Last Updated on May 26, 2020
Bitcoin is by no means the be-all and end-all of the crypto industry. There are hundreds of other projects with even more revolutionary ideas just waiting to take the world by storm.
Today, we’ll introduce you to one of the more refreshing projects on the crypto scene that has been gaining a lot of traction recently. Cardano is a third-generation blockchain and home to the ADA cryptocurrency, whose main focus is becoming a leading platform for financial applications.
Cardano is the brainchild of Ethereum’s co-founder Charles Hoskinson and it’s backed by the Cardano Foundation as the custodial organization behind Cardano, the research and development company Input Output Hong Kong (IOHK), and Emurgo, a Japanese company that funds the ideas of this project.
Cardano is the first decentralized blockchain built on peer-reviewed academic research. It supports the native cryptocurrency ADA, named after the revolutionary programmer Ada Lovelace (did you know she was the daughter of English poet Lord Byron?).
Cardano’s website contains the official roadmap of the project and a separate page called Why we are building Cardano, where the team discloses the backstory and design principles of the platform which could be seen as a kind of an unofficial white paper.
According to the official roadmap, Cardano will be released in five stages:
- Byron – Foundation.
Establishing the network and creating a community for the exchange of their native currency ADA. During this phase, the Daedalus wallet, a desktop wallet for ADA was created.
- Shelley – Decentralization.
This is the phase that takes Cardano to maturation and prepares the technology for complete decentralization of the system.
- Goguen – Smart Contracts.
The Goguen stage allows users to build smart contracts and decentralized applications onto Cardano’s foundation. This includes designing Pluton, a programming language for Cardano’s smart contracts, and Marlowe, a domain-specific language for financial contracts.
- Basho – Scaling.
This stage is centered on improving the network’s performance in terms of scalability and interoperability. It will see the creation of sidechains to off-load work from the main chain, and the adoption of parallel accounting styles or choosing between the UTXO model and account-based models.
- Voltaire – Governance.
The final Voltaire stage will transform Cardano into a self-sustainable network where network participants will be able to influence its development by proposing their own solutions. The stakeholders will vote on the best proposals that Cardano will fund using money from the new treasury system. A small fraction of all transaction fees will pool funds into the treasury system.
From Bitcoin to Cardano
You might be wondering why we introduced Cardano as a third-generation blockchain and what makes one generation different from the other.
In 2009, when blockchain technology made its appearance for the first time, launched by Bitcoin’s founder Satoshi Nakamoto, it showed that it’s possible to create decentralized currencies that could be exchanged without the omnipresence of the middlemen on a peer to peer network. This is known as the first-generation.
As soon as other developers went deeper into the technology, it was discovered that blockchain has the potential for so much more than just electronic payments. With Ethereum, the second-generation blockchain appeared, used for building smart contracts and decentralized applications fueled by digital tokens.
However, the spreading popularity and acceptance of cryptocurrencies brought new challenges that need to be addressed by the third-generation blockchains just as Cardano. These challenges are scalability, interoperability, and sustainability.
How Does Cardano Work?
One of the solutions proposed by Cardano that might help us solve the scalability problem is to develop the network using two different layers: the Cardano Settlement Layer (CSL) and the Cardano Computational Layer (CCL).
The CSL is the first layer that gives balance to the platform and uses a unique Proof of Stake consensus protocol called Ouroboros to generate new blocks and verify transactions. The CCL is the second layer that contains information on the reason why transactions take place.
The main reason why Cardano chose a PoS algorithm over a PoW one is unreasonable energy consumption. Bitcoin uses proof of work mechanism and, as a result, spends large amounts of energy to generate new blocks of data.
As the demand for BTC continues to grow, the mining difficulty increases and so do the energy requirements. The PoS mechanism is a cost-effective alternative where the validating nodes are chosen based on the number of coins they own. These coins are put at stake as an incentive for the node to remain honest when validating transactions.
The Ouroboros protocol is divided into epochs and each epoch is divided into slots (short time periods, e.g. 20s). Each slot has one slot leader who has the right to make new blocks, sign them with the secret key, and broadcast them on the network. Instead of validators, Ouroboros has stakeholders, i.e. nodes with a positive stake. They have the right to be elected as slot leaders.
To make sure that the election will be unbiased, Cardano performs a multiparty computation (MPC) to achieve random selection. The electors are asked to perform an action called “coin tossing” and share their randomly generated results with the others.
The election is divided into three phases: Commitment, Reveal, and Recovery Phase, and at the end, they run the “Follow the Satoshi” algorithm to select a random coin that belongs to one of the stakeholders.
Disclaimer: Digital currencies and cryptocurrencies are volatile and can involve a lot of risk. Their prices and performance is very unpredictable and past performance is no guarantee of future performance. Consult a financial advisor or obtain your own advice independent of this site before relying and acting on the information provided.