Cardano (ADA) Is The Top Asset On Grayscale’s Smart Contract Fund, But There Are Downsides

Cardano remains the most weighted asset on Grayscale’s smart contract platform fund, but a user points out some downsides.

It bears mentioning that after persistent demand from the Cardano community, on July 2 last year, Grayscale finally added Cardano to its holdings, making ADA the third largest holding on the fund.

A year later, Grayscale launched a smart contract fund with ADA as the largest holding. Notably, the token still maintains that position, with its weight, increased by about 4% since the launch but down a little over 1% since the start of September, making up 28.25% of the fund. It has nearly 6% more weight on the fund than its closest competitor Solana.

While all of these are positive for the network as it represents a huge institutional interest in the asset that would likely bring about massive capital inflows in the future under better macroeconomic conditions, a user has raised some concerns over how this will affect governance.

Concerns Over Increased Grayscale Adoption 

As highlighted by the user, known only as ThisCorrosion, the fact that Grayscale stores all ADA purchased in Coinbase cold storage means that Coinbase controls the staking keys and is likely to have too much influence over ADA governance. Additionally, these institutions are not earning enough returns on their staked asset as they would if they staked the assets with stake pool operators (SPOs).

Unfortunately, this interferes with both the Cardano staking and governance systems and is also bad for investors who are not getting the return they should for their staking.
This is a problem I would like to see addressed head on.
5/n

— ThisCorrosion (@SingCorrosion) October 11, 2022

According to ThisCorrosion, institutions need to recognize the unique advantages digital assets provide over commodities that allow you to earn only when the value increases.

Hopefully institutional investment firms see that Cardano is a unique investment and requires different approaches than commodities such as gold. If we manage to get their attention, maybe @cardano_whale can show them the error of their ways.
Fin

— ThisCorrosion (@SingCorrosion) October 11, 2022

CIP-50: A Possible Fix

Despite these concerns, it is worth noting that the Cardano network may have a fix coming in the Voltaire phase of its roadmap. Notably, the Voltaire era focused on governance will allow the network to function without Input Output Global management and is set to kick off in 2023.

As Martin of Latin Stake Pools highlighted in the comments, a fix for the problem should come with Cardano Improvement Proposal number 50 (CIP-50), which is scheduled for the Voltaire era. Notably, Dr. Michael Liesenfelt, a research assistant professor at the University of Tennessee and the proposal’s author, elaborated that it will benefit these institutions while requiring them to commit to the Cardano network.

#CIP50 would benefit these institutional stakeholders while requiring a bit of pledge. Those institutions could also choose to follow @Cardano_CF's example, delegating 675M to dozens of international pool operators instead of centralizing stake in private pools.

— Michael Liesenfelt (@DrLiesenfelt) October 11, 2022

CIP-50 is a proposal by Liesenfelt to improve Cardano’s decentralization such that the number of nodes that bad actors must comprise to attack the network (Nakamoto coefficient) is greater than 50. An article from Cexplorer.io currently puts this metric, also known as Minimum Attack Vector (MAV), at 24. While this may seem like a small number, it bears mentioning that Ethereum’s Nakamoto coefficient is 3, while that of Bitcoin is 4. Consequently, it is far more decentralized than both leading crypto networks.