Optim Labs
5 min readMar 23, 2024

OADA is more than a yield product. It’s a tool to advance DeFi and decentralization on Cardano

By improving both liquidity and network security as the ecosystem expands and evolves, OADA will help catalyze the next generation of Cardano DeFi and increase the resilience of the layer 1.

A key feature of the OADA system is superior yield above the base staking rate, as well as usability and composability advantages within the DeFi ecosystem. However, the largest benefits to Cardano go far beyond this.

Liquidity — A portion of the billions of passively staked ADA will come off the sidelines and into the DeFi ecosystem for the right product. However, there is a lack of innovative, passive ADA yield products that pay substantially more than the staking rate. This is one of the contributing factors to Cardano DeFi TVL seeing no increase for the past 5 months.The largest DeFi ecosystems such as Ethereum and Solana have a majority of TVL in synthetic staked ETH and SOL. While initially activated in DeFi to earn staking yield, once deployed this capital is more active, often rehypothecated, and put to more productive use.

OADA is an advanced passive ADA yield-product that will target 50%+ above the staking rate, likely bringing more liquidity into DeFi in the form of the most important ecosystem asset.

Security — The fast approaching drop in staking returns to the 2% range threatens active participation and stake management, potentially undermining decentralization and network performance. Active stake management, incentivized through meaningful staking returns, is the primary mechanism through which validators are punished for poor performance and/or malicious actions. Without strong economic incentives to motivate the movement of stake around the network it’s possible cracks could begin to emerge in the underpinnings of the network.

OADA provides economic incentive to delegate staking rights to an active ecosystem participant with a strong vested interests in ensuring honest, performant validator behavior. The Optim ODAO controls stake delegation and is functionally similarly to a dRep that controls stake.

Cardano, Consensus, and Decentralization

The development and evolution of Cardano have showcased true decentralization. Its unwavering commitment to principles has led to an ecosystem that stands as a testament to the values of web3. Security, accessibility and decentralization have been prioritized over speed and convenience. Cardano’s unique approach is being validated as censorship, hacks and high costs proliferate across many blockchain ecosystems.

At the heart of Cardano, as a proof-of-stake blockchain, lies its consensus protocol, known as Ouroboros. This protocol is responsible for ensuring the integrity and security of the network by enabling individual nodes to reach an agreement, or ‘consensus’, on various aspects of the blockchain’s operation.

One crucial function of the consensus protocol is to determine which blocks should be added to the blockchain. In a decentralized network like Cardano, there is no central authority that dictates which blocks are valid. Instead, the nodes in the network must collaborate to agree on which blocks should be included. The consensus protocol achieves this by defining a set of rules that the nodes must follow when validating and propagating blocks.

Another critical function of the consensus protocol is to resolve forks in the blockchain. A fork occurs when two or more blocks are proposed at the same time, leading to a temporary split in the network. The consensus protocol ensures that the network quickly converges to a single, consistent chain by providing a mechanism for the nodes to agree on which chain to adopt.

The Ouroboros consensus protocol is designed to be provably secure, meaning that it can be mathematically proven to be resilient against various attacks. It achieves this by utilizing a combination of cryptographic techniques and game theory to create a system where it is in the best interest of each node to follow the protocol and contribute to the security of the network.

The protocol is guaranteed to be secure in the so-called synchronous setting (that is, with strong guarantees on message delivery times) so long as more than 51% of the stake is controlled by honest participants (that is, those following the protocol).” -docs.cardano.org

While stake concentration to a degree that would enable a 51% attack is unlikely in the near-term, the longer-term trend towards fewer stake pools and decreased returns could meaningfully degrade the security threshold (Nakamoto Coefficient) of the network.

Performance, Penalties, and Incentives

Penalizing both suboptimal performance and malicious behavior on Cardano relies on the economic incentives of staking. The system relies on stakers being active participants who are responsive to validator behavior by moving ADA stake within the network.

Unlike Ethereum and some other proof-of-stake blockchains, Cardano does not rely on slashing, a common mechanism that penalizes validators for malicious behavior. While the slashing threshold of ‘malicious behavior’ is rarely met, the strong economic incentives of staking rewards are relied upon for optimizing network performance.

The possibility of a meaningful decrease in the staking rewards realized by a given Cardano validator helps ensure a performant network. “Stake pools must maintain high-availability, which means that they should always be online and available to validate and create new blocks” (docs.cardano.org)

Without meaningful staking rewards there is little economic incentive penalize a validator for poor performance by moving stake to a more reliable and performant node.

Liquidity and DeFi Activity

While Cardano has seen significant growth and advancements in its DeFi ecosystem since smart contracts debuted in late 2021, the amount of ADA on-chain has been stagnant for 5 months. During this period the rest of crypto and many other DeFi ecosystems have seen tremendous growth and an uptick in both user participation and liquidity.

To push Cardano forward teams and builders must innovate beyond incremental improvements to existing protocols. We must deploy completely new products and primitives that haven’t yet been offered. While launching a better DEX or an improved synthetics protocol is a valuable contribution, such protocols likely won’t attract a meaningful number of new users or liquidity.

As the lifeblood of any DeFi ecosystem, liquidity is an important driver of activity as it can be used as collateral to mint new assets and rehypothecated within the system to multiply its utility. This is a common feature of both traditional and decentralized finance.

By minting OADA, the underlying ADA is staked to participate in Cardano’s consensus, while its synthetic derivative is instantly available for use in DeFi protocols.

Whether it’s used to create trading pairs in decentralized exchanges, as collateral in lending markets, or to mint CDP stablecoins, OADA would meaningfully increase much needed liquidity in the ecosystem.

To put things in perspective, of the 22.75 billion ADA currently staked, it would only take low single digit percentage of to be minted into OADA to immediately double Cardano’s current Total Value Locked.

While that ambitious figure is only being used to illustrate a point, it is also entirely within the realm of possibility. While not an exact , Lido, a liquid staking derivative protocol on Ethereum single handedly accounts for roughly $20B of the network’s overall $55B of TVL. All LSD protocols together cumulatively make up about 54% of Ethereum’s Total Value Locked.

Simply put, OADA’s objective is to bring billions in liquidity to the Cardano DeFi ecosystem while helping secure the economic incentives that underpin Cardano’s consensus mechanism.