Canto: A Layer-1 Incentive Experiment

In 1900, California had the same population as Kansas. It was a gold rush state, and the gold had dried up. Rather than pull back, public institutions at the turn of the century bet that investing in critical infrastructure would bring new industry, community, and opportunity. 

A century ago in 1923, California introduced a 2-cent gas tax to help fund the California Highway Commission for building and maintaining public roads. Those and future public infrastructure investments proved extremely fruitful, and California soon boasted one of the nation’s largest transit networks. Today, California is the most populous state in the US, and the fifth-largest economy in the world.

To date, much of web3 has looked a lot like the California of more than a century ago: a land of tremendous opportunity, but also the wild west, at risk of falling prey to speculators and profiteers attracted to the gold rush. 

A core belief of Variant is that crypto can enable internet economies to grow bigger, faster as a result of more direct, meritocratic distribution of value in markets. As California’s roads demonstrate, public goods funding can be an effective way to create positive feedback loops that compound economic growth. And today this theory of economic development is being applied to blockchain ecosystems. One project that exemplifies this philosophy is Canto

Canto is a new EVM-compatible blockchain launched in August last year. Unlike many L1s, Canto does not purport to innovate on tech, at least initially—it is built with mostly off-the-shelf, open source components, e.g., Cosmos SDK. Instead, its initial innovations are primarily socioeconomic: mechanisms for funding public goods and developer activity on the network. We think these economic innovations are worthy experiments with the potential to offer developers a better set of defaults that can drive a healthy and fast-growing market economy on the chain. 

With that in mind, we’ve built a position in Canto at Variant, and have joined a growing community of builders who’ve proverbially “gone west” to explore new economic ground.

Economic Experiments in Canto

Canto’s Public Goods

The chain was born with three core DeFi primitives: a DEX, lending market, and native unit of account. These primitives are metaphorically “nationalized” public goods: built without a fee or fee switch, with liquidity subsidized by the protocol’s on-chain treasury of CANTO tokens to attract LPs. 

These core primitives are experiments in their own right, innovating on prior art in prominent DeFi projects, and uniquely designed to complement one another: LP pairs can be supplied to the lending market, and the unit of account is borrowed through the lending market. The DEX is an AMM, and charges no trading fees. The flexible design offers both constant function and concentrated liquidity pools, which allow users to LP longer tail pairs in constant function pools, and provide more capital efficient liquidity in ticks for blue chip and stabler pairs. The native unit of account – NOTE – is a “soft” stablecoin that can be accessed by depositing other stables and blue chips in the Canto Lending Market (CLM). Read more about these designs here.

Contract Secured Revenue

Another economic experiment in Canto is the chain’s proposed model of contract secured revenue (CSR), which is intended to incentivize third-party developers to build primitives with similar defaults to Canto’s “nationalized” public good primitives—namely an absence of fees, at least to start.

If the proposal passes, developers will be able to opt-in to earn a percentage of gas paid to the network when users interact with their smart contracts. This revenue accrues to an NFT, which can be minted by the wallet that deployed the smart contract. This mechanism holds a more pluralistic view of value creation on the chain: while most chains only route fees to block builders, Canto allocates a portion of protocol emissions to those directly responsible for generating transaction fees — the developers building apps. 

For developers, this mechanism offers a native way to bootstrap, sustain, and grow a protocol — one that is a direct function of building something people use. The result may be that protocol teams building on Canto are less inclined to prematurely focus on extracting fee revenue, or launching tokens to fund their efforts. Being an EVM chain, of course none of that is precluded when the time is right. What CSR offers is a different set of defaults for bootstrapping early-stage protocols: clarity of signal on product-market fit in lieu of token incentives, and a  default-on revenue stream that is not directly extractive from users or applications built atop these smart contracts. 

Critics of similar mechanisms have lamented that a reward to developers is a circuitous tax on users, and that efficient markets will result in that revenue being arbed out by competitors eschewing it or passing it through to end users. In a mature market, that’s likely right, but this critique fails to anticipate a messier world in the short run: when bootstrapping new markets there’s often space for inefficiency, especially the variety that helps developers to get off the ground and build products for users that have a willingness to pay to do something new, interesting and perhaps profitable. While the concept of protocol subsidies for contracts has been floating in the space for some time, Canto is among the first to attempt to run it in a fully automated way, in an ecosystem built around the premise of public goods funding as an engine for growth. You can read more about the mechanism here.

The Ecosystem Today

Canto is a young blockchain, but has already attracted a loyal and growing community. There was no presale, and no venture funding. 80% of the genesis token supply is allocated to medium and long-term liquidity mining (see a full breakdown here.) Core development has been community-driven from the outset. Notable core developers in the ecosystem include Plex, B-Harvest, and Neobase

In addition to the core primitives the chain launched with, there are a number of early DeFi projects building in the ecosystem, including Forteswap and Y2R. Canto has also seen a good amount of experimental NFT activity, with two marketplaces developed so far: Alto Market and Provenant. Other noteworthy projects include Canto Splits, which enables on-chain revenue sharing, and Canto Public Messenger Service, a messaging protocol. User numbers are also growing steadily. The community recently crossed 61k total addresses. Canto has also attracted ~$100m+ in TVL, ranking it the 5th largest Cosmos chain by TVL.

If you’re interested in building an ecosystem that values public infrastructure, and supports developers building it, Canto is an experiment worth getting familiar with. Because Canto is EVM compatible, Ethereum developers should be able to find their way around fairly quickly. For builders, there is a vibrant Discord to connect with other developers and ecosystem resources. And there are also monthly hack-a-thons where developers are experimenting on-chain. 

If you’re building in the Canto ecosystem, reach out, we’d love to hear from you!


Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Variant. While taken from sources believed to be reliable, Variant has not independently verified such information. Variant makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This post reflects the current opinions of the authors and is not made on behalf of Variant or its Clients and does not necessarily reflect the opinions of Variant, its General Partners, its affiliates, advisors or individuals associated with Variant. The opinions reflected herein are subject to change without being updated.