With blockchain adoption taking off within and outside of the crypto world, Cardano is one of the few open-source projects that can boast a platform developed based on science and peer-reviewed research.
Bitcoin pioneered blockchain technology; however, Cardano brings a new type of ledger that aims to ultimately increase the scalability, performance, security, and energy efficiency of blockchains through the Ouroboros Proof of Stake (PoS) consensus protocol. To recap, a blockchain consensus protocol is a set of rules that govern operations in a network. Since a public blockchain operates without intermediaries, a consensus protocol allows the network’s participants to agree on the mechanisms and processes employed to record data on that digital ledger.
Cardano was established back in 2015 by a blockchain development firm called IOHK (Input Output Hong Kong) as a fully operational open-source blockchain project with a native ADA cryptocurrency. Like Ethereum, the project is geared towards becoming an advanced smart contract network for the development of decentralized applications (dApps). Cardano’s blockchain stands out as it solves the inherent performance and scalability issues of legacy PoW (Proof of Work) blockchains with an energy-efficient and scalable PoS protocol.
How Does Cardano Work?
Cardano is built on two layers, i.e., the Cardano settlement layer (CSL) and the Cardano computation layer (CCL). The fully functional settlement layer is used for ADA transactions. On the other hand, the computational layer is the smart contract platform still under development.
By separating the smart contract platform from the transaction settlement layer, Cardano can achieve a higher flexibility level, allowing users on both layers to operate with different parameters. In fact, Cardano is developing a new programming language for the development of its smart contracts. Therefore, CCL users will be able to create smart contracts with different rules than those operating on the CSL layer.
Cardano’s settlement layer uses technological and philosophical strategies to achieve its goal of building a scalable, energy-efficient blockchain. One of its central philosophical positions is based on the idea that a network with an “honest majority” will withstand adversaries.
In terms of technology, the Cardano blockchain is developed using a highly flexible programming language called Haskell (a fault-tolerant programming language). On top of a flexible programming language, Cardano’s PoS protocol, Ouroboros, is designed to sustain the network’s security while maintaining a high degree of scalability. Let’s examine how.
The Ouroboros Proof of Stake Protocol
Ouroboros is a proof of stake protocol that solves one of blockchains’ most significant challenges: the need for more computing power to mine blocks and secure a network. Cardano claims that Ouroboros is the first of its kind to be developed based on peer-reviewed research.
At its core, Ouroboros is Cardano’s security backbone. While miners on a PoW protocol are rewarded for the computational power they deploy, Cardano’s PoS system selects participants (in this case, stake pools) to validate blocks and receive ADA as a reward based on the amount of stake they control in the pool
The Ouroboros protocol uses a mathematically verified system that prevents hackers from infiltrating the network. As long as honest participants hold 51% of ADA, hackers and malicious actors cannot double-spend.
To incentivize honest behavior, Ouroboros rewards good actors with more ADA for completing delegation and staking tasks while maintaining fairness in the selection of staking pools through a random and unbiased selection process. This random selection process is necessary as it prevents the formation of predictable patterns that can be exploited by keen observers.
What is ADA and What Role Does It Play?
For most people, Cardano and ADA are synonymous. However, Cardano is the name of the blockchain project as a whole, while ADA is the network’s native cryptocurrency. With a current circulating supply of over 31 billion coins and a maximum limit of 45 billion, ADA is currently ranked among the top ten cryptocurrencies in terms of market capitalization.
Cardano has a number of stake pools composed of owners and delegators, or stakeholders. From these pools, slot leaders are randomly elected to produce new blocks. The more ADA one holds, the higher the chances of being selected. Any time a slot leader adds a new block, they receive ADA as a reward.
Slot leaders earn ADA during the periods in between the validation of new transactions. These periods are called epochs. Therefore, for each epoch, transaction fees are collected and distributed in the staking pool among the slot leaders based on the amount of stake they control.
ADA is also used in Cardano’s treasury, a system that funds developers who contribute to the Cardano ecosystem. Anyone interested in advancing the Cardano open-source platform’s development can apply for a grant through the treasury and receive ADA upon approval by the network’s stakeholders. The treasury is funded by a portion of block rewards from each transaction. The treasury is designed to allow for continual development even after IOHK exits the project.
What Problem Does Cardano Solve?
With so many blockchain projects available, scalability is one of the main factors determining success and performance. For example, with skyrocketing transaction fees on Ethereum’s network, scalability is a great challenge the more it expands.
The first generation of PoW blockchains required every miner to keep a copy of the ledger for the process of validation. However, as the network grows and the number of transactions increases, mining nodes get overwhelmed as they have to keep a record of all trades while also validating new ones.
Ultimately, this increases transactional delays rendering the network inefficient for daily micro-transactions. Cardano solves this problem by separating transactional data from the ledger’s history. For instance, a block validator on Cardano only maintains data relevant to the transaction as opposed to the entire blockchain.
In contrast to PoW blockchains, whose energy consumption has been compared to that of entire nations, Cardano’s blockchain is much more energy-efficient. As explained, this is because the network’s security is based on staking rather than computational power.
Pros and Cons of Cardano’s Blockchain
Cardano’s blockchain’s main selling point is that it has no scaling limit. Even with an increase in the number of transactions, Cardano is capable of remaining stable. What’s more, ADA transactions on Cardano are quick and cheap, making it a better form of digital money than most cryptocurrencies with lower transactional throughput. Thanks to its PoS protocol, Cardano is environmentally friendly and secure.
However, the platform is still under development and some of its features are still theoretical. In addition, there are many reported issues with their Daedalus wallet. At this point, even if ADA has a capacity for 257 transactions per second (TPS), there is still a long way to go compared with Visa’s capacity of about 2000 TPS.
The Future of Cardano and ADA
Even though Cardano’s focus on code scrutiny and science-based development is a welcome addition to the nascent blockchain industry, many fans are not happy with the slow updates and progress. Overall, Cardano holds value in the long term as it promises a future where scalable blockchain-based innovations can be developed to accommodate a wide range of use cases.
Unlike most Blockchains that only seek to overhaul the financial industry, Cardano aims to create a system that will enable the creation of a transparent and secure dApp ecosystem that cuts across multiple sectors.