Analyzing the new rising star Canto public chain: zero protocol fees, minimal user capture

Author: Loopy Lu

Source: Odaily

DeFiLlama data shows that the 24-hour trading volume on the Canto chain reached $63 million, surpassing Solana's $56 million, ranking 7th among all recorded chains. Excluding the three Layer 2 projects of Polygon, Arbitrum, and Optimism, it has become the fourth largest Layer 1 by trading volume. Vertically, Canto's TVL has grown from $66 million at the beginning of the year to $125 million currently.

The price of Canto tokens has also surged. According to CoinGecko data, the price of Canto increased by 48% in 24 hours, reaching $0.32, while on January 1st of this year, the price was only $0.08.

As the hottest EVM network in the Cosmos ecosystem, what unique features does Canto have?

CSR Drives Canto's Recent Surge

On January 22, Canto announced Contract Secured Revenue (CSR).

CSR is a fee-sharing model on the Canto network that allows contract developers to take a certain percentage from the transaction fees paid to the network when users interact with their contracts, thereby earning revenue.

Contract developers registered as CSR can receive some NFTs. As the revenue from the contracts accumulates, holders of CSR NFTs can claim this revenue at any time. The NFTs themselves can also be traded and combined within DApps. This composability provides various use cases, including trading, packaging, investment, and loan collateral.

To meet the demand for protocol revenue and potential use cases, Canto's gas fees will be significantly increased. On January 25, the sections regarding burning and base fees will go live, and the CSR function will be deployed to the mainnet (but will not be activated). 24 hours later, a new governance proposal will begin, proposing to: increase gas fees and activate the CSR function.

What is Canto?

Canto is a Layer 1 network based on the Cosmos SDK, but unlike other Cosmos ecosystem projects, it is an EVM-compatible network specifically designed for DeFi. Under the protection of Canto validator nodes, the network will use Tendermint consensus, which can function normally even if up to 1/3 of the machines fail in any way. Tendermint is designed to be user-friendly, easy to understand, and high-performance, supporting a wide variety of dApp deployments.

Moreover, Canto's infrastructure support goes further than other public chains. The core primitives of this public chain are aimed at supporting Free Public Infrastructure (FPI).

From a user perception standpoint, new public chains (especially EVM new public chains) may seem quite similar. But from a narrative perspective, Canto sounds more appealing in terms of "decentralization." FPI is the key to realizing its decentralized vision. Currently, Canto has no investors and does not establish a foundation; the project relies more on the community and has no centralized governance.

FPI: Refusing to "Charge Rent" from Users for DeFi Protocols

The Canto team observed that most Layer 1s have some basic DeFi components, such as DEX, Lending, and Stablecoins. For these protocols, simply issuing a governance token allows them to gain the ability to extract rent from future users of the protocol, which contains immense value.

Canto has made some improvements at the application level: Canto develops these infrastructure-level protocols and treats them as public utility protocols, i.e., Free Public Infrastructure (FPI). Specifically, the Canto public chain has built-in lending markets forked from Compound, a DEX forked from Solidly, and a stablecoin called NOTE.

These established "public utilities" naturally need to fulfill their public attributes. Canto's DEX protocol cannot be upgraded and is unregulated. It will run permanently on Canto, and there will be no additional fees in the future. Canto's lending market is governed by Canto stakers. Canto holders value the ecological value of the entire chain and will not seek additional profits from a single application. For the stablecoin NOTE, the protocol will also not charge any fees.

Most importantly, these core public infrastructures will not have governance tokens, eliminating the possibility of charging rent from users in the future. Additionally, core protocols will follow the "minimum user capture" principle, not setting up user interfaces, and users can only trade through third-party aggregators. This minimizes the impact of centralization.

Canto believes that existing DeFi protocols are more like paid private parking lots serving only their own communities, while Canto's FPI is more like free roadside parking open to everyone.

From a narrative perspective, Canto is an interesting project. For the Canto ecosystem, sacrificing the protocol revenue of a few top projects can lead to richer and free composability, which is an innovation in the monotonous DeFi world.

NOTE: Will it Follow the Path of UST?

NOTE is an over-collateralized stablecoin launched by Canto, supported by USDC and USDT lent to the Canto Lending Market (CLM) by users. This token cannot be created out of thin air and only supports borrowing from CLM. The circulation of NOTE is dynamically managed by accounting contracts based on interest rates. The interest rate for NOTE is automatically adjusted every 6 hours based on the market price's TWAP.

If NOTE trades below $1, the interest rate rises, prompting people to buy more NOTE on the secondary market and deposit it into CLM to earn interest. If NOTE's trading price exceeds one dollar, the interest rate falls, leading people to borrow NOTE from CLM and sell it on the secondary market.

Previously, UST used volatile assets as collateral to mint UST out of thin air. This mechanism caused UST to plummet to zero after massive issuance. NOTE's mechanism addresses some of UST's shortcomings, such as only supporting two mainstream stablecoins as collateral and preventing NOTE from being created out of thin air.

However, similar to UST, NOTE also offers users generous stablecoin yields. Currently, the savings APR for NOTE-USDC LP in Canto Lending is as high as 14%, while NOTE-USDC LP is even higher, reaching 19%.