CANTO — An Impressive Narrative

Published in

Verum Capital Insights

10 min readFeb 14, 2023

Canto is an innovative blockchain platform that takes decentralized finance to the next level. It uses the Ethereum Virtual Machine and Tendermint consensus mechanism to provide unparalleled security and transparency for creating and exchanging various financial products and services. Canto’s permissionless structure makes it accessible to everyone, opening up new possibilities for a decentralized financial future.

Canto has a native token called $CANTO and a unit of account token called $NOTE. The native token is used for transactions within the network and to pay for network fees and access certain network services. The unit of account token is pegged to a stable asset such as the US dollar and is used as a medium of exchange.

Canto offers several DeFi primitives as Free Public Infrastructure (FPI), including a zero-fee decentralized exchange (Canto DEX), a lending market (Canto Lending Market), and a stablecoin ($NOTE). By making liquidity free for liquidity providers, avoiding rent extraction, and focusing on minimal viable user capture, Canto aims to become the best execution layer for original work in the DeFi space.

Preliminaries

Protocol Layer

The protocol layer in blockchain refers to the rules and technical specifications that define the behavior of a blockchain network. It governs the consensus mechanism, data structure, and incentives for participants, serving as the foundation for security, scalability, and interoperability. The protocol layer sets the standards for blockchain functionality, allowing developers to build applications on top of it.

Application Layer

The application layer in blockchain refers to the level at which end-users interact with the technology. It includes various applications such as decentralized exchanges, games, marketplaces, and financial tools. The application layer makes blockchain technology accessible and useful to a wider range of users and organizations by providing value-added services and experiences.

Native Token ($CANTO)

A native token is a cryptocurrency that serves as the primary asset or currency on a blockchain network and is used for transactions within the network. It is typically used to pay for network fees, access certain network services, or to participate in governance. An example of a native token is Ether (ETH) on the Ethereum network.

Unit of Account Token ($NOTE)

A unit of account token, on the other hand, is a digital token that serves as a medium of exchange and is pegged to a stable asset such as the US dollar, gold, or a basket of currencies. This stability makes them a good option for use as a unit of account for transactions. An example of a unit of account token is USD Coin (USDC), which is pegged to the US dollar.

What is Canto?

Canto is a general-purpose blockchain that uses the Ethereum Virtual Machine (EVM) and operates on a permissionless network. Its goal is to deliver on the promise of decentralized finance (DeFi) by making new, transparent, and accessible financial systems available to everyone. Canto is part of the post-traditional financial movement that aims to create decentralized and free financial systems.

Canto uses Tendermint consensus, secured by its validator nodes, and an EVM execution layer through Cosmos SDK to provide core financial primitives that support its Free Public Infrastructure (FPI) at launch.

These primitives include:

Canto DEX — a zero-fee DEX for liquidity providers
Canto Lending Market (CLM) — a pooled lending Compound v2 fork
$NOTE — a fully collateralized unit of account token issued by the CLM which also serves the ecosystem as a USDC/USDT soft-pegged stablecoin

Core Characteristics:

Canto’s goal is to become the best execution layer for original work. Canto accomplishes this in three ways:

1. Liquidity as a Free Public Good:

Zero fees for Liquidity Providers (LPs). Canto provides free liquidity for protocols, arbitrageurs, and traders.

Canto is a platform that facilitates trading of digital coins. To ensure there are enough coins for buyers and sellers, the platform uses Liquidity Providers, who do not have to pay anything to perform their role. This makes trading coins more affordable and convenient for users.

2. Rent Extraction Resistant:

Canto is working to establish free oublic infrastructure in the DeFi system. This means that key components of the system will not have sovereign governance tokens or the ability to impose additional charges in the future. This approach ensures the system remains fair and open to all users, without any additional fees.

3. Minimal Viable User Capture:

Where possible, Canto avoids interface-driven user ownership. Users of public infrastructure DEXes will not have a swapping interface, and therefore, they must conduct all trades using third-party aggregators. This will facilitate user acquisition for new protocols.

Minimal Viable User Capture refers to the minimum amount of effort or resources required to attract and retain users for a particular product or service.

In the context of blockchain, it could refer to the minimum amount of effort or resources needed to get people to use a decentralized application or platform. The goal is to provide the most basic and essential features that are necessary to attract and keep users, without adding unnecessary or redundant features that could slow down development or increase costs. The focus is on capturing users in a simple and efficient manner.

Free Public Infrastructure

Canto is a different approach to DeFi as it offers its core DeFi primitives as public utilities or Free Public Infrastructure (FPI). Unlike other DeFi protocols, Canto’s FPI will remain ungoverned and will not launch a token or implement additional fees over time, preventing the possibility of a predatory evolution.

Canto’s Lending Market is governed by Canto stakers who have an interest in the growth of the ecosystem and fostering the best environment for DeFi users and developers, so they do not extract rent. The interest charged to stabilize the price of $NOTE, the unit of account token, will be used to fund public goods and the interest rate algorithm will aim to promote stability instead of maximizing revenue. All interest paid by borrowers will go to the lenders and not to the protocol.

Contract Secured Revenue (CSR)

Canto is a decentralized platform that aims to provide core DeFi primitives as Free Public Infrastructure (FPI) for the benefit of its community. To generate revenue for its ecosystem, Canto has introduced a fee split model known as Contract Secured Revenue (CSR).

CSR allows developers to claim a portion of the transaction fees paid by users when interacting with their smart contracts. For example, if a user makes a transaction on a smart contract that has CSR enabled, a percentage of the transaction fee will be split between the developer and Canto.

The initial fee split in Canto is set at 20% with the developer receiving the specified percentage of fees. This percentage can be adjusted through a governance proposal by the community. The CSR module was added in the Canto v5.0.0 chain upgrade, following a successful governance proposal.

The implementation of CSR provides a way for developers to generate revenue from their smart contracts while also contributing to the growth and development of the Canto ecosystem. It is a mutually beneficial arrangement where both developers and the platform benefit from the transaction fees paid by users.

Canto DEX

Canto is a decentralized exchange that operates on a blockchain protocol. The protocol is the underlying technology that governs how the exchange functions and operates. In the case of Canto, the protocol is designed to be ungoverned and cannot be upgraded, which means that there is no central authority or group of individuals who can make changes to the protocol over time.

The reason for this is to prevent the possibility of a “predatory evolution toward rent-seeking behaviors.” Rent-seeking behaviors refer to actions taken by individuals or organizations to extract profit or value from others without producing anything of value in return. For example, if a centralized authority were able to upgrade the Canto protocol, they might be able to introduce new fees or launch a token that would allow them to extract value from users.

By making the Canto protocol ungoverned and unupgradable, the creators of Canto aim to prevent these types of rent-seeking behaviors and ensure that the exchange operates in a fair and transparent manner, without the ability for any individual or group to extract profit or value from users. The exchange is designed to run in perpetuity, which means that it will continue to operate without any changes or disruptions, providing a stable and secure platform for users to trade and transact on.

Canto Lending Market

The Canto Lending Market is a decentralized finance (DeFi) application built on the Canto protocol. Unlike the Canto decentralized exchange, the Canto Lending Market is governed by Canto stakers. These stakers are individuals or organizations who hold a certain amount of the Canto token and have a vested interest in the growth and success of the Canto ecosystem.

As governance is controlled by Canto stakers, they have the power to make decisions about the development and direction of the Canto Lending Market. The creators of Canto believe that Canto stakers have broad interests in the ecosystem and will act in the best interest of both developers and DeFi users. This means that they have no incentive to extract rent or profit at the application layer, as doing so would negatively impact the growth and success of the Canto ecosystem.

The idea behind having Canto stakers govern the Canto Lending Market is to ensure that the platform operates in a fair and transparent manner, without the possibility of rent-seeking behaviors that could harm users and developers. By aligning the interests of Canto stakers with the growth and success of the ecosystem, the creators of Canto aim to provide a stable and secure platform for users to access DeFi services and trade digital assets.

$NOTE

$NOTE is a digital token that operates on the Ethereum blockchain and follows the ERC-20 Standard
All the $NOTE is created at the beginning and stored in a special account, the CLM Accountant Contract
People can borrow $NOTE from the CLM by putting up other types of digital assets, such as stablecoins, $CANTO, $ETH, $ATOM, or Canto LP tokens, as collateral
Once $NOTE is borrowed, it can be used for various purposes, but no new $NOTE can be created. $NOTE is controlled by smart contracts governed by the Canto DAO and is immutable
The supply of $NOTE is managed by the Accountant contract
The interest paid on $NOTE goes to the lenders and the excess interest paid by borrowers goes to the Canto DAO to support further development

Token Economics

$CANTO is the native token of the Canto network. It is used to pay gas fees for transactions and can also be staked with validators to help secure the network.

At genesis, the initial total supply of $CANTO is 1,000,000,000 (one billion) tokens. Of this, the initial circulating supply of $CANTO is 150,000,000 (one-hundred and fifty million) tokens.

Token Distribution

The initial circulating supply of $CANTO tokens is allocated as follows:

130,000,000 $CANTO (13%) for initial contributors
20,000,000 $CANTO (2%) for Settlers of Canto who took part in the launch of the testnet

The remaining total supply of $CANTO is allocated as follows, pursuant to governance votes by the Canto DAO:

450,000,000 $CANTO (45%) for long-term liquidity mining to be distributed over the next 5–10 years
350,000,000 $CANTO (35%) for medium-term liquidity mining to be distributed over the upcoming months and years
50,000,000 $CANTO (5%) for future public goods grants

Inflation

In order to maintain the security of the Canto network, the total max supply of $CANTO inflates over time at a rate that is constantly decreasing. All tokens from inflation are distributed to $CANTO stakers, proportionally to their stake in the network.

Early Canto contributors propose these emissions be structured in 30 day periods, with rewards distributed daily:

For the first 30 day period, $CANTO will inflate at a 19.84% APR.
For subsequent periods, the Canto DAO will vote to adjust emissions as appropriate.

Over time, the inflation of $CANTO should tend to zero.

Recap

Governance occurs only at the blockchain level and not at the application level, in order to sustain a Free Public Infrastructure
$CANTO is used for governance through staking and for gas fees, while $NOTE is a unit of account or medium of exchange token
$NOTE can be borrowed from Canto lending markets by supplying collateral, and borrowers pay interest to lenders
$NOTE is borrowed on the Canto ecosystem to serve as a medium of exchange between all Dapps built on the Canto blockchain
Any excess interest that goes to the Canto DAO treasury will be used for future development
There will be no excess supply of $NOTE, as it is managed by a mint and burn mechanism. (i.e.) When $NOTE gets deposited inside the treasury, the same amount is burned from the existing balance, and vice versa
One interesting feature is the CSR (Contract Secured Revenue) proposal, which suggests splitting transaction fees to incentivize developers of the ecosystem in perpetuity

Inferences

Liquidity providers (LPs) are not incentivized solely by providing liquidity, but must lend their LP tokens to the Lending market to earn interest payments, which are currently higher
Another way to incentivize LPs is through governance tokens ($CANTO) since the protocol does not charge SWAP fees
LPs can earn higher returns from lending markets than the impermanent loss they suffer as a result of providing liquidity during the initial stages
As long as there is demand and sufficient CANTO tokens in the market, the incentives will be satisfactory for LPs
When inflation decreases according to tokenomics, CANTO rewards will go down, and liquidity providing will be less incentivized. This could result in less participation and have a high impact on token value with token dumping
The $NOTE reserves will come into action to address this dis-incentivization. It is unclear how this will happen, but it may involve using $NOTE reserves to provide additional incentives to LPs or other mechanisms
It is also unclear whether there will be any changes in the model through a consensus mechanism, which refers to the way in which updates to the protocol are agreed upon and implemented by the network’s participants
In order for this network to achieve its intended purpose, it is essential to prioritize endeavours aimed at upholding CANTO as the primary ecosystem driver.

References

Credits

Thank you Blanc for sharing this project and collaborating for the analysis
Thank you Kyle for the vlog