Should You Care About SundaeSwap, Cardano's First DEX?

Believe it or not, SundaeSwap – Cardano’s first functional decentralized exchange (DEX) – is alive and kicking. Despite its problematic launch that had left people doubting both the project’s and the blockchain’s viability, it launched on January 20th. 

Going forward, the most important question is whether SundaeSwap thrives after going through some growing pains. Is there an opportunity here for smart investors? Or will it be better to avoid Cardano's first DEX altogether? 

Let’s explore the case. 

SundaeSwap’s Characteristics

First of all, Sundaeswap is an AMM-based DEX. That means, it relies on automated market makers. According to Binance Academy, those are “a type of decentralized exchange protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm.”

The first and most popular of these DEXes is Uniswap, which runs on Ethereum and Polygon. Uniswap uses a token, UNI, to power its automated liquidity provider. SundaeSwap, similarly, uses the SUNDAE token. In addition, both UNI and SUNDAE are governance tokens, meaning holders have the power to vote on protocol changes and collectively control the DEX’s treasury.

How high will can SundaeSwap’s market cap grow?  We’ll have to give it time to gain some momentum and acquire users to know for sure. As reference points, Uniswap has an approximate market capitalization of $7.7B as of date, and Pancakeswap, which runs on the Binance Smart Chain, has an approximate $3.2B market cap. 

So far, we can say that the SUNDAE/ ADA pair traded over 50M ADA in the first 24 hours. ADA is Cardano’s native cryptocurrency. We can also say that SundaeSwap holds approximately 98% of the total value locked in Cardano smart contracts. The DEX debut was immediately positive for the Cardano ecosystem: ADA’s price surged from $1.28 to $1.55. However, at the time of writing this post, ADA is priced at an underwhelming $0.78. 

A fully functional DEX is essential for Cardano’s DeFi ecosystem to emerge. DEXs are the central point. It’s through them that the money circulates and creates momentum. However, if the system doesn’t work as it should, DEXs can have the opposite effect. Worst yet, it may reveal problems in the underlying architecture of the blockchain itself.  

Cardano is fundamentally different from other smart contract-enabled blockchains. Cardano is not EVM-compatible. Most of those kind of blockchains use the Ethereum Virtual Machine as an engine to process said smart contracts. For example, BNB Smart Chain, Avalanche, Fantom, and Polygon all use it.

Nor does Cardano use Solidity, the programming language those smart contracts are written in. Cardano uses Plutus, another programming language altogether. That means developers can’t just copy and paste code developed for Ethereum. They have to start from scratch, and their code is Cardano-exclusive. What happens to that code if the blockchain is not capable of operating at scale?  

Let’s not get ahead of ourselves, though. SundaeSwap is still in Beta. Is it fair to judge it as a fully-fledged product? Or, are users sensing a deeper problem that can’t be easily solved? The SundaeSwap team claims that “the DEX’s smart contracts have been fully audited, and the DEX will meet all industry standards for security.” In the same post, they preemptively announced:

“While orders (including swapping, providing liquidity and withdrawing liquidity) may take hours to days to process at first, it’s important to know that everybody’s orders will be processed fairly and in the order they were received and executable.”

The predicted backlog is exactly what happened.

Problems With SundaeSwap

When the DEX debuted, many people didn’t receive their coins or couldn’t get their operations to go through, be it for providing liquidity or simply for swapping. That last linked Reddit user reported, “It’s been 7 days, my [ADA is] still gone and [I] haven’t got the [S]undae token.” Even though the SundaeSwap team predicted problems, seven days is simply too much. People lose faith for much less.

A Coindesk report about the incident quoted Bybit’s head of communications Igneus Terrenus as saying:

"Cardano had a lot riding on the successful launch of SundaeSwap to finally vindicate itself. Its supporters created a narrative that managed to see the ADA price rally 40%. The heightened attention became a curse, and brought to SundaeSwap more traffic than its team had prepared for. Cardano has been such a target of ridicule and acrimony that it almost felt like this was completely predictable.”

After the fact, Coindesk gave Pi, SundaeSwap’s Chief Information Officer, the right to reply: 

“The congestion on the Cardano network is understandably frustrating, but also evidence of the network working as intended to live up to its mission of stability and economic fairness. The network didn't crash, the security didn't decrease, and it didn't create exploitive fees for the end user. Instead, it is creating queues at various breakpoints throughout the system so that it can soak up and process as many orders as possible.”

Notice how SundaeSwap points the finger at Cardano.

Problems With Cardano’s Blockchain

In the DEX’s official post about Sundaeswap’s launch, they start with impressive numbers. In its first week, SundaeSwap amassed “$71.69 million TVL (total value locked)” and “more than 300 active trading pools on the exchange.” Then, the team acknowledged that many of the trades and operations have not gone through and proceeded to throw Cardano under the bus. 

Cleverly, they pass the responsibility to the blockchain. 

“Every successfully submitted transaction on the SundaeSwap DEX reached the Cardano mempool, where all valid transactions await confirmation by the blockchain.” Elegantly, they provide cover for their host’s problems. “Cardano is in the very beginning of scaling, and every blockchain has growing pains, whether that be in gas fees, network failures, or in our case, congestion.”

After that, they announced what the team is doing to soften the blow by “helping users access the protocol easier, providing more information to the user throughout the transaction so they can make more informed decisions, and optimizing the scripting and throughput as well as taking as much load as possible from the chain and the wallets.”

Notice that none of that will solve anything if Cardano can’t scale. 

Another Problem: SundaeSwap’s Governance

The official reason for releasing SundaeSwap as a Beta is that the governance capabilities couldn’t be immediately implemented due to Cardano’s limitations. The transaction size parameters have a limit lower than 16kb, which is what the smart contracts that implement said governance would need. However, SundaeSwap aims to be a “fully community-controlled DEX” sometime in the future.

In a recent medium post addressing the issue, SundaeSwap said that until Cardano raises the limit: 

“The SundaeSwap Labs development team has created a governance category (called “Sundae DAO”) in the SundaeSwap Discord to discuss governance proposals and temperature checks on potential future proposals. Any critical decisions to be addressed in the near term may be subject to an informal staked community vote.”

As an “interim solution to community proposal voting for light protocol proposals,” they also created the SundaeSwap Governance Discourse forum. Both of those spaces will not be able to resolve “significant protocol changes or enhancements, as the DAO must consider the weight of each vote through the amount of SUNDAE held.” In other words, it’s akin to a Proof-Of-Stake consensus algorithm. And the size of the stake makes all the difference. 

The vision sounds great, the “interim solutions” less so. Plus, consider Ambcrypto’s take on the situation:

“It should be noted here that SundaeSwap’s previous experience with community voting had turned out to be disastrous, as its Initial Stake Pool Offering (ISPO) prompted billions of ADA to get concentrated into the hands of very few stake pool operators. While it soon enacted a reverse ISPO to mitigate these changes, it became clear that the effects of such centralization could be far-reaching for the whole Cardano network.”

Do SundaeSwap and Cardano have an unsolvable problem in their hands?

So, Should You Care About SundaeSwap?

The question here is, do you believe in Cardano? While a portion of the population praises creator Charles Hoskinson’s highly methodical and peer-review-centric approach to blockchain technology, another section of the Internet mocks the time it took for Cardano to deploy smart contracts and the less-than-stellar results those have gotten so far.

If you fall into the second category, don’t bother with SundaeSwap. It’s not ready and there are other fully-functional, more successful DEXs already running in other blockchains. 

It’s been a month and a half and the SUNDAE token’s information isn’t on Coinmarketcap or Coingecko, which is not a good sign. And there’s the possibility that Cardano just won’t be able to scale, to process transactions at that level.

The price of ADA is relatively low at the moment. If you believe in Charles Hoskinson, this might be a tremendous opportunity. First-mover advantage is hard to come by, and SundaeSwap’s disastrous first month might be a blessing in disguise. A user willing to risk its ADA, can potentially participate in the protocol’s governance, and learn about SundaeSwap’s inner workings.

If you believe in Cardano, there’s little doubt that SundaeSwap will be an integral part of its nascent DeFi ecosystem. If the blockchain can overcome its technical difficulties, and SundaeSwap can process transactions at other DEXes’ speed, then the SUNDAE token is tremendously undervalued. And becoming one of the protocol’s first power users might be extremely profitable.

None of this is financial advice, though. Do your own research.