Decentralized Finance on Cardano  

Decentralized Finance

The crypto space has historically been divided into Bitcoinists and Altcoinists — therefore crypto markets reflect these seasons accordingly. The Bitcoin blockchain is unique in many ways and will likely always remain as such; it being the keystone of crypto. But what is interesting to observe now is how other blockchains are improving, evolving and gaining greater capitalization in this industry. 

This article reviews one of the strongest players in the blockchain game; Cardano, focusing particularly on the rise of its nascent DeFi ecosystem.

The Cardano blockchain and its ecosystem

Cardano was launched in 2017 by one of the co-founders of Ethereum; Charles Hoskinson – this fact alone immediately gained the attention of the wider crypto community. The approach to blockchain development was and remains quite different and is known as one the most academic in nature. Development of the Cardano blockchain mirrors this philosophy of being “research-driven” and “peer-reviewed”. 

Today Cardano is 4th place by market capitalization amongst all other blockchains, following Bitcoin, Ethereum, and Solana. The base currency and governance token of the blockchain ‘ADA’ has remained consistently in the first ten positions of coins on the crypto ranking and listing website CoinMarketCap. 

Like many other blockchains, Cardano has a large community of supporters investing with their capital as well as their ideas and voting-power – contributing to the chain’s development. However, until last year’s launch of Alonzo update this community lacked many of the standard crypto services provided by L1 blockchains – such as DeFi and other instruments. The Alonzo update finally brought to the protocol smart contracts, accelerating both capitalization and development of new projects launched on Cardano. 

In the summer of 2021 the Cardano ecosystem still lacked any true DeFi trading options. However, this gap was quickly filled by 23 DEXes that began development in just the first 6-7 months of smart contracts being enabled.  

DeFi on Cardano 

The Decentralized exchanges currently released on Cardano are still young and continue their development, bringing more features and better functionality to their platforms as time passes. So here we will review just four of the more interesting ones, at least at this moment in time. 

Despite the large-scale marketing of SundaeSwap being the first Cardano-based DEX, this is in-fact not the case, and the first four DEXes were released in the following order:





 So let’s have a deeper look at these four. First, Muesli and AdaX are classic exchanges operating on an ‘order book’ style system, with all the well-known pros and cons of such methods. 

Order book style decentralized exchanges work well in some cases but the other two exchanges look much more interesting, as they both utilise ‘Automated Market Makers’ and are thus far more liquid and reliable when used in the context of a decentralized exchange. 

SundaeSwap is based on the native implementation of L1 (Layer1), which means that all operations are carried out inside the Cardano blockchain via smart contracts. Development of this DEX goes back to April 2021, in parallel with a great PR and marketing campaign, which ended up being somewhat detrimental to the DEX at the time of its launch. The SundaeSwap release attracted more users then the blockchain could handle at the time and the exchange could not cope with the number of requests. 

The technical reasons behind this failure are linked to the use of the eUTXO transaction model adopted by Cardano. This model is responsible for ensuring anonymity and security and is an improved version of the UTXO model used by Bitcoin itself, which – while very secure – does have consequences on TPS (transaction per second). During its launch, SundaeSwap paralyzed the operation of the main network since the number of generated transactions exceeded the system’s capabilities.

​​Following this incident, the Cardano developers made several changes to the inner workings of the protocol, including increasing the block size, but this didn’t fundamentally improve the situation enough to meet user expectations. In the case of SundaeSwap, the speed of sending transactions and the waiting time for execution was up to 20 hours. The problem is slowly improving with network updates but is still there and waiting for a solution, resulting in negative feedback from users.

The MeowSwap DEX went live in December 2021, but news did not accompany the event – so it is quite possible you missed this project’s launch. MeowSwap is an AMM-based exchange that uses a novel, bespoke Layer 2 solution which allows them to perform faster transactions by removing transaction logic off-chain, whilst maintaining security by settling transactions on the L1. The team has substantial expertise in the blockchain operation and is led by Gleb Nikitin, the co-founder of the MetaHash protocol.

The key to MeowSwap’s success is in its architecture. Layer 2 is a distributed architecture using L2 nodes, which are run by community members. This approach establishes decentralization of the L2 network, full transparency of transactions and protection from security risks. More details can be found in the project white-paper. 

The technology of the MeowSwap DEX looks more interesting than any other exchange on Cardano launched so far. The architecture they have chosen allows fast transactions even at high volume using full Cardano nodes to power their L2 solution; this proves the expertise of the team behind the project and their commitment to the Cardano ecosystem. 

The Cardano blockchain will continue on with its evolution, and for this exact moment, this L2 based platform allows the delivery of a faster and more secure method of exchange in comparison to simply relying on the L1 alone. Moreover, MeowSwap’s L2 technology opens up vast opportunities for integration with other blockchains, such as Ethereum and Bitcoin, through bridge systems. 

As real-world use proves, the differences in the speed of transaction on MeowSwap and Sundae can sometimes be quite significant:

Key takeaways

Crypto markets continue to surprise us with new, unexpected players coming on to the scene. Blockchain is not an easy technology to develop for and make profitable long-term, this takes a great deal of time and forethought. It seems that we have only just started seeing the true potential that blockchain as a technology can deliver. 

We observe changes in Ethereum; we see the rise of Solana and the technological improvements of Cardano. During this time, Cardano is growing towards new heights thanks to its consistent and well thought-out protocol developments. DeFi stays in focus in the crypto community and still is one of the most profitable and useful financial instruments available. There is no doubt that there will be new DeFi stars established on Cardano, and some of them may even step out outside of this community, becoming universally popular. Great potential can already be seen in MeowSwap, perhaps they will become the number one DEX, at least on the Cardano ecosystem. 

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