Why Tech Matters, a Fundamental Analysis of ADA vs XLM vs XLP
After my post on Inflation and Cryptocurrency, I received numerous requests to analyze other aspects of the Crypto market. The valuation battle between XLM, XRP, and ADA has been fascinating. All three have been vying to take ETH 1.0's marketshare, leveraging the POS benefits to latency, scalability, cost,
Before we get started, let me quickly run-through some factors that I used to determine the Fundamental Analysis and subsequent Technical Analysis.
Fundamental Analysis is attempting to put an accurate price on a item based upon an objective calculation of its worth. This is normally a nebulous number that roughly correlates to its in-kind purchase power if transferred to a universally traded currency. It answers the question of, given the ability to buy its competitors, what is the value of this good in a fair market setting. Fundamental Analysis generally seeks to answer whether the current price is overvalued or undervalued.
Some Fundamental Analysis include:
Best sources for Fundamental Analysis data: https://research.binance.com/en/projects
Technical Analysis is to Fundamental Analysis as a crystal ball is to a NYSE ticker quote. Technical Analysis is the attempt to predict the market value of an item given all the outside factors that influence it. A technical analysis is generally done when historic numbers are used to predict future trends. Correlation analysis, candlestick patterns, and social media references are ways analysts assess a coins technicals. Technical analysis generally seeks to predict the future price of a coin.
The White Paper
This, often overlooked, gem is the thesis behind the coin. This is the coin's reason for being and the market space that it intends on owning. A coin with an undefined white paper is a coin with an undefined answer, namely to the question, what makes you so special?
Valuation and Bubbles
A bubble can occur when there is a deviation between the Fundamental Analysis, what something should be worth based upon its own merits, and the Technical Analysis, where the market places the item's worth based upon outside factors. The idea of a bubble occurring is driven largely by projected future value and real future value. Both types of analysis seek to explain the market evaluation of an item.
A quick word on bubbles and bitcoins. This hits on tokenomics, or the inherent value of the coin based on its function as a store of value, unit of account, and medium of exchange. A coin's risk can be determined by its degree of usability, valuations, inflation rate of the coin, information surrounding the design team, and volume of fees (indicating a rough level of willingness for people to trade coin for other currency).
Proof of Work (POW): The basis for traditional Cryptocurrency, where a complex equation is solved, providing the equation solver with a unit of currency. The currency gains intrinsic value through the value of the expended energy used to complete the equation. Thus, the tie between energy and currency allows the valuation of the currency.
Examples: Bitcoin (BTC), Ethereum (ETH)
Proof of Stake (POS): The newer version of POW, favoring efficiency over whole-chain verification. Ouroboro’s Genesis-based POS relies on actors providing collateral to verify reduction of tradable coins in the marketplace. Traditionally, verification was performed through a reduced version of POW, where a portion of the blockchain is recorded and used to verify that the owners had not spent the stake. A second method of verification involves creating a lag time between when the currency being un-staked and the ability to spend the coins.
Examples: Zilliqa (ZIL), Cardano (ADA), Polkadot (DOT)
So lets get to it:
Ripple was founded 2004 by Ryan Fugger. Ripple Protocol, outlined in Ripple’s 2018 Whitepaper, describes its model for using the Byzantine Agreement system in conjunction with decentralized trust.
XRP was started by the folks at Ripple, and finished through open source collaboration. As a coin, XRP does not achieve system wide consensus and is instead backed, in part, by the company itself through their verification system. The current trust system utilizes master lists of trusted nodes. XRP supports a limited number of functionalities including: Payment channels, escrows, deposit authorizations, a decentralized exchange, amendments, and invariant checking.
Stellar Lumens (XLM)
Stellar, was founded by Jed McCaleb, a co-founder of an earlier coin, Ripple. The Stellar White-Paper explains the reasoning for the currency and the market gap it seeks to fill. Stellar seeks to create a word wide financial network, ensured through a Stellar consensus protocol (SCP) built around a decentralized trust model called the Federated Byzantine Agreement (FBA). Through implementing its decentralized trust model, SCP, the Stellar system seeks to ensure:
Unlike competitors, XLM seeks to fix POW’s latency, trust, and security problems through their SCP model. It’s worth noting that XLM’s SCP model was built before Ouroboro’s Genesis.
XLM allows individual users to select trusted nodes, separating them from Ripple’s earlier attempt to create master sheets with trusted nodes. Rather than individually selected by users, the master sheets employed by ripple ended up transferring the byzantine system of authority from ripple to the sheet owners, leading to sheet owners maintaining control over the term “trusted nodes” within Ripple.
The XLM model diverges from the decentralize admission Ripple attempted in an important way, rather than relying master node lists that are editable, FBA relies on a consensus between decentralized nodes. Turning different nodes into individual owner’s elected officials that verify transactions for them. Thereby allowing for a decentralized consensus along with all the benefits of the Byzantine Agreement. This change, according to XLM, allows their model to create the decentralized consensus that achieves their goals of decentralized control, low latency, flexible trust, and asymptotic security.
Cardano was founded by Charles Hoskinson, a co-founder of Ethereum, and was launched in 2017. The main goal of Cardano was to solve Bitcoin’s speed and rigidity, while also addressing Caradano’s stated issues with Ethereum’s scalability and safety.
Cardano, unlike Bitcoin, uses a Proof of Stake (POS) rather than Proof of Work (POW). This difference rewards the first rather than the most powerful, a system known as Ouroboros Genesis, where miners can rejoin their chain and continue where they ended. The goal of POS through Ouroboros was to reduce the amount of energy needed compared to BTC and ETH, which both use POW.
Secondly, like ETH’s ecosystem, the second layer of the Cardano is a layer similar to ETH, enabling using the system for smart contracts and applications. Cardano’s POS and computation layer, when combined, offer the benefits of BTC’s security and ETH’s functionality.
Cardano as a currency arrived at the right place, at the right time, and with the right tech to allow for it to finally break from its competitors. Its ascendance was owed to its superior tech, and it was able to beat out XRP, a coin with a company backing, and XLM, a POS coin that, while an early entrant to the market, has not kept up with ADA's recent adoption. At the time of writing this, Coinbase pro recently announced that ADA will begin trading on its exchange. This change will likely exacerbate the difference between the currencies. Time will tell if the space between ADA and XLM will close or widen over the long run. At this point, however, I think ADA will prevail in the developing world over XLM.
Edit: This is not financial advice
Edit 2: Thanks to commenter regarding XRP's founder/network permission-less status
Edit 3: Thanks to same commentator regarding BFT and XRP – you the best!