DApp Development on Cardano; Will the Customized EUTXO Model Herald a new DApp Era for Cardano?
Understanding the UTXO Model
A UTXO is the amount of digital currency remaining after a cryptocurrency transaction is executed. It is a blockchain term derived from Unspent Transaction Output that represents an amount of money owned by a participant that can be spent as an input in a new transaction.
Because blockchains are fundamentally ledgers, account balancing is executed using either the UTXO or Account model. Therefore, UTXO can be described as a protocol used for bookkeeping and to keep track of where coins are present at a given time. Most blockchains use the UTXO protocol and it is notable as the original form of cryptocurrency blockchain first introduced in the Bitcoin whitepaper by Satoshi Nakamoto.
UTXO vs. Account
In the UTXO model, the movement of assets is recorded as a directed acyclic graph consisting of transaction outputs. Each new output is added with an additional block.
In the Account model, the account balance is stored as the global state of the account. It is stored at each node and updated in real-time with each block. This model is similar to a database where the balance, contracts, nonce, etc. are stored under the account, which leads to the key bottleneck — the problem of state explosion.
The size of the entire history of the Bitcoin network (the size of all blocks combined) grew to 229 GB in 10 years, while the Ethereum network grew to 262 GB (Geth) / 180 GB in just 4 years. So the bigger the transaction size in the account model, the bigger the load on users and wallets.
In short, the UTXO model has the storage advantage because user accounts are smaller in terms of state and transaction size; however, the account model is more efficient in terms of simplification, scaling (building state and payment channels, etc.), and sharding. It is comparable to building skyscrapers
The advantage of UTXO also lies in its feature that it can save as much labor and material as possible without compromising security. In comparison, the account model can only build one “floor” at a high cost with the same building material, while UTXO can build three floors at the same cost. The problem, however, is that there is limited room for optimization once it is built, making it difficult to upgrade and expand in the future.
The advantage of the account model is that it leaves enough room for future renovations and expansions. Even if it is a minimalist silo now, it can be upgraded to a high-end condominium in the future through continuous renovation and expansion; however, this is also very costly and consumes a lot of resources.
Both have their own advantages. So can they be integrated and complement each other?
The Strengths and Weaknesses of UTXO
Cardano’s EUTXO (Extended UTXO) adopts the low resource consumption characterized by Bitcoin’s UTXO model in the consensus layer. However, it simultaneously takes inspiration from the Ethereum design and integrates an improved account model into the state selection to better implement smart contracts.
In short, EUTXO combines and improves the security of Bitcoin and the programmability of Ethereum.
The integrated model is significantly better than the primitive account model used in other blockchains and ensures several important features:
🚀Better security: each transaction uses a different address, making it impossible for others to trace the address or determine the user’s total balance.
🚀Scalability: the UTXO ledger allows parallel transactions, which significantly reduces on-chain congestion.
🚀Interoperability: EUTXO makes it easier for Cardano to establish interoperability between different blockchains, thanks to the implementation of off-chain and sidechain protocols.
In Cardano, EUTXO inherits UTXO’s security and simplification features while improving interoperability and scalability by optimizing and customizing the account model. The new design maximizes throughput capacity, overcoming performance bottlenecks for future business scenario applications.
Most importantly, developers of the original Ethereum and other EVM-compatible chains can leverage EUTXO’s interoperability to avoid the cost of retraining users. This allows them to open up to a large user base in a shorter period of time and enable rapid project migration.
Plutus: A Developer-friendly Architecture
- a functional language, i.e. Haskell, is more compatible with EUTXO
- an object-oriented programming language, i.e. Solidityy, is more compatible with the account model. The custom language underlying Plutus, Haskell is designed specifically for DApps. Its design focuses on the keywords “lightweight” and “secure.”
- based on Haskell’s predictability, which makes it easy to identify bugs in smart contracts. This is not the case with Solidity smart contracts where the developer must have a deep understanding of Solidity, such as reentrancy attacks and many other similar issues.
- After compiling Haskell into Plutus, the function returns only two outputs: true/false. This means that there will be no unpredictable state changes. The output depends entirely on the input, and if the input is the same, you will get the same output no matter how many times the function is executed. Also, these functions are usually easier to debug because you do not have to account for every state that a variable can take.
From this perspective, Haskell may be the next opportunity developers should focus on, as it offers a number of practical tools (see Cardano NFT Marketplace codebase developed by AdaverseDEMO).
This allows any entrepreneur or developer with an idea to get creative and build their own DApp world like Lego bricks by functioning as a powerful yet relatively safe and lightweight editor.
Challenges and Opportunities on Public Chains
With the fervor for new public chains waning, it seems that only Bitcoin and ETH have retained their resilience and robustness.
However, while Bitcoin and Ethereum hold a solid position, it is quite difficult for developers and project owners (especially startup teams) to compete in the fierce market. On the other hand, there are established projects like Cardano that have experienced several bull and bear rounds in the crypto market, but have still maintained a stable market cap and strong communities.
The past is a prelude to the future. The “public chain fervor” in 2018 and 2021 sees only a handful of successful projects in the end Cardano is one of them. Despite its success, it has been overlooked overall. For example, after the Vasil Hard Fork was successfully completed in September 2022, few people paid attention to the importance of this event in the era of smart contracts. Only a limited number of crypto users are highly sensitive to the investment opportunities hidden in this milestone event.
However, competition among public chains has always been ferocious, and Cardano, which has just entered the world of smart contracts, is at a very early stage. It is expected that as more DApps are released on Cardano, the richness and liquidity of DApps will greatly increase.
In parallel with Cardano’s march into the era of smart contracts, Adaverse — Cardano’s global incubation investment fund — is leaning on Cardano’s official support and focusing on incubating and investing in all Cardano projects. It will introduce more developers to the Web3 ecosystem and build a wide range of Web3 DApp ecosystems based on Cardano’s blockchain infrastructure.
Ken Kodama, the CEO of EMURGO, a commercial incubation company and venture capitalist for Cardano, said Emurgo will invest more than $200 million over the next three years to bootstrap the growth of the Cardano ecosystem. The funds, which will come from Emurgo’s own capital, will be made available to projects that build directly on Cardano, as well as projects from other networks that are developing products that integrate Cardano’s network alongside their own.
Cardano used to be characterized as a legacy public chain platform, but now that it is positioning itself as a blockchain project that supports smart contracts, Cardano offers both opportunities and challenges. It may be a while before we see how far Cardano can take us in its new direction after 2022. Stay tuned!