With prices up over 1,000% (to $2.10) year to date, Cardano (ADA -2.04%) has had a tremendous run this year. While the cryptocurrency market is notoriously volatile and difficult to predict, the high-flying blockchain may have more room to grow because of its strong economic moat. Let's explore the reasons for Cardano's edge.
1. Cardano is programable
Launched in 2017, Cardano is a public blockchain designed to facilitate peer-to-peer transactions through its internal cryptocurrency, ADA (investors purchase ADA tokens to bet on Cardano's growth and adoption). Unlike Bitcoin, which isn't programmable, Cardano allows private developers to create sophisticated smart contracts on its blockchain (Bitcoin's smart contracts are less complex).
Smart contracts are self-executing contracts, which enable developers to create complex decentralized applications. These peer-to-peer programs allow anyone to interact on the network.
Cardano hosts several promising decentralized applications under development, including MELD -- a decentralized finance platform aiming to allow users to lend out their cryptocurrency or use it as collateral for cash loans. MELD is funded through a unique system called an Initial Stake Pool Offering (ISPO), which involves ADA holders staking their tokens (proceeds go to MELD) in return for the new platform's native tokens, which will be distributed to the participants' wallets at launch in December.
Because investors need to stake ADA tokens to participate in ISPOs like MELD, these projects could help power long-term demand for the token.
2. A more environmentally friendly proof-of-stake mechanism
Cardano isn't the only popular blockchain that allows users to program and fund decentralized applications on its blockchain. Ethereum, which launched in 2015, offers similar functionality. But Cardano's competitive advantage comes from its proof-of-stake consensus mechanism (Ethereum also plans to implement proof-of-stake, but Cardano has the first mover advantage).
Consensus is a key feature of blockchain platforms that ensures the network is synchronized and transactions are legitimate -- removing the need for middlemen like traditional financial services. Proof-of-work systems like Bitcoin and Ethereum achieve consensus through mining, which involves solving complex computational puzzles to verify transactions in return for newly minted coins. The process is energy-intensive, with Bitcoin mining alone consuming 91 Tetrawatt-hours of electricity annually, which is almost 0.5% of global consumption, according to Business Insider.
Cardano uses a proof-of-stake system called Oroboros. Instead of solving puzzles, miners validate transactions based on how many coins they hold in return for new coins. This process is called staking, and it's typically done on cryptocurrency exchanges like privately held Binance or Kraken. Proof-of-stake is far less energy-consuming than proof-of-work, giving it an edge in this environmentally conscious political climate.
Minimizing risk in an uncertain industry
The cryptocurrency market is uncertain and prone to wild speculation. But fundamental-focused investors can mitigate the uncertainty by betting on assets with an economic moat that separates them from rivals.
With a total market cap of $69 billion, Cardano isn't cheap. But its environmentally friendly proof-of-stake consensus mechanism and programmable blockchain could help it outperform over the long term.