Research
Log In

State of Cardano Q1 2023

Apr 18, 2023 ⋅  18 min read

Key Insights

  • ADA’s market cap rose by 54% QoQ from $8.6 billion to $13.2 billion. This increase moved Cardano from the 9th to the 7th largest network by market cap.
  • TVL increased 172% QoQ from $50.8 million to $138.3 million. This increase is driven by both established protocols, such as MinSwap, and newer protocols, such as Liqwid Finance.
  • Indigo’s IUSD and Djed’s DJED stablecoins drove total stablecoin value up 261% QoQ. These stablecoins and their adoption were also a catalyst for the overall TVL increase.
  • The first Hydra Head was opened on mainnet. The Layer-2 state channel scaling solution and first solution of the Hydra series was first used on mainnet in March, although in a limited fashion.
  • Milkomeda C1, IOG’s EVM proof-of-concept sidechain, Wanchain, and Midnight continue to work towards increased interoperability and new use cases in the greater Cardano ecosystem.

Primer on Cardano

Cardano is a Proof-of-Stake (PoS) Layer-1 smart contract network launched in 2017. Cardano’s PoS mechanism allows for delegation of stake. Cardano aims to provide security, scalability, and sustainability to decentralized applications and systems building on top of the blockchain. In addition to the community of developers, node operators, and projects, Cardano is supported by three entities: Input Output Global (IOG), The Cardano Foundation, and EMURGO. They work together to support the network’s development, adoption, and finances while Cardano moves toward full decentralization of governance.

Cardano has taken a unique approach to development when compared to other smart contract networks, based on a phased roadmap:

  • Cardano’s development is methodical, deliberate, and sometimes slower than the market would like — prioritizing sustainability and stability over speed.
  • For example, smart contracts were not enabled until the Alonzo hard fork in 2021, over four years after the network launched.
  • The extended unspent transaction output (eUTXO) accounting model enables native token transfers, scalability, and decentralization.
  • Cardano has offered liquid staking and economic models to incentivize decentralization on its Ouroboros PoS consensus model since inception.

With a dedicated community of users and developers, Cardano has demonstrated staying power. In the past year, Cardano began to compete in more traditional crypto markets, such as DeFi and NFTs, while remaining focused on its core goals.

Key Metrics

Performance Analysis

Network Overview

New addresses and average daily transactions decreased QoQ by 71.5% and 10.6%, respectively. The average transaction fee increased by $0.01, from $0.11 to $0.12. However, it still remains lower than the average transaction fee of $0.17 in Q3 2022, which had roughly the same number of transactions. This indicates that transaction fees are decreasing, given the same amount of network traffic. The decreased transaction fees are likely a result of network traffic being more consistent in Q1 than it was in Q3, especially considering that there were no relevant network updates.

The “daily active addresses” metric represents all addresses included in ledger transactions. The metric does not directly map to users in a UTXO system, like Cardano, where multiple addresses can represent a single sender/recipient.

Financial Overview

ADA’s price rose by 54% in Q1, following the general market uptrend. Cardano rose to the seventh largest cryptocurrency by market cap in Q1 after ending Q4 as the ninth largest. With a quarterly inflation rate of 0.1%, the rate of increase in circulating market cap matched that of ADA’s price almost exactly.

Cardano’s treasury balance grew to 1.21 billion ADA during Q1. The 100 million ADA increase is generally in line with growth from previous quarters. The value in ADA terms increased 9.1% QoQ, but the value in USD terms increased 66% from $278 million to $460 million.

Nominal staking yield on Cardano is generally 3.3% for ADA delegators, although it can vary by stake pool. Real yield is calculated as nominal yield minus inflation to account for any value dilution due to inflation. Any reference to inflation refers to ADA’s circulating supply rather than total supply since ADA’s supply is capped at 45 billion.

Ecosystem Overview

DeFi

Total value locked (TVL) denominated in USD on Cardano grew 172% QoQ from $50.8 million to $138.3 million. The recent adoption of new stablecoins was a catalyst for this growth, as they are a cornerstone of DeFi but were missing from the ecosystem.

Minswap, an automated market maker (AMM), remains Cardano's leading decentralized exchange (DEX). While TVL on the DEX increased by $31.7 million, Minswap’s dominance decreased for the second quarter in a row in Q1. Other popular DEXs SundaeSwap, WingRiders, and MuesliSwap also decreased in dominance in Q1.

The shift in dominance from incumbent DEXs to emerging DeFi applications is due to:

  • Djed, an overcollateralized ADA-backed stablecoin minting protocol, ending Q1 with a TVL of $13.1 million and a dominance of 9.5%.
  • Liqwid, a borrowing and lending protocol, ending Q1 with a TVL of $8.4 million and a dominance of 6%.
  • Indigo, an issuer of synthetic assets and stablecoins, ending Q1 with a TVL of $24.1 million and a dominance of 17.4%.

In terms of gross activity, jpg.store and MinSwap remain the leading NFT marketplace and DEX on Cardano, respectively. However, newer protocols such as Liqwid are growing and capturing market share. In March 2023, Liqwid had 135,000 transactions and gained a 10.5% dominance of all decentralized app (dapp) transactions. Overall, dapp transactions increased 7.7% QoQ, from 3.2 million to 3.5 million.

Stablecoins

Stablecoin volume grew even faster than overall TVL did, increasing 261% QoQ from $2.8 million to $10.0 million. This growth was catalyzed by the new stablecoins available on the network.

  • There are three live stablecoins on Cardano:
  • RUSD, by Shareslake, launched in Q3 2022.
  • IUSD, by Indigo, launched in Q4 2022.
  • DJED, by Djed, launched in Q1 2023 and had $1.8 million minted on the first day.

Stablecoin growth was led by IUSD and DJED, which had 72% and 27% dominance, respectively. RUSD, despite being the oldest, had less than 1% dominance.

NFTs

Daily NFT transactions declined by 27% QoQ, and daily unique buyers decreased by 23%. The decrease in activity was not only due to fewer unique buyers but also to fewer average transactions per buyer. Daily unique sellers, on the other hand, increased by 43%.

In Q4 2022, Cardano was the fifth largest network by NFT secondary sales volume with $40.5 million. On some days, Cardano generated more secondary sales than Immutable X, which finished Q4 as the fourth largest network by secondary sales volume with $56.7 million. However, Cardano’s secondary sales volume decreased 18.6% to $35.8 million in Q1, and Immutable X pulled away, increasing by 18.7% to $66.3 million.

The average secondary sale price on Cardano was $85.84, much higher than on competing NFT networks such as Flow ($17.65) and WAX ($2.62). Thanks to this difference in average sale price, Cardano is ahead of chains like Flow and WAX in sales volume rankings, even though it lags behind in terms of total transactions, unique buyers, and unique sellers.

The number of unique buyers greatly exceeds the number of unique sellers despite the recent uptick in unique sellers. A relatively small number of sellers continues to sell to a larger number of buyers, which may indicate that more new users are entering the market. NFT sales volume is largely concentrated in jpg.store with its 98% dominance. The next largest marketplace is the collection-specific market for SpaceBudz. SpaceBudz is the leading collection of all time with 43 million ADA in sales volume.

Out of over 8,900 total verified NFT projects:

  • 464 projects have crossed 100,000 ADA.
  • 125 projects have crossed 1 million ADA.
  • 10 projects have crossed 10 million ADA in trading volume.

Sidechains

Milkomeda C1 launched in early 2022 as Cardano’s first sidechain. It brought EVM compatibility to Cardano. While Milkomeda C1 does use a different virtual machine from Cardano, it still uses wrapped ADA as the base asset for fees and gas. Milkomeda C1 is primarily maintained by dcSpark.

Milkomeda C1’s activity metrics and TVL have declined since Q2 2022. Q1’s average daily active addresses and daily transactions were down 64% and 90% from their all-time quarterly highs, respectively.

TVL, led by native DEX Blueshift with nearly 50% dominance, did not experience the same Q1 surge as Cardano mainnet. However, TVL could improve with future developments to make EVM contracts directly accessible to Cardano users from Cardano wallets.

Milkomeda's involvement in the gaming industry appears to be increasing, as evidenced by the efforts of Paima Studios. The entity is responsible for developing the Paima Engine — a blockchain gaming engine. On Jan. 10, Paima Studios released its first game on Milkomeda C1 called Jungle Wars.

Staking and Decentralization

Distribution of stake has become slightly more centralized over Q1. The number of pools controlling over 50% of the total stake dropped from 198 in Q4 to 193 in Q1. The number of delegators gradually increased over the past year, with a 2.2% increase from 1.25 million to 1.27 million delegators in Q1. Stake pools, stake distribution, and delegator distribution stayed generally flat.

Stake and delegator distribution were largely unbalanced across total pools in Q1.

  • Of the 24.6 billion total stake, the top 193 pools (6.6% of pools) accounted for over 50%.
  • Of the 1.27 million total delegators, the top 53 pools (1.8% of pools) accounted for over 50%.

Of the total 2,932 stake pools, 1,128 (38.5%) created one or more blocks during the final epoch of Q1. The most productive stake pools produced 70+ blocks during the epoch, which lasted five days. When looking at cumulative block production, distribution is similarly skewed to a smaller number of overperforming stake pools:

  • 691 stake pools have 1,000 or more lifetime blocks created.
  • 1,306 stake pools have 100 or more lifetime blocks created.
  • 1,652 stake pools have 10 or more lifetime blocks created.
  • 860 stake pools have produced zero blocks.

There are nearly 200 stake pools that are both retired and still have ADA pledged to them. Those pools have a combined 50.9 million ADA pledged and delegated to them by 14,300 delegators, worth over $19 million (0.2% of the total stake). By not implementing slashing, Cardano may be affecting how much ADA is still pledged to deprecated pools. If the network did slash ADA on inactive pools, delegators might have more urgency to move their pledge to pools that are actually contributing to the network.

In January, a bug caused ~50% of nodes to go offline for around two minutes of elapsed time due to an internal memory structure issue. The network did not miss any blocks or need to restart, and the bug was swiftly resolved in node version 1.35.5 with the support of the Cardano developer community. All nodes run the same client software, but versions 1.35.4-1.35.7 are each run by at least 5% of nodes. Most nodes, 56% of them, run version 1.35.5. There were other negative side effects of the degraded network performance, such as a double-mint occurring on Cardano naming and routing protocol ADA Handle.

Active stake is the total number of ADA staked. Engaged stake is the percentage of active stake out of circulating supply, i.e., the total amount that could theoretically be staked.

Active stake and engaged stake are down 1 billion ADA and 3% from their Q1 2023 peaks, respectively. Even with the decline, Cardano’s active stake of 26.4 billion ADA, or ~$10 billion, is the second highest of any network, behind only Ethereum’s $35 billion. Solana is the only network of comparable market cap that can compete with Cardano’s 69% engaged stake. Solana also hovers around 70% engaged stake, while most other large-cap networks such as Ethereum and Polkadot are under 50%.

Qualitative Analysis

Community

The Cardano community, led by developers, Stake Pool Operators (SPOs), and users, continues to build protocols and resources to onboard the next generation of community members. Notable community events in Q1 include:

  • The IOG Academy, an initiative presented by IOG Education, which provides open courses and technical guides to development with Marlowe, Haskell, and Plutus.
  • The Cardano Foundation and EMURGO continuing to run developer education programs.
  • Existing community-run projects for education and developer tools, such as Gimbalabs and Genius Academy, continuing to produce content and host events.
  • IOG is facilitating Working Groups to assist and support Cardano ecosystem developers.

Multichain Approach

Sidechains

Milkomeda C1 is working towards increasing adoption and utility for Cardano. The network already hosts an array of projects and is being further fueled by incubators and hackathons. New developments with Paima may position it to see increased adoption. Milkomeda and Paima plan to allow Cardano wallets to directly access EVM contracts.

Milkomeda also runs an instance on Algorand, known as Milkomeda A1, and has plans to launch a Solana testnet in 2023. These connections could greatly benefit Cardano, as users and builders from other ecosystems get better access to the Cardano ecosystem.

Midnight, Cardano’s upcoming data-protection-focused sidechain, is being built by IOG. Eran Barak joined IOG in Q1 as the CEO of Midnight. By leveraging zero-knowledge cryptography, Midnight aims to bridge the principles of DeFi with the requirements of TradFi. It will enable users to have selective data disclosure while meeting regulatory needs. They will also be able to choose which data they wish to reveal publicly or keep private. Unlike Milkomeda, Midnight will have its own token: DUST.

IOG launched a toolkit for building custom sidechains for Cardano. The toolkit currently includes a technical specification for developing sidechains on Cardano, a chain follower, and was showcased alongside the announced proof-of-concept EVM testnet. In the future, it will entail templates for mainnet smart contracts and a sidechain module to interpret mainnet data.

Sidechains built with this toolkit will be validated by any participating Cardano SPOs, which will be incentivized by additional rewards offered by the sidechain’s tokenomic model. The shared security model for Cardano mainnet and its sidechains bears some similarities to EigenLayer’s restaking model with Ethereum validators.

World Mobile also announced plans to partner with IOG to build out its own Cardano sidechain. This proposed sidechain will use the Cosmos SDK; however, it is unclear what security model it will use..

Wanchain is an L1 PoS EVM blockchain and a decentralized blockchain interoperability solution. Since Q3 2022, it has been working to connect Cardano to fully heterogeneous blockchains, such as Ethereum, Polkadot, and Bitcoin. In this way, Wanchain will serve as an EVM-compatible sidechain to Cardano. The Wanchain Foundation also recently announced that its bridge is now live on the Cardano preview testnet environment.

L2s and Hydra

Hydra is a family of scaling protocols, mostly L2s based on state channels. Hydra Head, the first solution from the set, is an off-chain mini ledger working between a small group of participants, not unlike other popular state channels such as Lightning. Hydra leverages the eUTXO model for a more efficient and flexible transfer from L1 to L2 and back, allowing for the isomorphic transfer of data. Hydra for Payments is an open-source toolkit for implementing payment solutions that will leverage Hydra Head. Hydra has its own Discord channel where other use cases and 2023 plans can be found.

The first Head on the Cardano mainnet, also known as a channel, was opened in a limited form on March 2023. Right now, the protocol can be considered to be in a “public beta.” Until the protocol is more thoroughly tested, the quantity of ADA committed is limited for user safety. Heads can be used for a variety of use cases, from making P2P payments to moving dapp activity off chain onto cheaper Head channels. In Q4 2022, SundaeSwap Labs demoed an instance of the SundaeSwap DEX on Hydra on testnet. MLabs and IOG plan to leverage Hydra Head channels to execute auctions that will be higher throughput, faster, and cheaper than if they were on L1.

Light Clients

Mithril is a stake-based multisignature scheme in development. It offers a lightweight, efficient experience, and secure alternative for users to access all or parts of the state of the chain. Because users do not require access to the full current state yet receive a similar level of trust, clients can become thin enough to be run on laptops, smartphones, and browsers. Mithril is both a novel cryptography scheme and a network of signing nodes deployed alongside the Cardano network. Its clients can download and verify certified snapshots from untrusted so-called aggregators and use those snapshots to resolve chain synchronization, state bootstrapping, and chain validation. Mithril aims to improve existing light clients by not requiring a third party to retrieve chain state. Developers of the open-source project are aiming for a mainnet deployment of a beta version this year.

Development

Network Communication

March’s node v.1.35.6 release included Dynamic P2P networking. Dynamic P2P enables SPO relays to automatically connect to each other, removing the need for static configuration. P2P makes the network more performant and resilient to changes such as node or routing failures. It also streamlines the flow of information between the thousands of distributed nodes.

Dynamic P2P improves upon the initial federated structure and takes a step towards Ouroboros Genesis and eventually peer sharing, which are being developed in parallel. Ouroboros Genesis is the successor to Praos and the next evolution of Cardano’s consensus mechanism. It is expected to reach mainnet in 2023. Among other consensus improvements, Genesis guarantees that users can pick the right chain, even if there is only one “honest” peer. It will also enable anyone running their own node (such as with a Daedalus wallet) to connect to a fully decentralized and self-organized network.

Cryptographic Primitives

Cryptographic primitives are no longer a barrier between Cardano and other ecosystems such as Ethereum. The specific elliptic curves used for blockchain functions, and their compatibility with other curves, directly affect the complexity of cross-chain interactions.

Through CIP-49 and the Valentine intra-era hard fork SECP upgrade, the Plutus core now supports ECDSA and Schnorr signatures, which are the primitives used by Ethereum and many other networks. This update enables Plutus to natively verify signatures generated in EVM sidechains. Such developments are opening doors for Milkomeda C1, IOG’s EVM sidechain, and dapp developers.

Programming Languages

Overall, crypto ecosystem development is heavily dominated by EVM languages such as Solidity and Vyper, although some other domain-specific languages like Cairo are beginning to take market share. These popular EVM languages are accessible to Cardano ecosystem developers via its EVM-compatible sidechains. Milkomeda even plans to develop a feature that allows Cardano users to interact with EVM smart contracts directly from any Cardano wallet.

Cardano developers are building developer tooling to support many languages, not just Solidity.

  • OpShin is a Python-based smart contract language and toolkit released in Q1. It compiles Python 3 code into Cardano Smart Contract Assembly.
  • Plu-ts is a Typescript-based smart contract language. V0.2.1 was released in Q1.
  • Aiken is a Cardano smart contract language and toolchain.
  • Helios is a domain-specific language (DSL) that compiles to Plutus Core (i.e., Cardano on-chain validator scripts). Helios is a non-Haskell alternative to Plutus.
  • Marlowe is a DSL developed by IOG for writing and executing financial smart contracts.

Python and Typescript are two of the most popular programming languages in general, and EVM’s Solidity is the most popular language for Web3 developers. Any tooling that supports these languages will open doors for both new and existing developers.

Ecosystem Challenges and the L1 Landscape

By not having smart contracts until 2021, Cardano was relatively late to the game. While the first mover advantage for other networks may be fading away, Cardano’s DeFi TVL nearly tripled QoQ, a rate of growth not seen by its competitors this quarter.

Internally, Cardano’s avenues for growth include:

  • New native protocols such as Liqwid, Indigo, and Djed. Protocols still under development, such as EMURGO’s USDA stablecoin, will potentially inject more liquidity into the ecosystem.
  • Developer toolings such as Python and Typescript-based programming languages and toolkits.
  • Core protocol updates such as support for new cryptographic primitives.

Externally, there are more catalysts:

  • Sidechains such as Milkomeda C1, Midnight, and IOG’s EVM sidechain. More sidechains may start to pop up as IOG’s EVM toolkit continues development.

Many Web3 developers unfamiliar with Cardano’s eUTXO accounting model may struggle to contribute to the ecosystem's growth. However, this may not be a permanent disadvantage. Protocols, such as Fuel and Radix, are also building with variants of the UTXO model and may end up in a positive-sum situation with Cardano. Established originally by IOG, the UTXO Alliance is a collaboration of technical leadership across six organizations rooted in advancing the UTXO model in blockchain. These include Wolfram Blockchain Labs, Topl, Ergo, Alephium, and Nervos Network.

Milkomeda’s C1 sidechain and IOG’s EVM sidechain both welcome developers accustomed to account-based systems. These ecosystem platforms remove the learning curve for new developers.

Closing Summary

In Q1, Cardano saw significant increases in financial and ecosystem metrics such as market cap and DeFi TVL. TVL nearly tripled due to increased dapp transactions and adoption of new stablecoins. Technical developments also progressed, with notable advancements in scalability and VM compatibility. Several Layer-2 scaling solutions were deployed on mainnet, and sidechains continued to build to increase compatibility with other ecosystems.

Let us know what you loved about the report, what may be missing, or share any other feedback by filling out this short form. All responses are subject to our Privacy Policy and Terms of Service.

This report was commissioned by Input Output Global. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

No part of this report may be (a) copied, photocopied, duplicated in any form by any means or (b) redistributed without the prior written consent of Messari®.

Looking to dive deeper? Subscribe to Messari Pro. Messari Pro memberships provide access to daily crypto news and insights, exclusive long-form daily research, advanced screener, charting & watchlist features, and access to curated sets of charts and metrics. Learn more at messari.io/pro.

Upgrade to Messari Pro

Gain an edge over the market with professional grade tools, data and research.

Already a member? Sign in

Upgrade to Messari Pro

Gain an edge over the market with professional grade tools, data and research.

Already a member? Sign in

Red is a researcher, educator, and developer in the web3 space. Red's background is in electrical and software engineering. His main interest is privacy technology, through zero-knowledge proofs and general cryptography.

Mentioned in this report

Read more

Research Reports

Read more

Based on your watchlists

Create a new watchlist
Read more

Research Reports

Read more

Based on your watchlists

Create a new watchlist

About the author

Red is a researcher, educator, and developer in the web3 space. Red's background is in electrical and software engineering. His main interest is privacy technology, through zero-knowledge proofs and general cryptography.

Mentioned in this report