Canto: A Decentralized Blockchain for the Future of Crypto
The information provided in this article is for informational purposes only and should not be considered as investment advice. The opinions expressed herein are those of the author and do not necessarily reflect the views of BlockArrow Capital or its affiliates. Investing in cryptocurrencies involves a high degree of risk, and individuals should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The crypto market is highly volatile, and prices can fluctuate rapidly. Past performance is not indicative of future results. BlockArrow Capital and its representatives are not responsible for any losses or damages incurred as a result of the use of or reliance on the information provided in this article. Readers are urged to exercise caution and make their own independent assessments before engaging in any investment activities.
Canto, a permissionless, layer-1 blockchain running on the Ethereum Virtual Machine (EVM) and part of the Cosmos network, stands as a significant innovation in the realms of DeFi (Decentralized Finance), Smart Contracts, and Non-Fungible Tokens (NFTs). Developed by a community of DeFi proponents, Canto provides a Free Public Infrastructure (FPI) with core financial primitives, including the Canto DEX, Canto Lending Market, and $NOTE. Secured by Tendermint consensus and Canto validator nodes, Canto offers a novel ecosystem that could revolutionize DeFi, smart contracts, and NFTs. This thesis explores Canto’s core principles, unique governance mechanism, and remarkable growth in early 2023 while offering a comprehensive analysis of its potential impact on the future of decentralized finance, smart contracts, and NFTs.
Introduced in August of 2022, Canto is an EVM-compatible blockchain poised to leave its mark in decentralized finance (DeFi), smart contracts, and Non-Fungible Tokens (NFTs). Its architecture employs readily available, open-source tools such as the Cosmos SDK. However, what sets Canto apart from many Layer 1 blockchains isn’t necessarily its technology but its unique focus on socioeconomic aspects: it aims to establish strategies for nurturing developer activity and facilitating the funding of public goods within the network.
These strategies are more than experimental — they represent a bold attempt to foster a vibrant market economy on the chain, potentially driving its growth. Moreover, Canto’s approach offers potential advantages for liquidity providers and DeFi protocol developers, suggesting new possibilities for the execution of smart contracts and NFT transactions.
Backed by Tendermint consensus's proven security, the Cosmos network's versatility, and a supportive community, Canto’s groundwork appears promising in the dynamic and challenging landscape of DeFi, smart contracts, and the NFT market. This thesis seeks to unpack the promising beginnings of Canto, its distinct features, and the path it might chart in influencing these rapidly evolving fields.
Core Principles of Canto
Canto’s primary objective is to provide free public infrastructure without resorting to sovereign governance tokens or rent. Its core principles include the following:
1. Zero fees for liquidity providers: Canto offers free liquidity for traders, protocols, and other participants, incentivizing liquidity provision and reducing user costs.
2. Free public infrastructure: Canto provides decentralized exchanges, a stablecoin, and a lending protocol as free public utilities. It bypasses interface-driven user ownership, encouraging users to engage with new protocols.
3. Decentralization: Canto eliminates centralizing features common among other blockchains. It has no official foundation or presale and does not allow holders to vest. It also does not use governance tokens to extract rent from future users.
Canto’s decentralized exchange is designed to be ungoverned and will not implement any additional fees or launch a token. Instead, stakers govern and grow the lending market and incentivize future developer work. The algorithm behind NOTE allows it to self-adjust its interest rate to minimize volatility.
Rapid Growth in Early 2023
Canto experienced rapid growth in early 2023 following the news that crypto venture fund Variant had invested in a position of unknown size in Canto. Between December 2022 and late January 2023, the number of Canto users more than doubled, and Canto’s total value locked (TVL) also more than doubled, from $66 million to $138 million, over a similar timeframe, alongside a rapid increase in trading activity placing it in the top-four layer-1 blockchains in the Cosmos ecosystem.
Canto’s Unique Governance Model
Canto’s unique governance model sets it apart from other layer-1 blockchains.
It does not have a traditional governance mechanism and is designed to be ungoverned, with stakers responsible for governing and growing the lending market and incentivizing future developer work. Additionally, the algorithm behind the stablecoin NOTE is designed to self-adjust its interest rate to minimize volatility. This governance model aligns with Canto’s core principles of providing free public infrastructure without centralizing features like a foundation or a token presale.
Canto’s rapid growth in early 2023 demonstrates its potential to become a key blockchain within the DeFi movement. Its focus on providing free public infrastructure and zero fees for liquidity providers is a significant departure from other blockchains that rely on rent-seeking governance tokens.
Canto’s focus on free public infrastructure and zero fees for liquidity providers sets it apart from many other decentralized platforms that rely on rent-seeking through governance tokens. Its unique approach to governance through stakers incentivizes the growth of the lending market and development work, while the self-adjusting interest rate of its stablecoin, NOTE, aims to minimize volatility.
It’s important to emphasize that Canto is a decentralized protocol; any changes to the protocol are proposed as Canto Improvement Proposals (CIP), which are voted upon by CANTO holders. The recent CIP passed by governance that reduces inflation of the CANTO token to liquidity providers is an excellent example of how Canto is a truly decentralized project where issues and differences in opinion are openly discussed, voted upon, and executed without any single entity in control.
Canto has taken steps to eliminate centralizing features that have become common among other blockchain platforms, setting itself apart in the industry. For instance, unlike Bitcoin and Ethereum, Canto has no official foundation or presale and does not allow holders to vest. Canto’s decentralized exchanges, lending markets, and units of account also do not use governance tokens to extract rent from future users, which can discourage new entrants from joining the DeFi space.
In terms of governance, Canto has taken a unique approach. The Canto decentralized exchange is designed to be ungoverned and will not implement additional fees or launch a token. Instead, stakers govern and grow the lending market and incentivize future developer work. The algorithm behind NOTE also allows for self-adjusting its interest rate, minimizing volatility.
Canto includes three primitives: Canto DEX, Canto Lending Market, and Canto stable-coin ($NOTE), all of which are free to use and open source. Each primitive is complex enough to have a whole page written about them, but at its core, each one connects to another to form methods to achieve the goals of Canto’s initiatives; here’s how it works.
The Canto DEX uses an automated market maker and has no fees for anyone. Users can provide liquidity in exchange for LP tokens which can also be supplied in the lending market. By allowing tokens from the exchange to be used as collateral, wait times are reduced, and the system is self-sustaining. The lending market can also be used to borrow $USDC, $USDT, or $NOTE (only $USDT/$USDC collateral can be used to borrow note). This creates capital efficiency.
“For example, a DeFi participant can lend $USDC to Canto Lending Market and then borrow $NOTE. If the borrow rate for $NOTE is less than the supply rate for $USDC, that DeFi participant will be getting paid to hold $NOTE on Canto.” (Canto Docs)
Contract Secured Revenue (CSR)
Canto supports CSR to encourage developers to create free and open-source programs. When a contract on Canto with CSR is deployed, the developer receives an NFT that holds the right to claim a contract’s revenue. This revenue comes from a reserved portion of transaction fees from users interacting with the contract. This innovative approach incentivizes developers to create better, more widely used programs while shifting the focus away from developers needing to charge fees to users. It puts a cut of gas fees right back into the pockets of builders instead of stakers.
Bullish & Bearish Perspectives
From a bullish perspective, the innovative characteristics of Canto shine brightly in the realm of both DeFi and NFTs. These are largely rooted in its sophisticated infrastructure, unique Contract Secured Revenue (CSR) mechanism, and steadfast dedication to decentralization.
Canto’s architecture fosters a fertile ground for developing high-quality and free software, crucial for the project's long-term vision and serving as a robust foundation for developers. The platform's adaptability to the ever-changing landscape of DeFi and NFTs further catalyzes its growth potential.
The introduction of CSR presents a significant shift in the DeFi and NFT space, fundamentally transforming how smart contracts are valued and incentivized. This stands in contrast to traditional smart contracts, which are often forked without providing any benefits to the original developers. For instance, the Compound governance contracts developed by Robert Leshner have been forked numerous times without any direct benefits to him. The CSR mechanism addresses this by allowing developers to gain a small percentage of the revenue generated by their contracts, incentivizing the creation of high-quality and innovative software.
Given the right conditions, Canto’s “growth loops” can snowball. This allows developers to focus on building rather than incentivizing users through tokens, fostering an environment that encourages experimentation and creativity. Artists, creators, and builders are incentivized to use Canto as a secure sandbox for their projects, leading to a vibrant and diverse ecosystem.
The potential market behind NFTs tied to CSR contracts could be enormous. Users have the opportunity to buy and sell the rights to the earnings from a contract. Unlike NFTs currently on the market, these have actual value provided by the contract they’re tied to, introducing a novel idea to the market.
The grassroots nature of Canto also aligns with the ethos of a decentralized future. The absence of founders and a pre-sale highlights its commitment to decentralization. This open and secure environment has resulted in multiple hackathons showcasing the potential for truly unique applications to be built on Canto.
Recent developments in 2023 have been particularly promising, such as the Canto tokens’ surge in value and the more than doubled total value locked (TVL) in a short time. This rapid growth, combined with the continued development of core infrastructure and applications, as well as improved tools like new user interfaces for dApps and a refined block explorer, hint at the maturation of Canto.
Canto has a strong bullish sentiment; Its innovative approach, commitment to decentralization, and high-quality software development position it as a project with serious staying power in the DeFi and NFT space.
From a bearish perspective, potential concerns regarding Canto could include the initial distribution of launch tokens, the novelty of the technology, and the limited number of quality projects currently being developed on the platform.
During the genesis mint, a significant portion of the total supply (about 12.88%) was distributed to 29 contributor addresses. This distribution model, while raising questions about centralization and potential market manipulation, was likely adopted due to the unique structure of Canto. As a truly grassroots project without a dedicated team or venture capital funding, Canto may have distributed these tokens as a reward to early contributors. This model contrasts many other projects in the space with a dedicated team or backing from venture capital firms.
The innovative approach of Canto, including its unique implementation of Contract Secured Revenue (CSR), brings both opportunities and uncertainties. Given the novelty of these mechanisms, unforeseen challenges or issues are possible. This is not unique to Canto, as it is a common risk factor for any nascent technology, especially within the rapidly evolving DeFi space.
In terms of development, the Canto platform is home to a number of projects, but the quality and maturity of these projects vary. Canto's future growth and success will heavily depend on the quantity and quality of the applications being built on it. The chain is still in its early stages, and it may take time for more robust and high-quality projects to emerge.
Moreover, Canto’s branding and marketability could potentially be improved. Consistent and strong branding is key for any project to establish its identity, gain recognition, and attract users in the crowded blockchain space. Given the grassroots nature of the project and the lack of a dedicated team, the marketing of Canto might not be the priority at this stage, focusing instead on the development of the technology. This approach could be seen as a strength, reinforcing the project’s commitment to tech over hype.
However, this structure also makes it difficult for centralized exchanges like Binance and Coinbase to list Canto. Instead of making a direct Over The Counter (OTC) deal with a team to acquire tokens, exchanges like Binance or Coinbase would have to purchase these tokens themselves on the open market, which is less capital efficient and makes it less likely for Canto to be listed on major exchanges.
As Canto matures, these potential issues could be mitigated. The development ecosystem could flourish with more high-quality projects, and the branding could become more consistent as the project gains more recognition and a solid user base. Meanwhile, the technology's novelty could be a significant advantage, setting Canto apart from other layer-1 blockchains and attracting users and developers interested in its unique features.
Canto is an exciting and promising blockchain project that aims to provide an open and decentralized infrastructure for the DeFi ecosystem. Its zero-fee liquidity provision model and focus on free public infrastructure make it an attractive choice for developers and users. Despite some concerns about the inflation rate of its utility token and the need for a traditional governance mechanism, Canto’s rapid growth in early 2023 suggests it has significant potential to become a key player in the DeFi space. As the DeFi and NFT ecosystems continue to expand and mature, Canto’s commitment to openness, decentralization, and innovation will be essential in driving the movement forward.
Written by Dylan Gold, Chief Investment Officer, and Jerry Xia, Analyst Intern
The information provided in this article is for informational purposes only and should not be considered investment advice. The opinions expressed herein are those of the author and do not necessarily reflect BlockArrow Capital's or its affiliates' views. Investing in cryptocurrencies involves a high degree of risk, and individuals should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The crypto market is highly volatile, and prices can fluctuate rapidly. Past performance is not indicative of future results. BlockArrow Capital and its representatives are not responsible for any losses or damages incurred as a result of the use of or reliance on the information provided in this article. Readers are urged to exercise caution and make their own independent assessments before engaging in any investment activities.