Arguably, most of the easily understood discussion points about Cardano (CCC:ADA-USD) center on its viability for investors. Although I don’t have firm evidence, it’s my belief that the vast majority of people invest in ADA or other cryptocurrencies not because of their fundamental value (that is, their utility for serving practical needs) but rather for their upside potential.
For those who bought ADA-USD a year ago and held, you can feel pretty good about that 585% gain.
That’s not to criticize people who buy cryptos without truly understanding their respective blockchain architectures. For example, when I buy a car, my main concerns are exterior/interior design, performance and reliability. While the auto manufacturer throws at me terms like dual overhead camshafts and twin-scroll turbochargers, I’m not always entirely sure what they mean. To be frank, I usually don’t care.
I like to drive. And if the car is fast, all the better, whether it has a twin-scroll turbocharger, a single scroll or no scrolls at all. What does it matter to me as the driver? Thus, I don’t think it’s a stretch to assume that most people buy Cardano because of its appreciation potential. That it pioneered the Proof of Stake (POS) mechanism is probably relatively meaningless to most ADA buyers.
However, a widening vulnerability is brewing in the Ethereum (CCC:ETH-USD) network, essentially the backbone of blockchain applications. Ironically, Ethereum is facing the same challenge that prompted multiple controversies with Bitcoin (CCC:BTC-USD). As ETH became popular, its inability to scale efficiently became evident. And that opens the door for Cardano as a possible Ethereum killer.
One of the biggest and most frustrating challenges right now for the ETH network is soaring gas transaction fees. As Ethereum became ridiculously popular, engaging its network also became extraordinarily pricey. Thus, Cardano could come in and provide a cheaper and more effective solution.
But ADA may face what I would call the Austin problem. (And it’s got nothing to do with Mark Cuban’s local business interests.)
Cardano’s Whac-A-Mole Dilemma
For many years leading up to the coronavirus pandemic, people have been migrating to Austin, Texas. True, a good number of folks came from California — typically because they couldn’t handle “Kommiefornia” taxes or firearms laws. But Austin has also attracted several people from the Asian continent due to the city’s booming tech economy.
During this period, real estate prices in the rather eccentric city ticked higher and higher. You don’t have to know anything about the housing market to understand supply and demand. Of course, the Covid-19 crisis struck and the pandemic accelerated the trend. But that trend was well underway before the virus.
Today, people complain about Austin the way they used to complain about a major Californian metropolis. Prices have soared well beyond what folks consider reasonable.
Similarly, I believe that Cardano — if it were to become an Ethereum killer — would experience the same fate as Austin. Sure, pre-pandemic Austin marketed itself as a cheaper and more viable alternative, a California without (high) taxes and liberals. But post-pandemic Austin is crowded and expensive, without the beautiful California beaches and weather to tide you over.
While you should know that this is completely my opinion, I don’t think it’s possible for any one blockchain network to be all things — decentralized, secure and scalable — without incurring higher costs. In other words, Cardano and other possible ETH killers are engaged in a game of Whac-A-Mole.
The problem is, you can whack some of the moles all of the time or all the moles some of the time, but you can’t whack all the moles all of the time.
Yes, Cardano could be a quicker, faster, safer, higher, deeper blockchain. But I’m almost certain it can’t be all these things and cheaper.
The Perpetual Conundrum
Many years ago, a friend of mine insisted that perpetual motion machines are real and that the government is hiding the truth from us. Currently, he is the oddity of my social media account, daily insisting in gross irregularities (to put it diplomatically) that allegedly occurred during the 2020 presidential election.
Unlike many folks, though, I don’t draw hard ideological or in some cases scientific lines. But per the Sagan standard, extraordinary claims require extraordinary evidence.
The perpetual motion machine conspiracy is most relevant to Cardano because what it and other Ethereum-killer candidates are proposing sound to me like an economic impossibility. We’re talking about a broadly and technically superior Ethereum with the same popularity of ETH, yet somehow cheaper.
Believe me, I don’t doubt for a second that Cardano could very well be technically superior to Ethereum in every imaginable metric. But as soon as the migration from ETH to ADA occurs, that’s when the same or similar cost challenge would likely affect ADA.
Why would that be the case? Because distributed decentralized systems require individual incentives to bolster the network. Dilute the incentive and you dilute the system. Thus, printing money never works unless there is a basis for it.
But I’m willing to believe that Cardano can kill Ethereum just like I’m willing to believe that Donald Trump is still my president. I’m just going to need to see some evidence. And that’s where the message gets a little shaky.
On the date of publication, Josh Enomoto held a LONG position in ADA, ETH and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.