ADA as governance and network ownership coin
To understand ADA you have to first understand what is Cardano. Cardano is a collection of protocols and abilities that allows you to do some interesting things in a decentralized way. Abilities of the system will be increasing in time as new features will be added. Important here is the level of decentralization. As you can notice that there are not many decentralized networks and all current attempts tend to centralization. Centralization means there are groups in a system that have some extra power.
ADA represents the control of the Cardano and allows people to use it. The decentralized system must be owned by the majority of users that will have the right to decide about important aspects. The best approach of how to do it is to make no or minimum differences between users, developers and stake pool operators. In Cardano, the proportion of ADA you have gives you proportional power in decision making. Stake pool operators have no extra rights. Every user can delegate ADA to any pool and participate in the decentralization of the network. Users will get a reward for participation so there will be no elitist group of people running the network and users. The network is open for everybody.
Once a Voltaire development phase is delivered, users will be able to propose changes and vote about priorities. The Voltaire era will provide the final pieces required for the Cardano network to become a self-sustaining system. With the introduction of a voting and treasury system, network participants will be able to use their stake and voting rights to influence the future development of the network.
In the end, users will own the system and overtake governance from the IOHK team. ADA will be the only asset you can buy to be part of it. The more you will use Cardano the more you will want to have decision rights.
ADA as a utility token
People do not understand what exactly is a public distributed network. The public distributed network is a network that is run by the people for the people. There is no company or group behind the network. There are many independent entities. There must be volunteers who are able to run validation nodes of the network. To keep the decentralization on the high-level everybody must be allowed to participate and run their own node with a stake pool included. Running a node costs something and people must be motivated to do so. That is why there are rewarded for the job. Now you can ask where the reward is taken from. People using the network and utilizing it must pay for that. If you use PayPal then you pay to the company for the service. Cardano is a public distributed network and it is also a kind of service. If you use it for a transaction or deploying a smart contract then you have to pay to the ecosystem by ADA. Basically to a bunch of people who participate in running the network and keeping it decentralized. ADA coins from people using the network go to people keeping the network running. So ADA is a utility token.
ADA will be the more precious and expensive the more the Cardano is useful for the people. The utility of the project will rise with every new functionality and improved scalability. And do not forget that people will democratically decide what to add to the system. So the utility will be ensured by the majority of users and smart contracts offer more possibilities than just simple transaction systems.
ADA as the key for decentralization
Bitcoin’s decentralization is based on a few mining pools, people willing to buy expensive ASIC miners and run them. ASIC miners consume a lot of electricity and people must pay for it from the reward they received in the form of new-minted coins. The high risk might deter people to participate in decentralization so it never can reach the level of the Cardano network.
Cardano, instead of relying on the external resource, uses the internal resource and it is ADA. Not only it is good for the environment but it also a better approach from the decentralization point of view. Every user can delegate ADA to a pool and thus participate in decentralization. Users just pass the right to create a block to the pools since they do not want to operate own staking pools. Users can easily delegate ADA to other pools if some pool is too big or behave dishonestly. The more distributed ADA coins will be the more decentralized network we can have. Staking generates a reward for users and plays an important role in the decentralization. Users are motivated to participate in decentralization.
The future stability of the network
This topic is not discussed a lot but I think it is very important. People would like to have a digital gold. It is generally believed that it is a Bitcoin. However, I can see some obstacles. Gold is very stable for thousands of years but Bitcoin is a very young project and changed dramatically in the last decade. Gold does not care that we invented electricity, internet and distributed networks that are secured by consumption of the electricity. Bitcoin and other projects depend on that and also on teams that maintain and improve protocols. So protocols can never be as stable as gold. However, we can do our best to ensure a high level of stability. Science and math can help to Cardano a lot. Let’s have a look at it.
Bitcoin security lies in a level of decentralization and reward for miners. As you probably
know, halving gradually decreases the reward provided by the protocol in the form of newly minted coins. It happens every 4 years and tends to 0. It was believed that the transaction fees cover the reward one day and the Bitcoin stays secure. However, scalability prevents it. It basically means that always when there is a halving transaction cost should rise if the network should hold the same security level. The security also depends on the price of bitcoins in fiat. At the moment, we do not know whether Bitcoin will be the same secured as it is now and whether it will more or less decentralized in the future. Within 10 years, decentralized Bitcoin became centralized and even some Core developers of Bitcoin started to speak loudly about that. Bitcoin is far from the stability that gold can offer.
If you hold a cryptocurrency then your wealth depends on the ability of the network to add new blocks in a secure way. PoW has generally one big disadvantage that brings instability from the economic model perspective. It is very expensive to keep the PoW network running and in the future, there might not be a sufficient reward to ensure security. Imagine that your network consumes the electricity as a mid-size state in Europe and users must pay to keep it alive. If you own a bitcoins, you will have to pay to miners to ensure that bitcoins preserve its value. The only way is currently only via expensive transaction fees. Gold does not need anybody for survival. Protocols do.
PoS is a much better concept in this regard since it is quite cheap to run the network. So from a stability perspective, it is more similar to gold and I am not afraid about Cardano networks. PoS enables more options to deal with scalability. The more transaction users send the more fees will be collected and the fee can remain low. It will be still enough for rewarding stake pool operators and users. Cardano will be here in 100 years and it will be probably cheaper for users to build some business or just use it. Decentralization will remain high. Bitcoin can have hard times if block size will be the same, coin inflation will be considered as a bad idea and there will be pressure to keep Bitcoin simple.
So far, we had discussed ADA as governance coin and utility tokens. At the moment we do not know how exactly cryptocurrencies will be used and how people will perceive them. ADA could be sound money or whatever else and it does not matter now how we call it. Important is for what it can be used.
What is sound money by Emurgo?
The first characteristic of sound money is its finite supply which can usually be found in both precious metals as well as for cryptocurrencies. With Cardano for example, there can only ever be a supply of 45 billion ADA, making it finite like minable gold on earth.
Another widely accepted feature of sound money is longevity which means that the asset has the ability to preserve its wealth over time. Because value is partially intersubjective, as long as other people value an asset, it has value. Gold has value to many people because they know that there are countless others who feel the same way, creating liquidity for gold. In fact, a bar of gold can be sold just about anywhere in the world.
The same is currently true for cryptocurrencies such as Cardano’s ADA. But comparing the long track record of gold with a short ten-year history of cryptocurrencies is akin to comparing apples to oranges.
I can easily imagine the ADA as sound money. Smart contracts allow using ADA as collateral for stable coins. I do not think that in the near future we will use a volatile asset in daily life and make 10 transactions a day in shops, restaurants, and cinemas. Cardano will be able to issue tokens and I believe that we will see some stable coin soon. The economy of the network does not change since a piece of a valuable stable token could be easily changed to a piece of ADA. So the reward and treasury mechanisms will work the same with the benefit that people will not face the volatility. Besides that, Cardano can issue many other tokens that can represent stocks, bonds, and other valuable assets. It will increase the number of transactions and the number of deployed smart contracts.
ADA generates passive income. If you delegate coins to a pool then you participate in decentralization and will be rewarded. It is also a big advantage in comparison with Bitcoin. The Cardano network will be used by millions of people and a big part of the profit might not be spent on paying for the electricity. Keeping the network running will be cheap so why not give earned money back to people? This is similar to company dividends. If a system generates money owners can be rewarded. Users own Cardano so they will be rewarded. It is very simple.
So if people use Cardano it will generate a lot of transactions. Transaction fees will be used as a reward for people who owned ADA coins and keep the network running. Just that concept itself will make ADA valuable in the future. Utility supports adoption and adoption supports the price of ADA.
The success of cryptocurrencies depends mainly on adoption. Cardano will have a big advantage. It will be governed by people and will offer many utilities that people might want to use every day. People are motivated to use the network, hold ADA because it generates passive income and decentralizes the network, and finally, allows to democratically govern the project.
Why Facebook and Google are the most valuable IT companies if they basically have just a few protocols and services built on them? It is mostly about the number of users. The number of users, the adoption, is what makes projects successful and valuable. The difference is that in public networks the people benefit from it. I have simplified it a bit but think about it.
Cardano aims to become a financial global computer. If it succeeds, ADA will always be the only asset you can buy. The price of ADA will rise with the success and adoption of the Cardano protocols and early adopters will be rewarded tremendously.
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