Vasil Upgrade Could Finally Unlock DeFi on Cardano

Cardano, the world’s fifth-largest blockchain by market capitalization, might be on the cusp of a DeFi revolution — if anyone still wants to build on it, that is.

Cardano’s latest upgrade, dubbed “Vasil,” aims to dramatically improve the blockchain’s performance, and may particularly benefit decentralized finance applications.

“You can see on Cardano, the only two real applications that exist so far are just these really slow DEXes and NFT marketplaces,” Sebastien Guillemot, co-founder of crypto firm dcSpark and an early contributor to Cardano, told The Defiant. With Vasil, “the goal is to get us significantly closer [to Ethereum] and enable a lot of DeFi use cases that weren’t possible before.”

But Cardano may have missed its moment.

Too Little Too Late?

“It’s a great technical achievement for the team, but I guess the question for me is, ‘Do builders really care at this point with so many options out there?’” Messari analyst Tom Dunleavy told The Defiant. “Why Cardano? Especially when you have a host of [Ethereum] compatible chains with ecosystem funds ready to court you, and the specter of the new and well-funded Aptos and Sui [blockchains]. Cardano seems like it missed its moment a bit.”

Founded five years ago by Ethereum co-founder Charles Hoskinson, Cardano is maintained by three organizations: Input Output, the Cardano Foundation and Emurgo. The triumvirate has, on occasion, been mocked for its careful approach to development.

“The approach that they’re taking is so extremely, like, esoteric, with such a huge stick up their ass about correctness, and this is why they’re never going to ship,” Solana co-founder Anatoly Yakovenko said earlier this year. “They’re trying to build something that is like a cathedral … you’ve got to kiss a couple frogs in your design and ship stuff.”

Cardano is betting its careful approach will prove warranted in the long run. “Founded on peer-reviewed research and developed through evidence-based methods,” Cardano’s website boasts of the blockchain’s “unparalleled security and stability.”

Serious Flaws

Despite being two years older than Solana, however, there were serious limitations in how quickly and efficiently one could transact on Cardano before Vasil.

Its ADA token remains popular with investors, with a market capitalization approaching $15B despite having relatively few active users or developers. More than 70% of all Cardano in circulation is being staked, or locked up in exchange for a modest annual yield. Crypto exchanges Coinbase, Binance and Kraken all support ADA staking.

Cardano “has always had, you know, some developer activity, but not nearly as much as other chains, especially proportional to the fact that they have such a large user base,” Guillemot said. Crypto enthusiasts “purchase ADA, they’re staking ADA, they’re following ADA on social media, but they’re not really interacting with any smart contract protocol.”

In 2021, the number of developers building on Cardano grew 90%, to just over 350, according to a report from venture capital firm Electric Capital – more than on Binance and Polygon, but fewer than on Solana or Cosmos.

Total value locked, a measure of how much cryptocurrency is being put to work on a blockchain, is only $77M on Cardano, according to data from Defi Llama. In contrast, the total value locked on Solana, the next-largest blockchain by market capitalization, is more than $1.3B.

“The hope is that this update will help convert more of these users to active developers or active users of the protocol,” Guillemot said.

DeFi Bottlenecks

Pre-Vasil, certain protocols would encounter serious bottlenecks when used by multiple people simultaneously.

“You could only use information by consuming it,” Georgie Flerovsky, of MLabs, an engineering consulting firm that provides expertise to teams building on Cardano, told The Defiant.

“What this means in practice is that DeFi on Cardano was, one, really slow, and two, not very composable,” Guillemot explained. “Imagine you have a DEX [decentralized exchange] on Cardano — you cannot interact with a DEX if someone else is interacting with the DEX at this moment. That’s why a lot of DEXes on Cardano had really, really low transactions per second, like 0.1 transactions per second maximum.”

That is set to change, however.

Post-Vasil, “you publish information once, and then multiple consumers are able to use that information without interfering with each other, which was very, very difficult to do before,” Flerovsky said.

This makes it possible to use oracles, which send off-chain data, such as the price of a specific real-world currency or the temperature, to the blockchain. Oracles, in turn, make stablecoins possible. And stablecoins are among the most important assets in DeFi.

Lower Transaction Fees

The upgrade improves Cardano in more fundamental ways.

During testing, Artano, a Cardano NFT project, found that using Vasil reduced the cost of buying and bidding on NFTs by more than 75%.

MuesliSwap, a DEX, found a 90% reduction in transaction size and a 50% reduction in transaction cost on Vasil.

And there are myriad other under-the-hood changes that will open up new possibilities with smart contracts and reduce infrastructure and operational costs.

How quickly existing protocols take advantage of these improvements is another matter, however.

Added Expense

“I’m not sure if everybody is willing to go for a full redesign to take advantage of [the upgrade], because there’s an expense involved,” Flerovsky said. “You have to have developers change your smart contract code, you have to have auditors come in … and those are fairly expensive things to do.”

There are several protocols set to launch protocols that have been waiting for the upgrade. But if Cardano to challenge other chains for DeFi prominence, it’ll have to attract even more talent.

Emurgo plans on launching a $200M fund to support development on Cardano, CoinDesk reported Thursday, citing founder Ken Kodama. Kodama told the publication that growth on Cardano has been “relatively slow,” but that the blockchain is now ready “with the infrastructure needed to safely expand and grow the network in the coming years.” Emurgo did not immediately respond to The Defiant’s request for comment Friday morning. 

“They claim it’s going to be faster than almost all other blockchains, but projections and production are quite different,” Dunleavy said. “But again speed only matters so much. You need a community who wants to build there.”