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Using eUTXO tokens and native assets on the Cardano blockchain

Albert Morgan

— 2 min read

The Cardano blockchain allows users to create and trade custom tokens and native assets thanks to its extended UTXO (eUTXO) model. In this article, we'll explore how eUTXO enables advanced financial applications on Cardano.

Introduction

Unlike account-based blockchains like Ethereum, Cardano uses an eUTXO system that provides deterministic guarantees around the outcomes of transactions. This allows developers to build decentralized apps and issue tokens with more predictability and security. eUTXO also enables Cardano to support native tokens and assets without the need for smart contracts.

Creating tokens with eUTXO

On Cardano, tokens are created by defining a monetary policy in the metadata of a transaction output. For example, a policy could specify that a token has a fixed supply or an adjustable supply over time. When transactions consume UTXOs containing these tokens, the policy rules determine if new token units can be minted. This is all handled seamlessly by the eUTXO ledger.

Developers don't need to write smart contracts to mint and manage tokens. The deterministic nature of eUTXO provides the necessary logic. This results in tokens and digital assets that are more secure and easier to reason about for end users.

Transferring and trading native assets

In addition to supporting user-defined tokens, Cardano allows for native assets like ADA and staking certificates to be transferred and traded without an overlaying smart contract. The ledger natively understands these assets and handles their movement accordingly.

For example, when transferring ADA, the eUTXO model ensures the right amount is debited from the sender's balance and credited to the recipient. Other ledger entries are automatically updated as well. This provides a seamless experience for transacting in native assets issued on Cardano.

The integration of native assets also enables decentralized exchanges to allow trading of ADA and other native tokens without smart contracts. Overall, eUTXO provides a high degree of native functionality for handling digital assets on Cardano.

"Cardano's eUTXO model strikes an elegant balance between predictable token behavior and support for native assets."
  • Charles Hoskinson, founder of Cardano
  • Native assets don't require smart contracts to transfer or trade on Cardano thanks to eUTXO integration
  • User-defined tokens can be created by defining monetary policies, no coding required
  • eUTXO enables deterministic outcomes for transactions involving tokens and native assets

Can eUTXO tokens enable algorithmic stablecoins on Cardano?

Yes, the eUTXO model provides the necessary foundations for creating algorithmic stablecoins on Cardano. Developers could define monetary policies that programmatically adjust token supplies based on price feeds to maintain a peg to a real-world asset.

For example, when demand increases and a token trades above the pegged price, new tokens could be minted to increase supply and bring the price back down. The reverse action of burning tokens could occur when prices fall below the peg.

These types of algebraic policies and behaviors are well-suited for eUTXO-based tokens. The deterministic nature provides predictability around how policy rules will execute. This allows creating algorithmic stablecoins on Cardano that reliably maintain their pegs without needing external collateral or custodians.

How do eUTXO tokens compare to ERC-20 tokens on Ethereum?

While both enable custom user-defined tokens, eUTXO tokens have some key advantages:

  • Predictable behavior defined by monetary policies, not dependent on smart contracts
  • Support for native assets brings added utility
  • Lower fees and faster transaction times currently on Cardano blockchain
  • Deterministic outcomes improve security compared to account-based model

However, ERC-20 tokens benefit from Ethereum's larger developer ecosystem and dominance as the most-used blockchain for DeFi apps currently.

Yet eUTXO shows promise for enabling the next generation of decentralized finance applications with predictable and secure tokenization of assets on Cardano.

Conclusion

Cardano's eUTXO model provides a robust foundation for creating both user-defined tokens and supporting native assets. By incorporating token behavior directly into the ledger logic, eUTXO enables predictable outcomes, security, and advanced financial use cases. As Cardano adoption grows, we can expect its native asset and tokenization capabilities to enable new decentralized apps and services.

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