Summary ADA was declared an unregistered security in the SEC's Binance lawsuit earlier this month. The coin has fallen dramatically since the beginning of June. The network metrics for Cardano are still fairly underwhelming. One of the more interesting projects on Cardano is the ADA-backed DJED stablecoin. DJED's developer was also named in the SEC's Binance for offering an unregistered security via its COTI token. This was a clear outlier compared to the other designations. It's now difficult to find a cryptocurrency with a top 10 market cap that the US Securities and Exchange Commission doesn't think is an unregistered security. The recent SEC lawsuit against Binance (BNB-USD) specifically cited nearly a dozen digital assets that included some of the top altcoins in the market like Solana (SOL-USD), Polygon (MATIC-USD), and Cardano (ADA-USD). Unlike the others mentioned, Cardano is not a network that I've previously covered for Seeking Alpha as I've never found the level of activity on the chain to be all that impressive. However, I think it's fair to wonder if ADA is now more interesting after the dramatic selloff following the SEC's announcement. Data by YCharts After falling nearly 40% from peak to trough in the month of June, ADA is now dramatically underperforming other top crypto assets like Bitcoin (BTC-USD) or Ethereum (ETH-USD). Network Metrics Unlike most of the other smart contract chains with a top 25 native coin market cap, Cardano doesn't have a significant DeFi footprint with a vibrant stablecoin presence. Coin MC Rank Network TVL Rank Protocols TVL Stables MC/TVL 1 Bitcoin 15 7 $170.45m 2,960 2 Ethereum 1 816 $25.22b $68.67b 8.32 4 Binance 3 612 $3.43b $5.68b 11.31 7 Cardano 19 20 $139.59m $12.58m 69.41 9 Tron ( TRX-USD ) 2 22 $5.37b $44.46b 1.22 10 Polygon 5 426 $887.92m $1.48b 6.84 11 Solana 11 104 $250.89m $1.53b 24.25 Source: DeFi Llama Based purely on the network's market cap to total value locked (MC/TVL), only BTC is more overvalued than Cardano's 69.4 MC/TVL ratio and that's not exactly a fair comparison because Bitcoin has not been positioned as a broad smart contract network. Furthermore, at just $12.6 million in stables on-chain, Cardano is ranked 38th in stablecoin value. Suggesting it's not a network that is used for payments. Cardano Development (Token Terminal) One of the areas where Cardano has generally been impressive compared to peers is in the level of developers and code commits on the chain. With 150 core developers in June, Cardano is well ahead of networks like Polygon, Avalanche (AVAX-USD), or Solana. However, over the last year, that activity has started to trend lower with developers down 8% and code commits down 25% in the last 365 days. Cardano DAUs (Santiment) Over the last several years the price of ADA has generally been well correlated to the number of daily active users of the network. While still well ahead of 2020 levels, Cardano's DAUs figure has rarely been over 80k over the last year while Ethereum scaling chains like Polygon and Arbitrum (ARB-USD) have regularly achieved six-figure DAUs over the last four months. The Unregistered Security Arguments In the Binance lawsuit, the SEC offered some rationale for why the agency believes ADA is an unregistered security. The SEC's argument seems to be centered around the idea that Cardano's developers have led holders to believe the coin has a reasonable expectation of profit: The information publicly disseminated by Cardano, IOHK, and Emurgo—including since the initial sales of ADA—have led ADA holders, including those who purchased ADA since November 2017, reasonably to view ADA as an investment in and expect to profit from the Cardano Foundation’s, IOHK’s, and Emurgo’s efforts to grow the Cardano platform, which, in turn, would increase demand for and value of ADA. Despite that, the majority of ADA holders have generally been underwater throughout Cardano's existence. As of mid-June, just 8% of ADA holders are in the money and over 91% of ADA holders are currently behind: ADA Holders (IntoTheBlock) IOHK responded to the SEC's allegations shortly following the lawsuit announcement but didn't offer many specifics as to what the organization disagreed with: The filing contains numerous factual inaccuracies and will not impact IOG’s operations in any way. Under no circumstances is ADA a security under U.S. securities laws. It never has been. Understanding how decentralized blockchains operate is a fundamental component in creating responsible legislation. IOG continues to welcome cross-industry collaborations with regulators to help develop frameworks, which not only safeguard consumers, but do not stifle innovation within the communities building decentralized protocols. This latest filing from the SEC demonstrates that we still have a long way to go in this regard. This might be somewhat expected if IOHK anticipates a court battle, but it would be nice to see the organization point out what some of the claimed inaccuracies are. Is the SEC Also After Djed? What I find really interesting about the coins that the SEC selected to highlight in the Binance lawsuit is that COTI (COTI-USD) was picked. COTI is a rather obscure token that is not very well known in the crypto space. Of the coins selected in the lawsuit, it's the only one that doesn't have a circulating market cap in or near the top 50: Token Market Cap (millions) Market Cap Rank SOL $9,640 11 ADA $9,640 7 MATIC $6,070 10 FileCoin (FIL-USD) $1,567 32 Cosmos (ATOM-USD) $3,039 20 Sandbox (SAND-USD) $729 53 Decentraland (MANA-USD) $651 56 Algorand (ALGO-USD) $842 42 Axie Infinity (AXS-USD) $587 60 COTI $56 330 Source: CoinMarketCap, as of 6/14/23 While it's not totally unusual for the SEC to go far down the market cap list when it designates coins as unregistered securities, for me it is odd that COTI was mentioned in the Binance lawsuit given the peers selected - it's a fairly obvious outlier from where I sit. Furthermore, there wasn't much rationale given for COTI's inclusion beyond founder blog posts touting token demand and alleged COTI wash trading on the Binance platform. But allegations of wash trading in crypto coins is certainly not unique to COTI. This is purely speculation on my part, but I suspect COTI's inclusion in that lawsuit might have something to do with the Djed stablecoin that Coti developed. DJED Mechanics (Coti) DJED is a decentralized stablecoin that utilizes ADA as its collateral. The stablecoin project aims for a collateralization ratio between 400-800%. This is an enormous collateralization ratio compared to other decentralized stablecoins like Dai ( DAI-USD ) and likely necessary because it's a single asset collateral coin. The nearly 40% peak to trough drawdown in ADA's coin price that began on June 5th has led to a scenario where DJED's collateralization ratio is now well below the target range at just 313%. The coin's dollar peg briefly broke below 96 cents on June 10th, but it has since recovered and now trades at a 7% premium to $1: DJED (CoinMarketCap) As I mentioned in the opening section, Cardano is not well known for having a large DeFi or stablecoin footprint. So it's interesting to me that the developer of what I view as the most promising chain-native Cardano stablecoin is also mentioned in the Binance lawsuit. Frankly, I don't know what exactly to make of it but I don't think it's a coincidence. DJED is an interesting crypto project because it is one of the few decentralized, crypto-collateralized stablecoins in a market that is otherwise flooded with fiat-backed coins. If the SEC is aiming to target DJED, lower ADA prices might be the best way to do it. Summary I think the risks with going long ADA are somewhat evident at this point. The market response to coins like MATIC, ADA, and SOL being named unregistered securities speaks for itself. Each of these coins have been absolutely walloped since the beginning of June. By itself, I don't believe this designation from the SEC is a reason to dump out of any of the coins. I believe we'll ultimately see more court challenges and clearer crypto guidelines down the line. In my view, some of these crashes could be opportunities to add to long term positions. In the case of ADA though, from an application standpoint there isn't much to show for all of the development activity that has been apparently happening based on code commits and developer numbers. In the past, critics of Cardano have gone as far as to call it "vaporware." I'm not personally willing to go that far because I don't think all blockchain networks have to go with the "move fast and break things" approach that can be witnessed elsewhere in the ecosystem. That said, I'm still not ready to call ADA a buy today.
