Bitcoin was the world’s revolutionary first cryptocurrency; Ethereum took the next herculean step forward with smart contract functionality, decentralized applications (dApps), and DeFi. Cardano has been termed a third-generation crypto project - But why?
Founded in 2015 by Ethereum founding member Charles Hoskinson and launched publicly in 2017, Cardano is an open-source, peer-reviewed blockchain protocol. It supports a native cryptocurrency, ADA, named after the famous English mathematician, Ada Lovelace. The smallest unit of ADA, 0.000001 ADA, is fittingly called a Lovelace. The Cardano team focuses on three core principles: scalability, interoperability, and sustainability.
Cardano’s architecture serves as a distinguishing feature, boasting a unique two-layer structure designed to improve scalability. Cardano also uses a Proof-of-Stake consensus algorithm, called Ouroboros, which is the first provably secure PoS protocol! The significance of this cannot be overlooked. With Ethereum now transitioning to PoS as well, the future of crypto projects truly lies in their ability to propose sustainable growth paths.
How It Works - Cardano’s Unique Structure
Unlike most other blockchains, Cardano’s blockchain is composed of two separate layers: the Cardano Settlement Layer (CSL) and the Cardano Computational Layer (CCL). This division of labor in the system reduces network congestion and fees.
CSL allows ADA to be transferred between users - it is essentially solely a ‘value ledger.’ According to the project, the purpose of this is to separate value from computation. As a result, CSL is able to focus on providing a streamlined service with links to other ledgers, higher security, and enhanced scalability.
The second layer, CCL, is built to support smart contracts, tokenization, and dApps - this means it must be able to support Turing complete languages, as well as compute gas fees. Unlike on Ethereum, where every transaction is treated equally, only CCL handles these few functions, which preserves network resources.
Ouroboros is Cardano’s consensus algorithm, built to improve blockchain security and reduce energy costs. Some blockchains currently use Proof-of-Work as their consensus algorithm, a pioneering and yet ultimately unsustainable mechanism. This is because PoW requires users to participate in energy-intensive ‘work’ called mining, as a way of securing the network.
Holders of ADA can join a staking pool, each of which operate as a node on the Cardano network. Nodes are then selected by the protocol to validate new blocks. The Ouroboros protocol’s block production schedule is cyclical - it consists of periods of approximately five days called epochs. Each epoch is made up of 432,000 slots, which are smaller 20-second divisions of time.
Each slot must be assigned a slot leader, nominated partly at random and partly by how much stake they contribute. The more ADA is staked in a pool, the higher the chances of being selected as slot leader. Slot leaders are responsible for verifying transactions and adding them to new blocks. Failing to do so loses them their chance at receiving rewards - newly minted ADA - for their contribution. This structure allows for improved scalability, as multiple epochs can be run simultaneously.
Cardano is a relatively young network, with an extensive and ambitious roadmap delineated by its creators. This is broken up into five, extravagantly named-development phases: Byron, Shelley, Goguen, Basho, and Voltaire. Each phase hones in on a new functionality that will be introduced to the network.
Byron (Foundation Era)
Byron is the foundation phrase of Cardano, primarily focused on allowing users to buy and sell ADA on the innovative Ouroboros PoS protocol. Cardano also released two wallets - the desktop wallet Daedalus and the light wallet Yoroi - in this phase. Named after Ada Lovelace’s father Lord Byron, this era sought to cement Cardano’s reputation among leading crypto projects. It ended in 2020 with the deployment of Shelley.
Shelley (Decentralization Era)
Shelley, named after Frankenstein author Mary Shelley, marked Cardano’s movement towards decentralization. Launched on July 29, 2020, Shelley takes over from Byron by giving more autonomy to the Cardano community. This was done by transferring the control of nodes to network participants.
Like other PoS protocols, Cardano supports stake delegation - meaning ADA token holders can delegate their stake to other validators as a means of participating. Shelley used the Incentivized Testnet (ITN) as a way of assessing incentive schemes: users could delegate stake or operate a stake pool and earn real ADA.
Shelley is expected to make Cardano 50-100 times more decentralized than its counterparts, paving the way for a thoroughly distributed network.
Goguen (Smart Contracts Era)
Goguen, named after American computer scientist Joseph Goguen, is next in line. This phase will allow developers to build dApps, as well as offer smart contract support and token issuance. To do this, Goguen introduced Plutus - its smart contract execution platform and programming language - as well as Marlowe, a more user-friendly language for building financial smart contracts.
Basho (Scaling Era)
Basho’s objective is to optimize what already exists on the network, with a focus on interoperability and scalability. As Cardano grows, Basho will concentrate on adapting to higher transaction volumes. This will involve the introduction of sidechains, which will be interoperable with the Cardano mainnet.
Voltaire (Governance Era)
The final phase, Voltaire, will introduce a voting and treasury system. This will allow users to vote on key issues like technical improvements, funding, and important upgrades. This last transfer of authority from IOHK, one of Cardano’s parent companies, will finalize the path to full decentralization.
While Cardano is still arguably in its infant stages, its unique makeup and ambitious goals make it quite the contender. Not to mention it is now the fifth largest cryptocurrency in terms of market capitalization! Cardano also boasts an impressively high throughput, at 257 TPS next to Bitcoin’s mere 4.6, and Ethereum’s 25.
As we have seen, Cardano will not have smart contracts until the Goguen update is fully up and running. This will be monumental for the network, as it will push forward one of Cardano’s ultimate goals of DeFi functionality. And with the recent hype around NFTs in 2021, Cardano’s potential as a cheaper alternative to Ethereum will likely attract users.
Cardano is also notably invested in humanitarian work, as exemplified by the Cardano foundation. It has been involved in several charitable projects, one of which is the creation of a digital identity system for students in Ethiopia. As of March 2021, the foundation had pledged more than $500 million for humanitarian initiatives on the Cardano network. And more recently, it teamed up with NGO Save the Children to facilitate donations in ADA.
Yes, Cardano has some big boots to fill. But, if it achieves all it has set out to do, it could truly redefine this space.