In Defense of Canto

Polkachu Intern | 2023-02-08

Canto is not a technological innovation, and it has never claimed to be. Instead, it is a business model innovation by integrating a Layer-1 and popular DeFi protocols at launch.

Many Cosmonauts dislike Canto. In their mind, Canto is the community's bastard child. It took the open-sourced codes of Tendermint and Ethermint, dressed it up with a few pinged protocols, and hyped it up with Twitter influencers and shitposters. The worst sin is that it has never paid back to the upstream open-source contributors, nor has it airdropped a few tokens to the sweet summer children of the Cosmos community. Yet, Canto's token price has soared recently, and we all get peanut-butter jealous.

But it is be a pity if we just get mesmerized by token price and open-source justice. Instead, we should try to understand Canto's fundamental innovation, if any, and learn from it.

Integrated vs. Modular

We often pretend that crypto can escape the innovation theories of the past, only to be reminded that we are just a new wave of disruptive technology whose cycle has been well understood.

An integrated approach wins at the beginning of a new market, because it produces a superior product that customers are willing to pay for. However, as a product category matures, even modular products become “good enough”. - Ben Thompson, summarizing Clayton Christensen's Innovator's Dilemma

Crypto is in its infancy. Based on the "Integrated vs. Modular" framework, an integrated approach will serve the users best at this stage of the product cycle. However, some teams pursue a modular approach early on by building different layers of composable pieces. They think that this provides users with the most flexibility and gives the project the best chance to thrive in the long run.

Evmos is a perfect example. The team seems only interested in providing a foundational Layer-1 and then encourage the community to build competing applications on top. As a result, the confusion starts as soon as a user acquires $EVMOS tokens. Where to provide liquidity and exchange ERC20 tokens? Diffusion? SpaceFi? Or wait for the Uniswap v3 deployment that may or may not happen? What about stable coins? Is the bridged axlUSDC safe? Remember the Nomad hack?

Often, the answer to such user confusion is a high-minded "Let the community decide." How? Popular token votes? More treasury-funded hackathons? A bureaucratized DAO with committees and work-streams?

In contrast, Canto has the audacity to take a top-down approach to integrate 3 popular DeFi products into the protocol at launch: AMM, lending/borrowing and a stable unit of account. Canto understands that these 3 products have achieved product-market fit since the DeFi Summer. By having them on Day 1, users have something to do safely with the tokens right away. It also avoids all the politics of competing applications looking for incentives and prevents DAO politicians from posturing to take charge of the procurement process.

Canto's Risk

Canto's integrated product strategy is sound, at least for now. However, it carries a large long-term risk. By enshrining 3 popular DeFi products at launch, it ossifies the protocol. If there is any new innovations in such products, Canto will have a hard time to adapt and compete. While it perfectly took advantage of the learnings from the Innovator's Dilemma, it is the same theory that will disrupt Canto when the crypto industry becomes more mature and users get wiser.

Crypto and Moral Judgment

Despite the rather smart product strategy by Canto, many have cried foul because Canto is a "bad" chain: It did nothing technically innovative, and it used the existing open-source codes without giving back. Harsh but fair.

However, the main issue with the universe of app-chains today is not that we have a few "bad" blockchains; rather, it is that most good blockchains are too similar. We might be able to improve the app-chain diversity by tolerating "bad" blockchains. I have a full post to defend "bad" blockchains.

At the end of the day, the crypto price action is a sideshow, so is the moral judgment of good chain vs. bad chain. It is much more productive for us all to try to understand the product strategies, how they resonate with users, and how their initial success might carry long-term risks. For this, Canto provides a valuable case study for us. I am excited to see how it plays out.