Cardano Spotlight: Catalyst Fund 11, DRep, and Orderbook Challenges

Author

Utsav Sheth
February 09, 2024

Hi,

What’s Spotlight? Every week, we highlight the most interesting events happening around Cardano. We want to help you cut the noise and find the signal.

Catalyst Fund 11 voting has closed. It's a good idea to discuss what needs to be changed for Fund 12. Then, we'll move on to talk about Dreps and end with the challenges of an Orderbook - featuring Axo.

Catalyst Fund 11

Catalyst Fund 11 voting has come to a close; it was the largest-ever round with ~$25M in funding. There were over 920 proposals in this round!

Catalyst continues to have a high voter concentration. According to Scat DAO, the top 1.5% of all stake keys control 55.71% of all voting weight. 

However, the Catalyst is much more concentrated, with the top 5 wallets controlling 280M Ada. In Fund 10, there were no proposals with 280M+ upvotes that didn’t get funded. This means that the top 5 wallets are most likely able to pass any proposal they require.

Even without institutional involvement, it requires 280M or 0.8% of the circulating supply to pass proposals in Catalyst. These proposals don’t need to be malicious, but they might be in a direction the community doesn’t want. How would this governance structure look like if Binance or Coinbase were voting?

The concentration reduces the significance of the common person voting, which results in voter apathy. This would ultimately make governance devolve into a plutocracy, a.k.a. whale games. This is a major concern because governance will go live on Cardano mainnet this year.

What is something that can fix this?

  • Increase participation rate; currently, only 8% of the circulating supply is voting.

  • The community retains its Ada staking rights and does not delegate them to protocols or large entities. 

  • Alternative voting methods involving identity.


Hopefully, this is something that can be fixed in future rounds.

Register as a DRep

The governance discussion brings us to Delegated Representatives. CIP-1694 is expected to go live in the Chang Hardfork during H1’24. This will bring us the first iteration of on-chain governance.

If you want to improve the current situation, you can participate by becoming a DRep. Here is how you can get started:

  1. Visit sanchogov.tools/register

  2. Connect your wallet

  3. You can optionally add your website or other details

  4. Delegate Ada to your dRep ID

This is currently available on the Sancho Net testnet. You can test it out and prepare for the future!

Orderbook Challenges


Axo, the most awaited protocol of Cardano, has finally launched on testnet. It has done more than two million in daily volume on its first day! This brings us to a debate of AMM vs Orderbook.

Cardano allows for parallel transaction processing but limits the use of a UTXO to only once per block. To address this, the current DEXs rely on Batchers. Unfortunately, this introduces censorship and MEV at the app level.

The apps must be parallelized to take advantage of Cardano’s parallelization. This is what Axo aims to do; the orderbook DEX breaks the state to each individual UTXO level. This greatly complements Cardano’s design!

The key benefit is a parallelizable batcher-free system that allows arbitrary market-making strategies and a range of order types. However, AMMs have a few key advantages.

Orderbooks require active liquidity, while AMMs operate with passive liquidity. Axo is market-making their own books through POL, but this isn’t ideal and creates a central dependency. The market-making has to be done largely by the community, but orderbooks tend to have this form of centralization where most of the volume is done by a few MMs.

Passive liquidity is great for two things - the community can bootstrap any token, seamless experience, and no dependency on external market makers. This is great for long-tail assets, which have low volume and liquidity. For example - all CNTs.

However, orderbooks face two major issues from Cardano's design - Speed and throughput. Orderbooks are best for assets with high volume/liquidity, but those assets are almost always better off on CEXs. This is because slow speed and low throughput are at odds with efficient market making. A professional market maker places 100s of orders every second and requires quick responses. Cardano isn't built to be fast or have a high throughput; it's focused on decentralization and inclusive accountability.

Orderbooks require active liquidity, but Cardano can't support active MM at scale or has the liquidity to attract MMs. It would be interesting to see how the team deals with all these challenges.

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