The launch of smart contracts on the Cardano public testnet has shed light on issues with older protocols that have not been fixed.
Cardano, the third-largest cryptocurrency with a market cap of over $ 82.8 billion, has been the subject of criticism as its ecosystem infrastructure prevents most major decentralized applications from running without immediate scaling issues.
Cardano dApp developers face concurrency issues
Cardano faces a major scalability hurdle. The Input-Output, the developer of Cardano, announced the launch of the Plutus smart contract feature on the testnet last Thursday. Since the release of the Minswap update, the first decentralized exchange launched on the testnet has faced major scaling issues, raising concerns about Cardano’s ability to run smart contracts.
Users testing Minswap were surprised to find that the dApp can only process one transaction per block. “Looks good,” wrote one Reddit user. “But when I try to swap places, all I get is ‘Transaction failed: This block uses UTxOs.’ Wait 20-40 seconds and try again. ”
“After we launched, some users took screenshots of the blocked UTXOs on Twitter, and the rest is history,” said Minswap founder and lead tech, Long Nguyen. He added that Minswap built its protocol on Cardano because “it is the most decentralized Proof-of-Stake chain, with over 3,000 nodes run by the community and 66% by single node operators.”
Be that as it may, it looks like building scalable, fully decentralized on-chain applications on the blockchain has become more challenging than many in the community expected. Specifically, unlike Ethereum, Solana, and most other smart contract-enabled blockchains that use an account-based model to calculate transactions, Cardano uses a new iteration of the Bitcoin UTXO model called Extended UTXO (EUTXO).
The EUTXO model creates problems for Cardano dApp developers due to the so-called “concurrency problem”. In simple terms, concurrency refers to the ability of several different agents to simultaneously interact with the same smart contract.
By default, account-based models allow multiple users to interact with the same smart contracts. However, EUTXO-based smart contract blockchains pose challenges for developers to reduce concurrency without compromising security or decentralization.
Concurrency solutions involve building dApps that allow state segmentation or aggregation of multiple interactions to establish the same state. For decentralized exchanges, this will mean either fragmentation of liquidity into multiple pools (states), or using third-party sequencers to batch process multiple transactions and calculate them as one transaction in the same state.
The former seriously reduces capital efficiency, while the latter could potentially prove to be a viable solution. Maladex is a Cardano-based decentralized exchange that claims to have solved the concurrency problem. Discussing the potential disadvantages of using sequencers to reduce concurrency, Jarek, the project’s CEO and lead developer said:
“Except, depending on the way of implementation, the bottleneck of centralization, there are none. Off-chain is a natural part of the ecosystem and simply prepares transactions for the blockchain, where they are then verified and executed. ”
“There is such an inconvenient part that it could increase centralization,” he added. “But this is no different from the centralization we have with the user interface for each protocol.”
Jarek also argues that using dApp-level sequencers can mitigate foreground and MEV attacks as they combine multiple transactions to execute concurrently.
However, Arcane Assets chief investment officer and Cardano critic Eric Wall argue that MEV would still be possible if a sequencer were used on the blockchain. Explaining how MEV can happen on Cardano, he said:
“First of all, a sequencer can extract the MEV by choosing to include one transaction (it’s own), but censor another. Second, a Cardano miner/validator at a basic level can look at the sequencer’s batch of transactions and reject parts or all of the batch if he would prefer to do some of those transactions himself when he collects the block. ”
Other proposed solutions for scaling dApps on Cardano include the implementation of Layer 2 protocols and sidechains that address their own unique centralization and security concerns (although such solutions have not yet been launched in Cardano, at least one EVM compliant sidechain is under development) …
The big question is whether Cardano – given its choice of EUTXO-based design – will be able to support scalable and cost-effective decentralized exchanges built entirely on-chain. While Maladex argues that concurrency is “complete and absolute FUD,” Eric Wall argues that it is unlikely that Cardano dApps will solve the concurrency problem without significant sacrifices in terms of security or centralization. He said that while dApp developers might find workarounds, they could include “serious development issues, UX issues, or centralization.”
The Cardano community hailed Alonzo as an important new step in realizing blockchain’s DeFi capabilities. However, the testnet results show that it could take at least several more years before it lives up to its promises. Once the update is sent, there won’t be a lot of DeFi protocols. On the contrary, it will be similar to Ethereum in 2018. The good and the best-decentralized apps will gradually emerge over the coming years.