How Cardano’s latest update makes it easier to fairly valuate ADA
The same principles hold true for Ethereum, NEO, EOS and other platform-type cryptocurrencies.
Putting an accurate price tag on store of value-type cryptocurrencies, such as bitcoin, is easy. They're purely intended to hold monetary value in a digital form, so however much they can be bought and sold for at any given time is exactly how much they're worth. This is how bitcoin's valuation can be equally correct at one cent, at $20,000 and at exactly $6,133.25.
Supply and demand for these coins might shift, and someone might consider it over or undervalued when they expect the supply-demand ratio to shift later, but no matter what happens it's always a fair price by definition.
Valuing platform-type cryptocurrencies, such as Cardano (ADA), Ethereum (ETH) and EOSIO (EOS) is trickier. They're typically intended to actually serve a function within a network such as a revenue-generating staking token, a symbol of voting rights or gas for transactions, which means they have a separate value that's wrapped up in the functionality of a system itself. Unlike store of value coins, these utility tokens can have "correct" and "incorrect" prices.
Depending on how you look at it, that's either good or bad news for speculators. On the one hand it means they actually have a definable function to raise their value above zero. On the other hand, it means their maximum potential price is capped at some finite point in line with their actual function.
To make it more confusing, all of these platforms are still under construction so the functionality itself is almost entirely speculative. Meanwhile, the tokens themselves can be bought and sold and spent as currency just as functionally as the cash-type cryptos.
"At the moment I'm more bullish on cryptocurrencies than application [platform] tokens," said eToro senior market analyst Mati Greenspan to finder, "for the simple reason that there are four major application tokens that are kind of competing, so I don't really know which ones are going to gain prominence over the next year or two. Certainly if we see one of them breaking ahead or making a groundbreaking moves, that is something that I'd be willing to consider on the spot to shift allocations."
The challenge of needing to predict growth is one of the reasons why Charles Hoskinson's latest Cardano announcement might be a very interesting development. The two main elements of the announcement are:
- Icarus wallet plugin for Google Chrome: It's a new light wallet designed to more easily onboard new users having trouble with the Daedalus full wallet, while also serving as a template for third party developers to start playing around with. Incidentally, Icarus is Daedalus' son in Greek mythology but he dies as a victim of his own ambition. The light wallet name is equal parts appropriate and concerning.
- An opening-up of the Cardano system for third party developers: The Icarus wallet and its function as a template is one of the first steps towards opening Cardano development to a wider range of third parties.
In itself Icarus isn't a huge leap forward, but its implications might make it much easier to put a more accurate price tag on the Cardano ecosystem.
Putting a price tag on Cardano
Metcalfe's law is a common fallback for frustrated analysts trying to explain cryptocurrency price movements. This law simply proposes that the dollar value of a network is proportional to the number of participants in that network. So the more people using something, the more it's worth.
This principle isn't just for cryptocurrency though. The same broad theory of putting a dollar value on each user is widely employed by tech companies like Facebook which tracks revenue generated per user, average retention rate and similar to put different price tags on different users and estimate a fair valuation for the company as a whole.
But in cryptocurrency users aren't directly generating any revenue or value, and the platforms often aren't functional yet. Still, the sheer size of a platform - in applications and user numbers - is as solid a way of valuing a cryptocurrency network as any.
"As far as Cardano is concerned, we don't really have any way of valuing it as of yet," Greenspan said. "It's not fully functional at the moment, meaning the only real point we can look at is what other people are buying and selling it for, what's the normal price range, looking at the market cap and comparing that to other coins."
"So in 5 years from now we could see the Cardano network grow, we could see large companies using it. That doesn't mean any guarantee that the price of the coin goes up."
The problem isn't that network size is an inaccurate way of valuing platforms, Greenspan says, so much as that there's currently no accurate way of valuing Cardano's ADA token because the network itself is under construction and highly speculative.
"It stands to reason that more projects happening on the network would have a positive impact on the price. The only thing is we don't know is if [ADA is] overvalued or undervalued at the moment, because we don't have enough activity on the network to really get a good gauge of that... We could have a situation where the price of ADA now is the fair price, even given a large increase in network usage."
It's quite possible that the Cardano network simply grows into current ADA prices like growing feet filling out shoes, rather than actually pushing prices upwards. But it's equally possible that Cardano turns out to have freakishly large feet which quickly stretch out the ADA shoes, or unusually small feet which necessitate a step down in shoe size.
"[Cardano's] still a baby," Greenspan says, "but the baby has all the potential in the world to grow up."
Baby's first steps
This is why the latest Cardano announcement might be so significant. Not (entirely) because it might hype speculators onto the FOMO train, but because it suggests that Cardano will be having a growth spurt over the next six to twelve months. This makes it much easier to gauge how big it will be when it's all grown up and therefore whether ADA prices are too big, too small or just right for Cardano.
The most important part of this growth spurt is the opening up of the Cardano ecosystem to more third party developers and contributors. This not only helps it grow further and faster, but also provides solid indications of how useable it really is for third parties, and how much interest there actually is in being part of the ecosystem.
So far there are only reasons to expect a lot on both fronts. If and when it actually happens, one can see whether those expectations are well-founded. This lets speculators revise their expectations of Cardano's growth with a lot more certainty.
Third party developers will be needed to drive Cardano's growth, and over the next year the world will be able to see if they really want to, if businesses want to start moving into Cardano as a platform and what the system can actually do. This will firstly make it a crucial time for revisiting one's expectations of Cardano's growth, and secondly start making it possible to tie together ADA's value and Cardano's real world functionality.
"We never intended to launch a product, but rather build something that we're going to give to our partners to launch and try to encourage the development of a third party application ecosystem," IOHK CEO and Cardano head honcho Charles Hoskinson said in his announcement. "That is called Icarus."
Icarus is two things: a wallet and a template.
- The wallet: It's a light wallet in the form of a Google Chrome extension, meaning it doesn't have to run the full blockchain. Cardano's full Daedalus wallet has been problematic on old systems and in areas with spotty internet, so this opens up the floor to more people. And as an extension it can start running similar to Ethereum's MetaMask to let people start Cardanofying their browsing, make easier ADA payments through websites and similar.
Learning to walk
"This is kind of an iceberg of an announcement, because the reality is that this codebase is running parallel to the Cardano codebase and we expect a lot of people to get really excited and start using this to build their experiences over the next six months to a year," Hoskinson explains. "In tandem with that we've also been hiring out for an open source software director and we are going to begin the process of opening up the Cardano project for third party contributions. We've been getting a lot of people who want to tackle issues... we want to start pulling that into Git[Hub] wherever possible."
"We're starting to have discussions with the foundation about a formal Cardano improvement proposal process. So as the protocol stabilises we're going to go ahead and allow people to write up CIPs (Cardano Improvement Proposals) and start some democracy about them, so we can actually have community driven flow in our efforts."
"So Prometheus [a recently revealed Cardano code library] and Icarus are kind of the first stepping stones in that direction and we're gonna try to use them as a guinea pig for open source contributions... this is just the beginning of a kind of new direction. Come mid-August you guys will be able to play with it [Icarus], fork the code, make suggestions on where to go."
"It's the first time third parties are really starting to build Cardano wallets that and ecosystems are going to start being built around them."
Learning to ride a bike
"There's a war right now. We have Cardano, NEO, we have EOS and we have Ethereum the grandfather," Greenspan explains. "There's not enough business to go around, and every project is going to have to make their choice... Cardano has planned [for this] in its roadmap... but it's not something you're going to want to make a large part of your portfolio, it is a project that's under construction and any number of potential things could go wrong. Even though there's a lot of knowledge [in the Cardano team], we've seen those types of things happen before."
Cardano in particular still has one major obstacle in store that others have already overcome - it has to take off its training wheels and decentralise its development and governance. This is, in part, what Icarus is all about.
Hoskinson appreciates the potential for grazed knees, all as part of growing up.
It's going to be "very dangerous" he says, "because you go from a very centralised, predictable level of control and predictable release cycles and a more predictable roadmap to a more decentralised ecosystem. And when you go through that transition almost always there are some growing pains."
You can't put a price on a platform token like ADA until the platform itself has grown up enough... and overcome the cryptocurrency world's shocking infant mortality rate. But if and when it does, token prices can stop being guesstimated and start being tailored in line with their specific function in that specific network.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA