You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $20/month you can upgrade to our FULL library of 50+ reports (including this one) and complete industry-leading analysis on the top crypto assets.
Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:
- Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
- Early access to future CORE ratings: Being early is sometimes just as important as being right!
- Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
- CORE report Audio playback: Don’t want to read? No problem! Listen on the go.
Cardano's eUTXO accounting model is a significant departure from traditional blockchain systems. Learn about the benefits of eUTXO, such as cheaper transaction verification, lower data storage requirements, and improved scalability. Discover how it addresses concurrency risks and how developers can structure their dapps to take advantage of the eUTXO model.
A fairly unique feature of Cardano, compared to its smart contract peers, is that it utilizes an extended unspent transaction output (eUTXO) model as opposed to an account model. The UTXO model, as implemented in Bitcoin, creates new addresses every time there is some unspent output from a given transaction, therefore, tracking individual coins as opposed to simply crediting and debiting account balances.
UTXO vs. the account model, popular in other chains like Ethereum, Solana, and others. Source: Kraken
The UTXO (Unspent Transaction Output) model is the foundational method of maintaining blockchain records. UTXO refers to the remaining amount of crypto unspent after executing a transaction. In the context of UTXO-modeled blockchain, individuals do not directly transact specific amounts of digital currency but instead transact in the denomination of UTXOs.
In the example below, Alice owns 1.2 BTC. She only needs to spend 0.2 BTC for her purchase. Therefore, because of the way the Bitcoin blockchain works, she will send all 1.2 BTC. 0.2 BTC will then go towards her purchase, and 1.0 BTC will be returned to her. It is very similar to only having a $20 bill and buying something for $5. You must hand over your $20 and get $15 returned to you.
The UTXO (Unspent Transaction Output) model is similar to cash change in that it represents unspent funds but differs in that cash change has fixed denominations, while UTXOs can have fractional values. Additionally, cash change transactions are not recorded, while the record of UTXOs are permanently recorded on the blockchain ledger. The balance of an address can be determined at any point in time by tracing its recorded UTXOs.
The UTXO model has both advantages and disadvantages for Bitcoin-based wallets. On the one hand, it promotes privacy-preserving behavior as it is difficult to link digital assets to a specific wallet due to the creation of new addresses with each UTXO. On the other hand, it poses challenges in terms of user interface and experience as users are accustomed to the concept of accounts, whereas the UTXO model operates without the concept of an account, requiring users to rely on their wallet provider to manage a range of addresses and sum up the corresponding UTXO balances.
The Extended Unspent Transaction Output (EUTxO) model used in Cardano allows for highly predictable (deterministic) results of smart contract execution due to its nature of local state and immutability. This enables users to verify the outcome of a transaction before it is executed and ensures that it will succeed if all inputs are present. Additionally, Cardano's deterministic fee structure allows users to calculate the exact cost of a transaction in ADA, unlike the non-deterministic gas model used in Ethereum. This prevents users from incurring unnecessary costs for failed transactions.
The eUTXO model includes two key features over the classic UTXO: scripts and datums. Scripts enable the specification of arbitrary logic that references the eUTXO itself and its data to determine its suitability as an input for a new transaction. Datums provide metadata or a smart contract in Plutus, which instructs the transaction builder on the appropriate actions to be taken with the eUTXO.
In comparison to the account-based model, the eUTXO model offers more cost-efficient transaction verification, as it does not require fees for the memory cost of tracking the accumulated chain state. Additionally, the eUTXO model has lower node requirements in terms of data storage, as it does not require the maintenance of a state tree of all account balances, as is the case with an account-based model. Furthermore, the eUTXO model is highly scalable, as transactions can be processed in parallel rather than synchronously.
However, the eUTXO model also presents certain concurrency risks, as dapp developers must find ways to batch transactions to allow simultaneous UTXO interactions within the same block. This means the eUTXO approach suffers with transactional throughput as it effectively only allows one transaction per block. As a result, dApp developers must approach Cardano DeFi differently than they do on Ethereum, Solana, or other account-based protocols. Given that each UTXO can only be spent once, protocols cannot make a user's UTXO available to multiple users simultaneously.
The slow throughput originally meant users had to wait for the next block (~20 seconds) or have a centralized relayer coordinate transactions. Obviously, this creates an inferior experience, and since then, Cardano dApps have since found other ways around this concurrency issue. However, the solutions are more patchwork, as each dApp must architect a solution in its own way, and the larger issue remains an obstacle for Cardano writ large. Comments from Charles Hoskinson and the community suggest Cardano plans to primarily solve scaling via Layer-2 protocols.
Djed
Launched in Q1 2023 and issued by Coti Network - a payments protocol built on top of Cardano - Djed is an algorithmic stablecoin that requires an over-collateralization ratio of 400%-800% to mint new units of the token pegged to the US dollar. Although Djed is backed by ADA (native asset of the Cardano network and independent of the operations of Djed), it uses a third asset known as SHEN serving as an additional reservoir for the smart contract responsible for maintaining Djed’s price parity with the US dollar. The employed algorithmic model prevents the burning of SHEN and the minting of Djed once the collateralization ratio has fallen below 400%, in contrast to users only losing the ability to mint SHEN once the ratio exceeds 800%, but can issue and redeem DJED. The mechanism is designed to dodge the fragility of the Luna ecosystem along with its fully-algorithmic UST stablecoin, whereas the latter’s backing was entirely dependent on the usability and adoption of the governance token (Luna) functioning as the reserve. In that view, Djed doesn’t belong to the fully algorithmic stables such as UST and FEI due to its reliance on exogenous rather than endogenous collateral. Although fully decentralized stablecoins are key factors in serving the censorship-resistant needs of the blockchain-based economy, we remain wary of the sustainability of the existing models.
