Cardano’s DeFi will scale to ‘millions of users’ due to extended UTXO

  • Cardano uses an extended UTXO model to achieve scalability for DeFi applications of “millions of users”.
  • The model enables more operations to be performed off-chain and thus faster and more cost-effectively.

In a recent interview for the YouTube channel “Econmic Design”, Nicolás Arqueros, CTO at Emurgo, spoke about the extent to which the Cardano blockchain will establish its own DeFi ecosystem in competition with Ethereum. As CNF reported, with the upcoming Goguen era, Cardano will have the ability to host a defi ecosystem. Thus, Charles Hoskinson, the inventor of Cardano, has identified decentralized finance applications as a priority goal for 2021.

Arqueros explained during the interview that he believes the current setback for the sector, with falling DeFi tokens prices and returns, is only temporary. As Emurgo’s CTO pointed out, it is common for new technologies to “overheat too quickly and turn into a bubble”. Consequently, he referred to the example of Amazon during the 2000s bubble and to the current value of the company:

But, for example, we have the bubble in the 2000s with all the tech companies, and we saw that Amazon was a bubble at that point. Yes, at that point it was a bubble, but now the value and the price in the stock market even higher.

Cardano will be superior to Ethereum because of the extended UTXO model

In this sense, EMURGO continues the development the DeFi on the Cardano blockchain undisturbed. As Arqueros discussed, IOHK and Emurgo have investigated what Ethereum is doing and how Cardano can be superior to it. These are essentially four features: secure smart contracts, a sustainable governance model, the proof of stake (Ouroboros) and a scalability for “millions of users”, as Arqueros stated.

To achieve the latter, Cardano uses a UTXO model, unlike Ethereum, which uses an account-based model. According to Arqueros, the extended UTXO model allows more operations to be performed off-chain:

We’re avoiding most of the unncessary operations on the chain. For example, you no longer have to interact with that many smart contracts. Instead what you can do is verify that information was signed by some specific private key after the usage of its public key and also we are working with scalability solutions, like sharding.

The execution of off-chain operations is especially useful in the area of price oracles, as Arqueros pointed out. This can save costs for the users as well as speed up the operations.

We have different types of oracles. So, for example, we have signed data from Coinbase, so you actually don’t need an advanced solution like Chainlink […] Because they are already giving you information that is signed so you can verify that with smart contracts ion Cardano, so you can have information faster and cheaper. Right now, something that we see in Ethereum, gas fees ae super high so that’s why we are doing something on-chain, so we can speed up the process.

Furthermore, the UXTO model is also more compatible with scaling solutions such as Sharding (Ouroboros Hydra). Overall, the model makes it much easier to implement parallel processes. The result of this are the advantages mentioned above. With regard to decentralized exchanges, such as Uniswap, Arqueros explained that there should be several organizations working on several proposals:

Definately we want to have a few on Cardano, and we multiple organizations working on multiple proposals […] you can expect to see most of the same applications that you see on Ethereum and other blockchains in Cardano, but they will be built in another way.

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