. In exchange we will provide SPOs and exchanges with both new revenue sources as well as incentives. We will provide developers with use cases and a fund to help them create more interoperability between networks and as we shared here last year...Ada holders will get a token drop for Midnight so everybody can get acces to this utility" - Eran Barak, CEO of Midnight
Here is how I interpret that.
We wish to use Cardano to help get Midnight up and running quickly. Specifically using SPOs to help validate Midnight transactions, and Cardano DeFi exchanges to make use of Midnight. In return they will get new revenue sources as well as incentives.
Developers can build apps on Midnight (using Typescript as we already know) and will get funded to help them do so.
Let's pause here a moment. None of this is about developing the Cardano ecosystem. Its about Midnight wanting to utilise Cardano infrastructure for its own purpose. Developers and existing Cardano DApps are being asked to consider developing solutions thatr run on Midnight, not on Cardano. And the Cardano SPO network will be used to process transactions on Midnight.
Do transactions then settle on Cardano? No doesn't sound like it. They will settle on the the partner chains layer The only connection appears to be using the processing power of Cardano SPOs and rewarding them for it by paying them in Ada.
Given that may cause uproar amongst the Cardano community, the last sentence goes on to appease them by saying "Don't worry we'll give you dust to stop you from complaining".
Tokenomics
Without knowing the tokenomics of Dust, it's total supply and its exchange rate to Ada, it's impossible to say what impact this will have on Cardano, but it is in effect buying off the protestors by promising them free dust tokens.
Value Accrual
But can Dust or Midnight help accrue value to Cardano? Well value can accrue to Cardano if people are using DApps built on Cardano. From the above this is not the case. The above is pulling builders into the Midnight chain, promising them a better developer environment, and access to liquidity on other chains. Midnight in effect seeks to be a central exchange where liquidity from other chains come to mingle with one another.
It's not doing anything to push demand to the Cardano L1. Hence why it can be thought of as a vampire attack, draining value from Cardano to Midnight. It would result in DeFi on Cardano being dead and Cardano becoming an SPO chain that serves as the backend call center to ther chains where all the action is happening.
Wider outlook
All of this ignores the fact that other chains are progressing full steam ahead with their own agenda. Base, the chain launched by Coinbase and a derivative of Optimisim, is seeking to serve a smiliar multi-chain role but for Eth L2s. A central hub where liquidity from different chains come to trade.
Aztec Network are building a privacy layer 2 on Ethereum using zero-knowledge proofs. And there's is also another zero-knoweldge L2 on Ethereum built by Ernst & Young called Nightfall. Certainly it indicates an enterprise ned for privacy. And it indicates a clear multi-chain strategy by IOG, who wish to be seen as a blockchain agnostic, web 3 engineering company.
But so far there has not been any announcments that will boost adoption on Cardnao. No enterprise announcments, no update on how the Ethiopia project will lead to more users and more projects.
I'm not bearish on IOG or Midnight - I think it's an excellence strategy. I just cannot see why Ada holders are celebrating this as a win for their chain when it's at best likely to be a neutral impact. It's Cardano Summit 2023, but feels more like Midnight Summit 2023.
Caveat: I may change the above text as I continue to get caught up on developments from the Cardano Summit.
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