While everyone’s focusing on L2 solutions and rollups, a new L1 blockchain quietly pumped 700% last month. Canto, an EVM-compatible L1 blockchain built with Cosmos SDK, took crypto by surprise by creating a fully decentralized DeFi experience reminiscing us of the old-school 2020 yield farming days.
Canto has no fees, and neither does it have a governance token – although it has a governance model and a DAO. Canto focuses on FPI, an approach to DeFi seeking to make it accessible, decentralized, transparent, and free. Oh, and did I mention that Canto doesn’t have any fees? (this is important enough to mention twice).
Today’s article discusses the fascinating experiment that is Canto. You will learn about Canto, how it works, the NOTE ‘stablecoin,’ CANTO tokenomics, CANTO governance, staking, and more.
What Is Canto?
Canto is a decentralized L1 blockchain network developed on the foundations of Cosmos Software Development Kit (SDK) and Tendermint Core. Canto is also EVM-compatible. Canto is a DeFi ecosystem that facilitates staking, lending, yield farming, etc.
The developers behind Canto have a mission of making new DeFi systems that are accessible, decentralized, transparent, and free. Canto is built on the premise of Free Public Infrastructure (FPI), an initiative that seeks to make DeFi primitives free to use for the public.
FPI is an approach that seeks to transform the traditional DeFi model in which protocols launch governance tokens that derive their value -- as Canto developers state -- from their ability to extract rent from future users. Canto wishes to launch DeFi primitives in the form of public utility protocols.
“Where existing protocols serve their community more similarly to a pay-by-hour private parking garage, Canto’s FPI intends to provide for its community in a manner more akin to free parking on a city street.”
For example, Canto's DEX is ungovernable. You cannot upgrade the protocol or make changes to it by voting on governance proposals. The DEX cannot launch a token or implement extra fees in the future, which prevents the potential emergence of "rent-seeking behaviors."
Canto lending is governed by Canto stakers. The difference here is that users have no incentive to extract rent from the protocol. They want what's best for the growth of the Canto ecosystem, including fostering a better environment for both users and developers.
NOTE, an ERC-20 token stabilized around $1, is Canto's unit of account. NOTE is not a stablecoin. The Canto DAO raises or lowers interest rates on the lending protocol to bring NOTE's price closer to $1. Even in this case, all profits from NOTE go toward the ecosystem. The protocol extracts no profits.
How Does Canto Work?
Canto identified and launched three primary DeFi primitives:
Decentralized Exchanges (DEXs)
Units of Account
All three are necessary for a healthy ecosystem. Canto has its own DEX, lending protocol, and unit of account (NOTE). Neither of these primitives is designed to extract value from future users. As noted previously, there is no governance token in place that allows investors to introduce protocol upgrades to primitives like the DEX.
Canto's no-fee model attracts users by bringing something new to DeFi. Potential buyers no longer have to fear becoming someone's "exit liquidity." A feeless protocol effectively means zero fees for liquidity providers, whether they're protocol users, arbitrageurs, or traders.
The statements above are backed by the fact that Canto doesn’t have a:
Another important aspect of Canto's revolutionary level of decentralization is that community engagement is delegated to a community of DeFi advocates.
Although the initial contributors have created most of the resources, announcements, and other content, there are no official Canto community channels. This means that anyone is free to create new resources, servers, social channels, visuals, and educational content for Canto.
As mentioned earlier, Canto has identified three primary DeFi primitives that make a healthy ecosystem and protocol. These primitives represent Canto’s main features. The sections below contain an in-depth description of each feature.
Canto DEX and LPs
Canto's approach to building out an FPI means that the Canto DEX cannot be upgraded, has no official interface, and runs in perpetuity without the ability to implement any extra fees.
From the DEX's launch, users were capable of interacting with Canto's DEX contracts through Slingshot - a popular DEX aggregator.
The Canto DEX utilizes the Automated Market Maker (AMM) model for pricing assets and regulating trading pairs. The AMM facilitates token swaps with the help of liquidity pools that are financed by investors - otherwise known as liquidity providers.
Canto DEX supports two types of liquidity pools:
Traditional constant product LPs (k = x * y)
Concentrated LPs (k = yx^3 + xy^3)
Those who are interested in liquidity mining on Canto DEX can do so at this link.
Liquidity providers earn LP tokens as rewards. You can supply LP tokens to Canto's lending market. LP tokens can be collateralized and borrowed against.
At the time of writing, Canto has 5 LPs:
Canto Lending Market (CLM)
Lending is a crucial component of DeFi markets. The Canto Lending Market (CLM) allows LPs on Canto DEX to use their LP tokens as collateral. You can provide these tokens as collateral but cannot borrow LP tokens from other users.
CLM is governed by Canto stakers. The governance model is compatible with FPI because canto stakers have a reason to be interested in the ecosystem's growth. They are incentivized to create an environment that's great for both users and developers. Canto stakers have no reason to "extract rent" from the protocol.
Unit of Account (NOTE)
NOTE is Canto's unit of account currency. NOTE is an ERC-20 token that is over-collateralized. It is rebalanced in perpetuity to stabilize at around 1 U.S. dollar. The NOTE token has the following traits:
You can't create NOTE tokens. You can only borrow them from a smart contract named 'Accountant' that implements an algorithmic interest rate policy through CLM.
The Accountant charges interest. However, that interest goes towards funding public goods on Canto's FPI. The protocol holds interest in the Community Treasury - governed by Canto DAO.
Keep in mind that NOTE is not a stablecoin in the traditional sense of the word. Stablecoins are pegged to a fiat currency. NOTE has an interest rate policy targeted at stabilizing the token around $1. NOTE can be quite volatile compared to stablecoins under certain market circumstances.
To reiterate, NOTE is an overcollateralized ERC-20 token backed by collateral lent to Canto's Lending Market. You can only borrow it by supplying certain assets as collateral. For example, you can swap USDC or USDT for NOTE.
Canto (CANTO) Tokenomics Explained
CANTO represents Canto's native token. You use CANTO to pay for gas fees. You also secure the network by staking CANTO in return for rewards.
CANTO has an initial supply of 1 billion tokens. The Canto network launched with 150 million tokens. Out of 150 million tokens, 130 million were distributed to initial contributors. 20 million tokens were distributed to 'Canto Settlers,' users who took part in the network's testnet launch.
The Canto DAO will distribute the remaining total supply of CANTO in the following fashion:
450 million (45%) to long-term liquidity mining
350 million (35%) to medium-term liquidity mining
50 million (5%) to future public goods grants
CANTO doesn't have a locked max supply. CANTO is an inflationary token whose inflation rate is constantly decreasing. Tokens generated through inflation are distributed to stakers. The amount each staker receives is proportional to the amount of value staked.
How to Stake on Canto
Staking involves locking up tokens to contribute to a blockchain network's security. You can stake your CANTO tokens for a period of reward to receive rewards generated by the token's inflation rate.
Staking on Canto contains a 21-day unbonding period. In translation, you must wait 21 days to access your tokens after unstaking your CANTO.
After connecting your wallet you will see a validator tab. Here, you can view a list of validators to whom you can delegate your tokens. Token delegation is the same as staking - unless you plan to run your own validator.
You need to select the validator you're going to stake with. Clicking on a validator will show you a pop-up window where you can delegate, undelegate, or redelegate CANTO tokens.
To stake, simply type the number of CANTO tokens you wish to stake and click on the delegate button. Confirm the transaction, and you're finally staking.
Canto Governance Explained
CANTO holders are free to submit and vote on governance proposals. Participating in governance enables you to introduce positive changes to the network and its ecosystem. Proposals and their results have a direct effect on CANTO holders and Canto users.
You can access Canto's governance model by visiting the following link. Everyone with staked CANTO can vote here. The governance page shows a list of completed and ongoing proposals.
You have 4 options when it comes to governance proposals:
Note that veto votes can prevent a governance proposal from passing even if an overwhelming part of the votes voted yes. Each proposal has a threshold that activates the veto if enough people vote for it.
Conclusion: Is CANTO a Good Investment?
The Canto L1 crypto network takes a novel approach to DeFi ecosystems by focusing on Free Public Infrastructure (FPI). FPI has attracted many investors to Canto by establishing a true and long-term Web3 experience that doesn't rely on extracting value from future users. Canto offers the only DeFi ecosystem where you don’t have to pay fees.
Canto has cemented its full decentralization by preventing governance participants from making any changes to the Canto DEX. Users can’t add extra fees in the future or introduce any other changes to the protocol and the way it works. While this does mean no upgrades for the DEX, it does represent a worthwhile sacrifice.
The CANTO token has pumped 700% in less than a month, attracting many new investors looking for that old-school 2020 DeFi experience. The pump helped the word for Canto get out, leading to network effects and, naturally, further positive effects on CANTO’s price.
Canto seeks to make DeFi decentralized, transparent, accessible, and free. Canto does not have a governance token, nor does it include fees for the purpose of maximizing revenue. This narrative is what drives the value of Canto and what makes investors believe it’s a good investment.
Whether Canto will turn into a success depends on how many DeFi advocates will choose to adopt it. A DeFi ecosystem without users is no ecosystem at all. While Canto did succeed in attracting a user base over the last few months, it has to keep its pace if it wishes to survive and continue growing as a fully decentralized solution for DeFi.
Whatever Canto’s outcome may be, monitoring the project is a worthwhile endeavor due to Canto’s rather experimental nature.
Want to learn more about DeFi? I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.
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