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Cardano price analysis: Project progresses slowly

The Cardano project has added new updates to its platform during 2019, with the completion of its Byron development stage driving positive price activity and community enthusiasm. However, the blockchain remains characterized by a slow release schedule and primarily speculative value creation.

Cardano is a smart contract platform blockchain similar to Ethereum. Its point of difference is a two-layered architecture and a scientific approach to implementing network updates.

The network’s native token, ADA, can be used for value transfers between users of the network. Eventually, when the Cardano blockchain’s Ouroboros proof-of-stake solution is fully launched for mainnet, it will be used as a medium for designating network stake and paid out to block producers for their services. Cardano is coded in a programming language called Haskell, which is based on the principles of functional programming.

Since hitting an apparent bear market bottom in December 2019, the price of ADA has risen ~166%. ADA currently has a market cap of ~USD2,017,322,356 and is the 11th largest digital asset on the Brave New Coin market cap table.

The Cardano blockchain was the brainchild of early Ethereum contributor Charles Hoskinson and he maintains a key position within the Cardano ecosystem as the CEO and founder of IOHK (Input Output Hong Kong). IOHK is a blockchain focused research and development company that has been contracted to build, design, and maintain Cardano until 2020.

The ecosystem also includes the Cardano Foundation, which provides legal support and promotes adoption of the Cardano protocol, and Emurgo, an investment arm that supports and funds venture blockchain projects and is a major contributor to IOHK.

The Cardano Foundation was restructured in December 2018 with now-former CEO Michael Parsons resigning following months of tension between the foundation, IOHK and Emurgo. Responding to the resignation, Hoskinson told the community he was “waking up the Foundation and getting it where it was supposed to go.”

Cardano development began in 2015. The ADA token’s presale raised USD 62 million and occurred in Asia, mainly Japan, from September 2015 to January 2017, where a total of 26 billion tokens were sold at US$0.0024 each. Public trading of the tokens began on October 1st, 2017. There is a hard cap of 45 billion ADA tokens, 13.88 billion of which will be issued through staking rewards.

FA1

Early ADA buyers came mainly from Japan. https://www.cardano.org/en/ADA-distribution-audit/

FA2

_The most active demographic participating in the sale was 35-44 _https://www.cardano.org/en/ADA-distribution-audit/

Cardano has proposed a number of novel architecture design choices. A unique feature of Cardano is that key network operations are enacted on separate sidechains of the Cardano network. The first chain is the Cardano settlement layer (CSL). The CSL chain manages the accounting and transactional operations of ADA for the Cardano ecosystem, while the Cardano Computational Layer (CCL), supports smart contracts and decentralized application (Dapp) hosting.

There are a number of theoretical advantages of this style of sidechain system. It simplifies privacy and network interactions because smart contract information is kept separate from transaction information. If X is sending money to Y, a node does not need to know who X and Y are, or the purpose of the transaction.

Cardano’s approach may not be universally superior. Ethereum for example bundles accounting and smart contract information together. This gives it an advantage in that there are additional checks for fraudulent activity because more data is retained by network miners.

The Cardano blockchain will eventually use a new, proof-of-stake consensus algorithm to confirm network transactions called Ouroboros. In proof-of-stake, the stakeholders (ADA holders) who form the next block are randomly selected, proportional to the size of the stake (amount of ADA held by a node), as determined by the blockchain ledger. This selected node is referred to as a slot leader.

Time on the Cardano blockchain is divided into epochs and slots. A slot lasts 20 seconds, while an epoch contains 21,600 slots and lasts five days.

Operationally, this means Cardano block producers have to stay online in order to determine if they have been selected to become the slot leader to mint the next block.

Participating in the Cardano protocol consensus is designed to incur less computational costs than traditional proof-of-work. Nevertheless, slot leaders need to be online to determine when it is their turn to create a block or to participate in the election process, and this requirement is important for both the security and efficiency of the protocol.

To incentivize the maximum number of possible slot leaders online and available to create a block, Ouroboros implements a designation system that revolves around staking pools. Because a number of large ADA stakeholders are unlikely to have the computational power, interest or technical understanding to stay online for block production requirements, staking pools are set up for the network which can be assigned ADA by stakeholders.

This assignment solution and hand over of fiduciary responsibility by ADA holders to staking pools suggests that Ouroboros may be closer to delegated-proof-of-stake as opposed to proof-of-stake when it is fully launched.

When a stakeholder assigns ADA to a staking pool they still maintain control of the spending power of those tokens, only the rights for delegation are handed over. Cardano also implements delegation certificates that are baked into the blockchain to definitively determine delegation.

Block producers earn transaction fees (not newly minted tokens) on Cardano for their services. The current total supply of ADA is 31,000,000,000 with a preset maximum total supply of 45,000,000,000. The team behind Cardano has assigned these remaining ~14,000,000,000 to block producer incentives when Ourobros is launched on the mainnet.

Incentives/transaction fees are distributed in each epoch. Transaction fees of the blocks created during that epoch (together with ADA from monetary expansion) are collected into a virtual rewards pool and that total is distributed amongst the stakeholders.

Cardano has proposed two transaction fees/new ADA allocation models. Rewards will be allocated based on the size of block producers stake at the start of an epoch, or proportional to the number of slots the stake pool was elected as slot leader. Both models potentially incentivize the creation of oligopolies as staking pools may hoard ADA to incentivize potential allocation. The 2nd model may be considered unfair if a pool is allocated multiple slots within a given epoch.

However, in classic Cardano fashion, IOHK developers and researchers released the latest version of a paper titled Reward Sharing Schemes for Stake Pools in October 2018. The paper suggests models for the fair formation of staking in collaborative proof-of-stake networks with numerous shareholders. It finds a possible equilibrium number of pools which mitigates for potential bad actor occurrences like a single stakeholder creating multiple pools in order to dominate the project or launch a sybil attack.

In January 2018, Dan Larimer, the creator of the DPoS consensus model, wrote a negative review of Ouroboros which garnered a response from Hoskinson. In his review, Larimer criticized both the proof-of-stake and the peer-reviewed design choices used by Cardano.

The Cardano platform is guided by a complex and transparent roadmap. There are plans to launch ADA functionality in three phases; the testnet era, the bootstrap era, and the reward era. Currently, the network is in bootstrap era. IOHK and the Cardano Foundation run every node operating on the network in a centralized manner. There are no options yet to utilize ADA tokens for staking.

FA3

The pre-decentralization state of the Cardano blockchain, https://seiza.com/blockchain

Underlying these 3 stages is another roadmap format organized into 5 stages (which overlap and are worked on simultaneously). The 5 stages are Byron, Shelley, Goguen, Basho, and Voltaire.

  • Byron is the first developmental phase of Cardano and is focused on developing the CSL. Following the launch of Cardano 1.5 in March 2019, Byron appears to be complete.
  • Shelley aims to release a viable public implementation of Cardano’s proof-of-stake consensus algorithm, Ouroboros. Other objectives include staking incentive development, delegation implementation, and network infrastructure development to support decentralization.
  • Goguen deals with the development of the Cardano virtual machine ‘IELE’. The IELE will automate the smart contract process by utilizing a uniform, cross-language execution.
  • Basho will improve scalability, security, and performance by implementing a revised network layer.
  • Voltaire is the final phase of Cardano’s current roadmap and it will involve the implementation of a treasury system and a governance model.

As mentioned, Cardano 1.5 launched in March 2019 and was received positively by the Cardano community. The launch preceded and may have contributed to ADA’s drive towards new 2019 price highs. The update implemented support for the Ouroboros BFT protocol in preparation for the eventual launch of Shelley. The update also included a number of other improvements to the project’s primary cryptocurrency wallet, Daedalus.

Following the launch of Cardano 1.5 in March 2019, a Shelley testnet was launched for Cardano on June 20th.

The testnet provides a way for ADA users and developers in the community to experiment with staking and help build up a collection of stake pools on Cardano.

Network launches like Cardano 1.5 and the Shelley testnet releases appear to be key drivers of buying pressure for ADA tokens. The days immediately following these releases have set new 2019 price highs and led to surges in trading volume across exchanges.

FA4

This positive market reaction to the network releases may stem from Cardano’s historic characterization as a project that is slow to release updates.

A major operational target and selling point of the project is to achieve its core goal of building a scalable, interoperable and sustainable platform blockchain while making sure that core developer ideas are peer-reviewed and implemented in a competent way. There are academic papers for Ouroboros, sidechain solutions and many other topics released by IOHK and connected Cardano entities, as well as published code reviews for Haskell. This process of peer review development takes time and is likely a major factor in Cardano’s slow release history.

From a market perspective, competing platform Ethereum has built core mainnet functionality that far exceeds the current version of Cardano. Ethereum has also attracted developer interest and network effects as the go-to robust, secure platform solution to build on. Cardano and the ADA token’s future success will be dependant on the network’s ability to attract new and existing blockchain developers away from solutions created by Ethereum and competitors.

Objective on-chain indicators

NVT Signal

Derived from the NVT ratio, the NVT signal is a responsive blockchain valuation metric developed by Willy Woo and Dmitry Kalichkin.

Crypto markets are prone to bubbles of speculative purchasing that don’t reflect underlying network fundamentals. The NVT signal provides insight into what stage of this price cycle a token may be at.

A high NVT signal is indicative of a network that is going through one of these bubble periods and may move towards a position of becoming overbought/overvalued, as the market’s speculative momentum slows.

FA5

Indications sent by Cardano’s NVT signal lean bullish. Since around March 2019, a falling NVT signal has coincided with a rising price line. This pattern suggests that on-chain activity has been growing more quickly than the external value of the ADA token, an unusual trend because digital assets are often characterized more for their passive speculative investment/trading value as opposed to their active on-chain utility.

If the pattern continues, then it would imply that ADA is undervalued based on fundamental indicators and price will likely rise further in the near term until the external value rises high enough for the NVT signal to hit a point of being oversold.

This pattern is somewhat surprising given ADA’s current limited utility. The mainnet version of the token currently has no staking or delegation properties and Dapp building on Cardano is limited. ADA does have utility as a medium to transfer value between users on the network at relatively fast speeds and cheaply. Users may also be trialing the efficacy of the Cardano 1.5 build or potentially front-running the eventual Shelley mainnet release, which is expected to be one of Cardano’s next core releases.

PMR

Metcalfe’s law is a measure of the connections in a network, as established by Robert Metcalfe, the founder of Ethernet. It has subsequently been used to analyze the true value of network-based financial products like Facebook and Bitcoin. By comparing it to price, it can provide a useful tool to assess whether a token is over or undervalued.

It is also a more straightforward metric to assess when compared to on-chain transaction volume, which can be challenging to measure accurately in USD terms. Addresses are measured as the number of unique sending and receiving addresses participating in transactions daily.

FA6

Like the signals sent by ADA’s NVTS, its PMR also leans bullish. PMR for ADA has been steadily falling since around October 2018 which means that the number of active addresses has been growing steadily versus the token’s external value. These gains in the inherent fundamental value of the token do not appear to have not been reflected in the price. The chart pattern implies that these gains should eventually be reflected in the token’s external value.

A cryptocurrency’s network effects increase when new users join and strengthen the network, making it more valuable for existing users. The most direct network effects are improved liquidity and utility. More daily active users can be indicative of a higher level of developer adoption to utilize the Cardano platform blockchain and more counterparties willing to accept ADA for payments. Once Cardano publicly launches its Ouroboros consensus model and staking pools activate to allow any ADA user to passively earn income by designating stake, the value of the token may rise.

Exchanges and trading pairs

The most popular trading option for ADA is USDT (US Dollar Tether) with the pair currently handling over 56% of daily trading volumes. The second most popular market is the ADA/BTC pair. Together the top two pairs make up ~86% of the daily ADA trading volume. There is some liquidity on the ADA fiat trading with the US dollar trading pair.

There was a sharp uptick in both USDT and BTC trading volumes beginning around mid-March 2019. This may suggest growing interest to accumulate ADA in the lead up to major network updates expected to occur in the next year or so (Shelley and Goguen related).

The USD value of the daily volume of the entire ADA exchange trading market is ~USD 105 million.

FA7

A mix of exchanges dominates the ADA trading marketplace, with 5 different entities operating the top 5 ADA trading pairs. The ADA/USDT market on Huobi Global is the most active market in the ecosystem. ADA is also tradeable on high profile exchanges such as Kraken and Bitfinex.

FA8

Technical Analysis

Moving Averages and Price Momentum

On the 1D chart, since the bear market bottom, ADA has followed a linear uptrend, which resulted in a golden cross at the end of May 2019. Despite the golden cross, price has recently been in freefall, plunging beneath both the 50 and 200 day EMAs. However, the current uptrend still holds, but price will need to recover the 200 day EMA, as support, if the trend is to hold. If price, currently $0.076, falls beneath the trendline with significant volume, a retest of $0.06 would be likely.

TA1

On the 1D chart, ADA has moderately followed the Fibonacci retracement levels during its uptrend. Price has been unable to push towards the 1.618 level during this uptrend, which has resulted in the 1.0 level being used as support frequently. Currently, price is beneath the 1.0 level. If ADA cannot recover the 1.0 level as support, a fall to the 0.786 level of $0.068 is inevitable.

[TA2

Lastly, on the 1D chart, the volume flow indicator (VFI) is still well above 0 with a linear trend intact. The VFI tells a similar story as the overall price trend. If VFI maintains its current uptrend, price is likely to find support before moving higher again. If the trend breaks, price falling to either level of $0.068 or $0.06 are very likely.

TA3

Ichimoku Clouds with Relative Strength Indicator (RSI)

The Ichimoku Cloud uses four metrics to determine if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, Lagging Span (Chikou), and Senkou Span (A & B).

The status of the current Cloud metrics on the 1D frame with singled settings (10/30/60/30) for quicker signals are mixed: price is below the Cloud, Cloud is bullish, the TK cross is bearish, and the Lagging Span is above Cloud and touching price.

A traditional long entry would occur with a price break above the Cloud, known as a Kumo breakout, with price holding above the Cloud. From there, the trader would use either the Tenkan, Kijun, or Senkou A as their trailing stop.

Price completed and maintained (via sideways trading) a Kumo breakout since mid-May 2019. Recently, its drop has resulted in ADA falling beneath the Cloud. Currently, price has faltered at Cloud resistance of $0.079 when attempting to re-enter the Cloud. A failure to breach above Cloud resistance in the coming days/weeks would signal further downside.

However, there are a few positive factors for ADA, including:

  1. VFI still in the bulls’ favor
  2. RSI of 37 and trending slightly upward

In the event of another Kumo breakout, price targets are $0.086 and $0.09. If Cloud resistance holds, downside support is $0.069 and $0.061.

TA4

The status of the current Cloud metrics on the 1D time frame with doubled settings (20/60/120/30) for more accurate signals are mixed: price is in the Cloud, Cloud is bullish, the TK cross is bullish, and the Lagging Span is above the Cloud and touching price.

Using the slower settings, price is currently in the Cloud with little support until $0.069, Senkou B Cloud support. If support holds, coupled with RSI continuing to trend upward, price may re-complete a Kumo breakout above $0.084. If so, price targets are $0.092 and $0.10. If Cloud support fails, additional support levels are $0.064 and $0.06.

TA5

Conclusion

Despite some key network releases, Cardano is still in the very early stages of development. It will likely take a few years before it becomes a viable Dapp platform solution that is able to compete against EOS and Ethereum. It retains long term potential as a store-of-value staking token where users can earn passively through staking rewards. The recent success and adoption of staking tokens like XTZ may give hope to some ADA holders however there is also likely to be an extended wait until mainnet staking solutions are launched. ADA’s inherent value is affected by its slow progress, internal turmoil between the IOHK, Emurgo and the Cardano Foundation and negative assessments of the network’s yet to be released staking consensus solution.

In the short term, fundamental indicators like NVT signal and PMR lean medium-term bullish. However as ADA and other altcoins continue their slow rise from the bear market bottom, price gains based on fundamental progress is dependant on external market conditions.

The technicals for ADA are giving mixed signals despite a golden cross. On the 1D chart, both the fast-setting trader (10/30/60/30) and slow-setting trader (20/60/120/30) will await a Kumo breakout above $0.084 before entering a long position. A new Kumo breakout will yield price targets of $0.086 and $0.09 for fast-settings, and $0.092 and $0.10 for slow-settings. Failure will highlight support levels of $0.069 and $0.061 for fast-settings, and $0.064 and $0.06 for slow-settings.


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