Cardano Proposes $1.2 Billion Sovereign Wealth Fund to Boost DeFi Position

On June 13th, Charles Hoskinson, the co-founder of Ethereum and founder of Cardano, proposed a bold plan to establish a sovereign wealth fund for the Cardano blockchain ecosystem. The proposal involves converting 5-10% of the ADA treasury, valued at approximately $1.2 billion, into harder assets such as Bitcoin or tokenized dollars in the form of stablecoins. This move aims to put Cardano on the decentralized finance (DeFi) map and enhance its position in the crypto market.

Sovereign wealth funds are typically associated with governments, with notable examples including Norway's Government Pension Fund Global (GPFG). This fund, initially based on oil and gas production, has diversified into stocks, bonds, real estate, and renewable infrastructure, doubling in value from $996 billion to nearly $2 trillion between 2019 and 2024. Hoskinson hopes to achieve similar gains through exposure to Bitcoin and stablecoins, using the proceeds to acquire more ADA and boost its price.

This strategy is supported by two key factors. First, the U.S. government's continued spending beyond its means will further erode the purchasing power of the USD, making Bitcoin a valuable wealth-safeguard asset due to its fixed scarcity and proof-of-work security. Second, exposure to stablecoins, which are backed by U.S. Treasuries, extends financial hegemony into the digital sphere and keeps the yield on U.S. Treasuries at a manageable level. The U.S. Secretary of Commerce has previously expressed support for properly backed stablecoins, highlighting their importance in maintaining financial stability.

Cardano's performance year-to-date shows a 35% decline but a 56% increase over a one-year period. With 35.36 billion ADA in circulation out of a maximum supply of 45 billion, there is potential for price depression if demand does not keep up with the supply. Cardano's annual inflation rate is around 2%, similar to the Federal Reserve's target inflation rate. The proposed conversion of 5-10% of the ADA treasury into Bitcoin or stablecoins could pose significant selling pressure, but Hoskinson believes this can be mitigated by spreading out the purchases over a week using over-the-counter (OTC) exchange desks and a time-weighted average price (TWAP) strategy. This approach, similar to that used by Michael Saylor for Strategy’s BTC accumulation, aims to minimize market disruption and maintain ADA’s average market price.

Cardano's core demand is also a critical factor. As a robust alternative to Ethereum, Cardano completed its smart contract functionality with the Goguen era in September 2021. However, its blockchain performance is significantly behind top performers like Solana, with a real-time transactions per second (TPS) of 0.26 tx/s against its maximum theoretical TPS of 18.02 tx/s. This positions Cardano at 34th in the rankings, with a finality of 2 minutes compared to Solana's 12.8 seconds. The completion of the Basho scaling stage, particularly the Hydra layer-2 solution, is crucial for improving Cardano's competitiveness. Currently, Cardano holds $267.5 million in its DeFi apps, far behind Solana's $8.3 billion and Ethereum's $62.7 billion. Stablecoins account for only $31.44 million in Cardano's ecosystem, highlighting the need for increased stablecoin liquidity to boost dApp activity and reduce risk in lending and borrowing.

In late May, the Ethereum Foundation borrowed $2 million in stablecoins from Aave using wrapped ETH (wETH) as collateral, demonstrating a more mature DeFi ecosystem. To reach similar maturity, Cardano needs to make bold moves. Allocating a portion of the ADA treasury into Bitcoin and stablecoins is a step in the right direction. While it may seem that Hoskinson favors BTC over ADA, it is important to note that Bitcoin acts as a store of value rather than a general-purpose smart contract blockchain like Cardano. The current administration has signaled support for stablecoins as an alternative to a cancelled CBDC, making it crucial for Cardano to stimulate activity without waiting for the completion of its scalability era.