Cardano is an ambitious project that uses academic methods to build a scalable, interoperable and sustainable cryptocurrency and smart-contract platform that targets to become the financial infrastructure in developing countries and eventually throughout the world. News about Cardano is usually about academic publications or education on the technological innovations that are being built. However, over the last few weeks the tone has changed, as particularly the Cardano Foundation’s chairman is under fire. This long-read aims to talk you up on the recent events and what the implication on Cardano’s future may be.
First things first
Before we dive into what has happened, let’s address some Cardano-basics first. Cardano is the name of the ecosystem, of which the cryptocurrency (ADA) and smart-contract platform are main features. Cardano has been running its own mainnet since September 2017 but is still a work-in-progress, of which the roadmap runs through 2020. After the roadmap is completed, Cardano will be a self-sovereign infrastructure layer that is governed through a liquid on-chain democracy where stakeholders determine the future course of the system. Until then, Cardano is ‘federated’ by three entities.
Input Output Hong Kong (IOHK), lead by CEO Charles Hoskinson, is the engineering company that is building Cardano. Emurgo, lead by CEO Ken Kodama, is a company that looks to boost the Cardano ecosystem through commercial ventures. Finally the Cardano Foundation, lead by chairman Michael Parsons, is a non-profit organization whose mission includes driving adoption of Cardano, growing the community and facilitating partnerships. So far the entities have been working together, each doing their own part.
…or have they?
Cracks in the foundation
One of the roles of the Cardano Foundation is to oversee the development of Cardano. To this cause, it has hired the FP Complete firm to audit Cardano’s codebase, which is estimated to cost $600.000 per year.
On September 13th, FP Complete released a new audit report on Cardano’s Haskell libraries on the forum. The report had quite a bit of yellow and red in it, raising eyebrows amongst community members. On September 14th, the Cardano Foundation made a statement in which they basically pointed the finger at IOHK, stating they never responded to the first audit. On September 17th, IOHK CEO Charles Hoskinson explained his stance on this to the public in a video message.
Charles Hoskinson’s reaction to the audit report (starting 4:52 min)
In his message, Hoskinson explains that the audited codebase was just a proof-of-concept that was actually developed by another company and was never intended to be used as long-term code. In his opinion, the audit report has little value and it is questionable to spend community money on it. IOHK has already developed two codebases using their own method that includes formal verification and wonders why these weren’t audited instead.
Hoskinson then continues to IOHK will go “above and beyond what needs to be done” if necessary. IOHK will create more video content, has hired a product marketer and are hiring community managers to get the work done.
So apparently the Cardano Foundation is not only spending millions of dollars of community money on a useless audit report, but IOHK is also hiring staff to fulfill tasks that fall under the Cardano Foundation’s responsibility. Hoskinson’s frustrated tone in the video and his apparent urge to reassure the community that the necessary work will be done also speak volumes.
What’s really going on here?
Lounging on the Cardano forum
Cardano has an official forum, which is moderated by the Cardano Foundation with some help from community members. The used Discourse software allows users to earn badges or privileges when they reach a higher level, for instance by loggin in frequently, reading, writing and liking posts. On the Cardano forum, users that reach level 3 get to see a new subforum called ‘The Lounge’. Although its content is not available for the general public, anyone can gain access to it. The necessity to have a private lounge is questioned by some of its users, but was chosen by the Cardano Foundation to allow the more active community to converse with each other.
On September 15th, a community member posted a message on the Lounge titled “I am concerned over friction between the Cardano Foundation and IOHK”. The initial remarks were quite general in nature, but appeared to touch a nerve in the community. Messages from other worried members piled up, fueled by discussions on Cardano’s Official Telegram channel.
Besides the audit-dispute, mentioned concerns included:
- IOHK is very active to achieve adoption of Cardano in African countries. This appears to be a responsibility of the Cardano Foundation; why do they appear to have no role in this?
- Cardano Foundation chairman Michael Parsons has been pretty much invisible in public fora and appears to have done little to promote Cardano. Why is he not more visible and active, like his function seems to require?
- A lack of transparency (e.g. external audits or even communication) and an apparent lack of ambition of the Cardano Foundation’s plans to develop the ecosystem.
- A lack of progress and/or updates regarding the Cardano debit card and ATMs that the Cardano Foundation has promised to deliver.
- A lack of news on the ambassador model, which is planned to describe how community members that are active in helping the Cardano ecosystem progress may be rewarded in ADA using the funds that are controlled by the Foundation for this purpose.
- The address where the Foundation’s ADA is stored was never shared, unlike IOHK who have been transparent about this.
- According to the Foundation’s website, Pascal Schmid is the only Cardano Foundation Council member. Why are there not more council members?
Although all (30) concerns and questions were thoroughly written out by a community member that appeared to find broad support, the Foundation chose not to respond on the actual forum or in a written message. On September 18th, they held a ‘lounge call’, where people could join a Google Hangout to receive some explanation on the matter. According to community members that participated in the meeting, chairman Michael Parsons did not participate and none of the questions or concerns were actually addressed, frustrating community members.
These members started contemplating on what to do next and started summarizing their concerns to explain the situation and expand the discussion to the public forum. For instance, a visual representation for the degree to which the Cardano Foundation has performed based on their self-described goals over the past year appeared on the lounge.
Visual representation of the degree to which the Cardano Foundation has performed regarding their self-described goals over the past year, according to one community member
By September 23rd, some of the frustration on the lack of transparency and communication moved onto Twitter. Particularly Cardano Foundation chairman Michael Parsons received a lot of mentions. Why is his username ‘@BitcoinByte’, does his profile feature a Bitcoin logo and does he barely seem to tweet about Cardano? Again, no response.
Then, the Cardano Foundation cancelled a Meetup-event on October 6th in London. This, combined with the Cardano Foundation still not sharing their ADA-address even though they stated they expected to do so ‘by the end of September’ fueled skepticism within the community even further. Intended or not, it almost seems as if the Foundation is trying to halt communications with the community and obfuscate certain information, hoping the discussion will just drift away if they treat it with deafening silence.
So… not good, right? Somebody needs to step up.
Chris Pratt stepping up in Guardians of the Galaxy
The Guardians of Cardano
On October 9th, a post titled “Special Announcement on the investigation of the Cardano Foundation” appeared on Cardano’s public forum. The post was written by an account called ‘Guardians of Cardano’ and described that in 3 days time, the first batch of results of their investigation regarding the concerns over the Cardano Foundation were to be revealed. A link to their website was added, which contained a count-down timer, links to Twitter, Medium and Reddit, as well as an e-mail address.
The Guardians of Cardano
So who are these ‘Guardians of Cardano’, why include a timer and not just post the results right away, and what is this about, really?
As promised, on Friday October 12th, the Guardians of Cardano released an open letter to Cardano Foundation chairman Michael Parsons. The letter was signed by 9 Cardano community members under their full names and begins with the description that the Foundation hasn’t responded to their attempts to communicate (hence the count-down timer), leaving them with no other option than to write a public letter. They go on to describe their disappointment regarding the performance of the Cardano Foundation, its lack of communication and overall transparency.
The open letter continues with another 15 pages of results of their investigations into the Cardano Foundation. The main findings include:
1. Concerns regarding appointing the right persons for critical positions in the Cardano Foundation
- Bruce Milligan (who is Parson’s stepson according to Hoskinson) and John Michael Maguire (Parson’s long-term business associate) were founding members of the Foundation, which may be signs of biased decision-making or even nepotism.
- Robbert (Bob) McDowall (a member of London-based think-tank Organization Z/Yen), with whom Parsons supposedly already had close contact before the Foundation was founded, was hired as a special advisor. It is unclear what his specific role within the Foundation was.
2. Concerns regarding the appropriate use of funds
- In Parsons’ keynote speech on October 14th, 2017, he announced the Distributed Futures open source blockchain research program, on which millions of dollars would be spent. The open letter states the papers are not Cardano specific, somewhat superficial, barely shared in public and their value proposition for the Cardano ecosystem remains unclear. All papers where delivered by the Z/Yen think-tank and partially (3 out of 8) co-authored by Robbert McDowall, who was also a special advisor of the Foundation at that time. Z/Yen was co-founded by Michael Mainelli, who Parsons describes as ‘an old friend’. The open letter therefore questions if there perhaps was a conflict of interest in hiring Z/Yen.
- The situation regarding the FP Complete audit was described earlier. The Guardians question the choices made to continue the audits, knowing their results would not be useful beforehand.
- The Cardano Foundation controls a portion of the ICO funds, which is intended to be used for community development. However, the Cardano Foundation only has contracted five employees to manage social channels, while relying on volunteers and speakers from IOHK to organize meetups.
- There is a lack of transparency regarding (1) the Foundation’s current financial holdings, (2) the Foundation’s plans on how to spend it, (3) the address(es) in which they hold these. The Guardians assume that this ADA address (created on September 28th, 2017) that held ~648M ADA is the Foundation’s address. Oddly, all ADA was moved to this address on June 27th, 2018, raising the question why it was moved and who possesses the corresponding private key of this address.
3. Concerns regarding Parsons’ motivation, competence, efficiency, fitness and agenda to lead the Cardano Foundation as a chairman
- Parsons doesn’t appear to have interacted with the community at all, thus also limiting his transparency and accountability to the community.
- Aside from a short appearance on the BBC on January 18th, 2018, Parsons hasn’t appeared on any media outlet to support Cardano.
- Parsons hasn’t been active in refuting fake news, inaccurate reviews or any other (social) media communications that reflect negatively on Cardano.
- The open letter suggests the numbers of followers on social media accounts appear to over-exaggerate how much members in the Cardano community actually actively participate.
- In September 2018, the Cardano Foundation changed the wording of its goals on its website and removed certain goals. The Guardians wonder if such a shift in direction should have been communicated, and perhaps resulted in a change in policy and budgeting as well.
- Failing to (1) build and lead a competent organization, (2) grow the Cardano brand and image and carry out any marketing in this respect, (3) deliver the promised Cardano debit card and ledger wallet roadmap items and generally enrich the Cardano ecosystem with valuable partnerships, (4) efficiently support the global adoption of Cardano, (5) prepare for the sustainability era of Cardano [on-chain governance], educate the community on it and research the upcoming transition.
4. Concerns regarding the integrity and rationality of the decision-making process at the Foundation
- Apparent lack of self-regulation and applying any of the recommendations of the Swiss Foundation Code.
- Ideally a foundation would be set up with multiple boad members, but currently the Foundation has only one board member next to Parsons.
- As a result, Parsons appears to have full control over the Cardano Foundation. The Swiss civil law (Article 83) describes that “The foundation charter shall stipulate the foundation’s governing bodies and the manner in which it is to be administered.” The open letter asks chairman Parsons to publish the charter for the Cardano Foundation.
- There are no external audit reports or metrics (KPI’s) available on the Cardano Foundations performance.
More details can be found in the letter itself. The letter came accompanied with a petition that asks Parsons to “consult and agree with the community and the CEOs of IOHK and Emurgo regarding the election or appointment of four irreproachable new members to the Foundation council, or to resign.” By the time of writing (October 22st), the petition has been signed by over 3.000 people. The Chinese community translated the open letter and set up their own petition, which was also signed by over 500 people.
While the Guardians’ initiative appears to have found broad support within the Cardano community, some community members do question the Guardians’ motives. These concerns include these nine Guardians being self-appointed and corresponding in private channels.
These nine people got together in a closed group on a private channel because they felt conversing on public fora that are moderated by the same Cardano Foundation they’re investigating might be counterproductive. In a video statement released after the open letter, the Guardians invite fellow community members to join them in their initiative, explaining that anyone can be a Guardian and contribute. Community members that disagree with this approach can set up their own initiative; it’s called decentralization.
Furthermore, the mentioned allegations have limited merit in the current situation, as the Guardians have no formal role within the Cardano ecosystem. However, if an actual shift of powers were to happen, a fair amount of skepticism regarding whomever is trying to grasp it is definitely in place — like in any situation where such a shift of powers occurs.
Unexpected support
To many’s surprise, the Guardians of Cardano weren’t the only ones to release an open letter on October 12th, as IOHK and Emurgo also released an open letter almost simultaneously. Unlike the Guardians’ letter, the statement by IOHK CEO Charles Hoskinson and Emurgo CEO Ken Kodama was directed towards the Cardano community.
In the letter, IOHK and Emurgo first describe their own vision and workflows, as well as the Cardano Foundation’s responsibilities. They go on to describe similar dissatisfaction on the Foundation’s performance as the Guardians’ expressed, including a lack of (1) strategic vision from the council, (2) a clear public plan on how it will spend its funds to benefit the community, (3) transparency on the Foundation’s operations, (4) financial transparency, (5) appointing a complete and diverse council, (6) any concept on how the millions of dollars committed to the foundation will benefit the community, (7) any meaningful internal governance system at the Cardano Foundation, and, (8) material misrepresentations and wrongful statements by the Foundation’s council including a claim that it owned the trademark in Cardano.
Although the open letter by IOHK and Emurgo points out similar concerns as the letter by the Guardians, it adds details that can be expected from two companies that worked closely with the Foundation — or at least that have attempted to. IOHK and Emurgo then ask the Foundation council to voluntarily subject itself to Swiss authorities for a complete audit and for the results to be released to the general public. They also describe that the Foundation is an independent legal entity governed by its council, meaning IOHK, Emurgo and the Cardano community cannot enforce the chairman to resign but only hope that reason may persuade him to voluntarily step down.
The good news is that in the absence of a well-functioning Cardano Foundation, IOHK and Emurgo commit to take multiple actions to ‘fill the gap’, namely: (1) hiring community managers, (2) hiring Cardano Foundation personnel directly engaged in community management should they desire to leave the Foundation, (3) hiring an open-source community manager, (4) starting efforts in Japan to improve exchange access and community understanding of Cardano, (5) scaling up educational and marketing efforts, (6) expanding the research scope to include areas originally foreseen for the Foundation, (7) starting a research agenda to design a decentralized foundation built as a decentralized autonomous organization (DAO) to be deployed on the Cardano Computation Layer (CCL).
Later that day, a video message from Hoskinson was added.
Charles Hoskinson reflects on the recent chain of events
In Hoskinson’s video message, he explains that the open letter to the community was their way of showing support to the Guardians’ effort and say “we hear you, we acknowledge you and we feel your pain”. He admits that IOHK and Emurgo have pretty much given up hope that the current Foundation council will change things for the better. On a more positive note, Hoskinson feels that the community autonomously stepping up in this manner is very encouraging, since an active, self-thinking community is essential in Cardano’s planned liquid on-chain democracy to work as envisioned.
The Cardano Foundation unfortunately — yet unsurprisingly — hasn’t publicly responded to either open letter.
Potential implications for Cardano’s future
IOHK CEO Charles Hoskinson has confirmed several times that IOHK is fully funded to complete all planned developments until at least 2020. In his latest statement, he added that due to the appreciation of Bitcoin, IOHK and Emurgo are sufficiently funded to commit to the additional roles as well. Due to this, the loss of access to the ICO funds and ADA allocation of the Cardano Foundation should not necessarily limit Cardano’s overall development.
The open letter by IOHK and Emurgo also described the Foundation’s statements that it owned the Cardano trademark were wrong. If that is correct, IOHK and Emurgo can just continue to develop the technology and brand as originally planned, supported by the newly hired personnel that will perform the tasks that the Foundation couldn’t.
The potential inaccessibility of the ADA allocated to the Cardano Foundation (~648M ADA) does have implications. Aside from the fact that these funds would be unavailable for community and ecosystem development as originally planned, they represent ~2.5% of the circulating supply. This is not nearly enough to pose a direct threat to the system’s security (which requires a >50% stake) but the allocation would represent a large stake in the envisioned liquid on-chain democracy and could thus potentially influence Cardano’s future.
While the monetary losses hurt, particularly reputation damage may have long-term consequences for Cardano. Even if all other negative effects could be prevented and there wouldn’t be any rational reason to worry about the system, brand reputation also has an emotional nature. While negative associations can never fully be prevented, being transparent and vigorous when it comes to dealing with setbacks (for instance, Hoskinson appearing on a popular YouTube channel to explain the situation or doing a surprise AMA to answer community questions) may help.
A few days ago, the Guardians of Cardano’s Twitter account has been restricted, which some see as a sign that “whatever is being pushed, it’s working”. The Guardians replied in this thread, saying “They can silence our Twitter account but they can’t stop us from pointing out the shameful silence of Parsons.” They also thanked the rest of the community for standing together, and described they’re working on additional information but just need some more time to do things the right way.
Sounds like this dance is far from over.
When facing opposition — just dance
The author wants to thank the Guardians of Cardano for providing and fact-checking information that was used in this article.
Rectification (Monday October 22nd, 16:00 UTC): The article originally stated that both IOHK and Emurgo had publicly shared their ADA address, which was incorrect as only IOHK has publicly shared their address.
Disclaimer: This article was written for informational and educational purposes only and should not be treated as investment advice.