Cardano is a Blockchain created with the capacity to host and run decentralized applications (DApps) and smart contracts, besides a cryptocurrency. In basic terms, it is similar to the Ethereum blockchain.
The native currency, ADA, plays a central role in how the Cardano network performs—especially in how the nodes find consensus on the status of the shared ledger and the transactions recorded on it. Those who help maintain the shared ledger must hold some ADA to take part in a process known as staking. I explain how this works below.
Meanwhile, one also needs ADA to pay for any fees needed in order to execute processes in applications launched on the Cardano blockchain.
There is more in common between Ethereum and Cardano than just what they are designed to do and how they work. Two of the founding team members of Cardano, Charles Hoskinson and Jeremy Wood, were also in the Ethereum’s founding team that Vitalik Buterin led.
Cardano is a product of IOHK (Input Output Hong Kong) an engineering and research company that Charles Hoskinson and Jeremy Wood founded in 2015 after leaving the Ethereum project. The primary goal of IOHK is to use peer-to-peer innovations (blockchain) to design and deliver new financial solutions.
To fund the development, marketing and launch of Cardano (and other projects), IOHK held an initial offering between October 2017 and January 2018. They raised slightly over $62 million.
Meanwhile, the release of the initial Cardano core software was done in September 2017.
Because Cardano is a public blockchain based on an open source protocol, it does not augur well for it to be under the control of IOHK, a private entity. After the launch, IOHK turned the project over to the Cardano Foundation, a nonprofit based in Zug, Switzerland. The foundation oversees and supervises the development of the Cardano core protocol through community initiatives.
Meanwhile, IOHK is considered an independent contractor that the foundation, and the community at large, engage to build and maintain the core protocol and other related applications. The company does not have any powers to make technical changes without the express crowdsourced permission from the community through the Cardano Foundation.
Another entity that plays a major role in the advancement of Cardano is EMURGO. This is a for-profit company that is the founding member of the Cardano protocol. Its primary role is to help businesses, institutions, and other entities to find and leverage opportunities on the Cardano blockchain.
What is Cardano Used for
Cardano is designed to perform various functions. Its first application is ADA, a cryptocurrency that supports payments, the way Bitcoin and ETH do.
The second application is the smart contract capability, which third parties—individuals, businesses and public institutions—can use to develop, launch and run decentralized applications. Again, just like it is the case on the Ethereum blockchain, this application opens up infinite opportunities.
While Cardano has not yet received a lot of interest from developers and businesses, there is optimism within its community that in the long term many in the mainstream will appreciate its strengths and adopt it for various use cases, in particular through its smart contract application.
What is special about Cardano?
There are over 1000 blockchains out there. And even at the time Cardano was launching, there were several hundreds already live. It was, therefore, important that Cardano found a niche, differentiated itself or developed superior capacity. It has attempted to do all these three things together.
But why, in particular, would one look at Cardano and decide to use it over all the other blockchains?
The Cardano blockchain consists of 2 different layers, namely the Cardano Computation Layer (CCL) and the Cardano Settlement Layer (CSL). The reason it was created this way is that it wants to separate the blockchain transactions executed by the ADA cryptocurrency from the “smart contracts”.
Ultimately, this is a logical choice: This is because the scalability of the blockchain is much less limited. The transaction history does not have to be kept in the same place as the “smart contract”.
The goal of IOHK is ultimately to create a fully fledged platform that can be combined in a safe and fair way and the exchange of several important financial ecosystems such as payments, credits, rights and identities.
There are many ways that the dev team behind Cardano differentiated it from other blockchains.
The list includes the following.
Developed through peer reviewed research
Blockchain enthusiasts expect every dev team launching a blockchain project to write and publish a white paper they can read to understand its technical designs, processes, models and logic better.
It all started with Satoshi Nakamoto publishing the Bitcoin white paper in late 2008 through the cypherpunk mailing list.
However, no dev team, not even Satoshi Nakamoto, seems to have considered exposing the paper describing their innovation to a peer review process. That was, however, until Cardano came along.
Charles Hoskinson, Jeremy Wood, and the rest of the team at IOHK pursued an uncharted path in search for technical superiority. They had the project built on technology that has been challenged and faced positive and negative criticism from the best minds from around the world.
After coming up with their designs, models and hypothetical scenarios, they wrote scholarly papers and then invited experts from around the world to peer review them. Indeed, Cardano has a paper for all its critical components, and all of them have been peer reviewed by top academicians from elite institutions of learning from around the world.
Indeed, the company seemed to have created a mechanism through which any scholar interested in interrogating the project can do so with ease and acceptance.
Cardano, like any other blockchain, relies on a consensus protocol to maintain a shared ledger on its network. It had to find a way of picking a node on the network after every short while to add new transactions to the shared ledger in a way that does not jeopardize its security and integrity.
Bitcoin and Ethereum chose to use the Proof of Work (PoW) consensus protocol. That means their networks elect a node to add a block of new transactions to the shared ledger through a competition that involves spending energy to solve a difficult mathematical problem.
To participate in the lottery for picking the winning node that gets the responsibility of adding the next block of transactions to the Bitcoin ledger, for example, the nodes must prove that they have spent a considerable amount of energy (hence proof of work).
Indeed, the need to consume energy has been the most cited weakness of Bitcoin, and other blockchains that use the proof of work consensus mechanism. In particular, it has been viewed as unfriendly to the environment.
The Cardano blockchain is designed to use a consensus mechanism known as Delegated Proof of Stake (DPOS). This is an improvement to the Proof of Stake (POS) that many other blockchains before Cardano had chosen to use.
The Cardano consensus mechanism is implemented in their protocol known as Ouroboros.
To understand how the Cardano Delegated Proof of Stake works, you need first to understand how Proof of Stake works.
In Proof of Work, a node has to spend energy in order to participate in the lottery meant to choose one that adds the next block. In Proof of Stake, the node doesn’t join the competition by consuming energy.
Instead, the owner of the node stakes some of the platform’s native coins they already own. That means they tell the protocol that they have added coins to a wallet, and it should use those coins to enter them into the lottery for choosing the person to add the next block to the chain.
The concept of Proof of Stake was first described in a white paper that two blockchain developers, Sunny King and Scott Nadal, published in 2012. The two went on to design and launch Peercoin the next year as the first ever blockchain to use the consensus mechanism. In the same year, Pavel Vasin launched Blackcoin, also a proof of stake blockchain.
Ethereum recently joined the list of blockchains that use POS after it upgraded to Casper and switched from Proof of work.
In many of the Proof of Stake blockchains, the staked coins are locked or frozen for a specified period. That means you can’t send or spend them until the expiry of the specified duration, which can be days, weeks or even months. It also often means that you need to have a node online 24/7 to stand a chance of getting a reward.
Delegated Proof of Stake does things a little differently. Instead of staking the coins yourself, you have the opportunity and the means to select another node on the network to stake on your behalf. That takes the responsibility of maintaining a node from you and also increases the chances of winning the reward, as the delegated node has a lot more coins to stake.
That also means that the reward that is won is shared among those who contributed their coins to the staking node.
And because they will earn fees from all those who have chosen them, the delegated stakeholder (or operator) is motivated to have the node online throughout.
The network also benefits from this arrangement because the more nodes are running, the slower it might become. With at least a slightly reduced number of nodes, the network can run a little faster.
It is important to point out that Cardano is not the only blockchain that uses delegated proof of stake. Bitshares, a blockchain launched by one Dan Larimer and Charles Hoskinson in 2013, was the first. The launch of Bitshares happened before Charles Hockinson was involved with Ethereum.
The other significant blockchain network that uses the Delegated Proof of Stake consensus mechanism is the TRON network, founded by Justin Sun in 2017.
However, the way Cardano uses the delegated proof of stake protocol is unique. For example, other staking protocols, including that of Bitshares and TRON, require that the coins participating are locked or frozen for a specified period.
With the Cardano DPOS, you can add and subtract the coins you have staked at any time you want. That means you can have the coins in the wallet you make and receive payment participate in the maintenance of the shared ledger.
If that is so, then how does the Cardano protocol know what reward is due to stakeholders, and how does it deal with the frequently changing wallet balances?
The purpose of locking coins in the other proof of stake consensus mechanism is so that the protocol can include them in the lottery without the interference of frequent changes in the balances.
To fix this problem, the Cardano protocol takes a snapshot of the stakeholders’ status and staking wallet balances at the end of a period known as an epoch which lasts about 5 days.
It is that snapshot that is used to pick the slot leader to add the next block and also the amount of reward to be shared in the next epoch, regardless of whether users have added or subtracted from their stakes.
In other words, the balance in a wallet when the snapshot was taken is what is used to process staking and the resulting reward.
At the time of launching Cardano, it was apparent that old blockchains like Bitcoin and Ethereum were struggling to scale to meet the growing transaction demands.
For example, Bitcoin could only confirm about 7 transactions a second, and Ethereum could manage about 15. These are tiny numbers, especially when you consider that payment processors like Visa can process 60,000 transactions per second.
Cardano is designed to confirm as many transactions as there is a need for.
How is this possible?
You see, for the other blockchains, the entire network at each moment is focused on adding a single next block to the ledger. With Bitcoin, the entire network for about 10 minutes works of mine one block. The same applies to Ethereum and many other blockchains.
With Cardano, however, the Ouroboros protocol is designed in such a way that the nodes on the network can be clustered so that each works on a separate block at the same time. This means many blocks can be added to the ledger at near the same time.
Nevertheless, the different clusters of nodes on the network still collaborate so that a double spend never happens.
This clustering opens up an opportunity of multiplying the ability for the network to confirm a significantly huge number of transactions.
There are a few unique features built into the Cardano protocol that make it a little more secure than other blockchains out there.
One such feature is the dis-incentivizing the growth of staking pools into sizes that threaten the decentralization of the network.
We have at some point seen some mining pools on the Bitcoin network come close to having over 50% of the hashing power. If this is technically possible, then it means one entity could easily have the majority say on the network, and that means they can dictate how things are done.
Everyone is free to join any of the Cardano staking pools. Thanks to desirability based on fees charged, amount pledged by the pool owner and the proven ability to win rewards, some pools become more attractive than others.
This means those at the top of the desirability list can easily attract new stakeholders than those that are less attractive. Without intervention, the unintended consequence could then be that a single staking pool has most of the staked ADA coins and thus wins the rewards more frequently than the rest on the network.
The intervention that exists is that the Cardano protocol is designed in such a way that staking pools can reach a saturation point.
The more ADA is added to a staking pool, the higher the chance of it being selected as a slot leader. However, this trend goes on until a certain point and then the opposite effect starts to be realized. When this point is reached, the pool stops being attractive, and that limits its growth, thus protecting the network from possible decentralization and fewer entities becoming more frequent slot leaders.
The Cardano blockchain is not an island blockchain like Bitcoin or Ethereum. It is designed with the capability of talking and sharing value with other blockchains.
This makes it compatible with the vision many have of the blockchain ecosystem becoming something akin to the internet: many blockchain each with unique features and functionalities linking with one another to build an even bigger web.
This is indeed another way that the Cardano blockchain fixes the problem of scalability.
Like all the other public blockchains out there, the question on how developments and campaigns are carried out and, in particular, how decisions are made and implemented is important to the Cardano community.
In finding an answer, delicate balances have to be struck. It is important that critical decisions are not made by a few and also that open democracy does not detail progress.
Cardano manages its affairs through a nonprofit organization—Cardano Foundation. While this body provides guidance, especially in relation to off-chain activities, the actual decisions are made by stakeholders through direct or delegated voting rights.
Any stakeholder can come up with a proposal on how to improve the protocol or the ecosystem. They can put this proposal into what is known as the Cardano Improvement Proposal (CIP) and share it with the rest of the community through an established platform known as a Project Catalyst.
The rest of the community will consider and debate about it. At the end it is subjected to a vote whose weight is determined by the amount of stake in a stakeholder’s wallet.
Stakeholders can vote directly to either approve or disapprove. They can also abstain or delegated another to vote on their behalf. The stakeholders must also vote to approve the budget.
Adherence to regulation
The Cardano blockchain is not built to be completely anti-regulation. It is built to meet the needs of both those who want to keep their transactions private and those who may want to identify themselves and their transactions.
The Cardano allows users to choose which way they want to transact. The hope is that financial institutions and other entities that come under the sharp focus of regulators can use the blockchain without offending the regulators and others in the financial ecosystem.
This is the native coin of the Cardano. Its emission is capped at 50 million coins. This differentiates the blockchain with in particular Ethereum that doesn’t have a clear cap on its native coin Ether.
The ADA coin is also critical for the consensus protocol. It is the coin that stakeholders stake. It is also the unit in which the staking reward comes.
An ADA is divisible into a million Lovelace. This smallest unit of the cryptocurrency is named after Ada Lovelace, a 19th century English mathematician. Many consider her to be the first ever computer programmer.
How to earn from ADA
You can earn ADA in many ways. This includes buying it on an exchange, receiving it as payment for services and goods, and also staking in pools to earn it as a reward.
The initial holders of the ADA coins received them after participating in the initial coin offering (ICO) in late 2017. In the crowdsale, slightly over 50% of the total ADA coins were sold to the public.
How to stake on Cardano
In order to stake, you need to have some ADA coins. You can buy some from an exchange or earn them through commerce.
You also need to download the participating wallets. At the moment the only wallets you can use to stake are Daedalus, Yoroi and AdaLite.
Daedalus is a desktop wallet that has versions for Windows, Mac and Linux. On its part, Yoroi is a light wallet that can be used on mobile and browsers. It has Android, iOS and Chrome extension versions.
Meanwhile, AdaLite can be used as a web wallet and also through hardware wallets, in particular Trezor and Ledger Nano.
It is important to point out that with your coins in these wallets, they remain in your full control even when you join a staking pool.
With this ready, all you need to do is to transfer your ADA coins to the wallet and through the wallets interface, choose a staking pool.
There are several points you need to consider when choosing a staking pool to join.
One of those is the performance of the pool node and, in particular, its online availability. A node that disconnects from the network for reasons like poor internet, power disruption or malfunctioning of the hardware is likely to be ignored by the network and that reduces its chance to be selected as a slot leader. If you pick a pool with such a node, then your return on stake (ROS) is going to suffer.
The other factor to consider is the saturation level. Staking pools with a significant amount of stake are at the risk of being saturated, and that hurts the amount of reward they receive. You are better off in pools with average amounts of stake.
Also, consider the fees that the pool charges. Pools have the leeway to set their own fees. Before you join one, find out from their website or social media channels the amount of fees they charge.
Indeed, also consider whether the pool treats communication and being transparent to stakeholders as important. It is always better to be in a pool whose operators are always ready to share information.
Last, but not least, look at the amount of pool pledge, which is the amount of coins the pool operators have staked.
Otherwise, if you have the technical know-how and can keep a node online 24/7, you have the option of putting the ADA coin in a wallet of a node you have installed on your machine.
You can buy and sell ADA coins on exchanges just as you would Bitcoin and other cryptocurrencies. Indeed, you can also HODL in the hope that the price will go up in the long term.
The weaknesses of Cardano
Cardano is far from being a perfect blockchain. It has its own share of weaknesses.
One of those is that it has struggled to achieve market penetration. Meanwhile, the price of ADA has seemed to always struggle, even during crypto bullish markets.
Also, while the designs look great, they have not been tested enough to prove they are as resilient as they are portrayed in the peer reviewed technical papers.
For example, while Ethereum has struggled with scaling, its capacity to host applications has been tested.
Common Cardano terms used
Slot leader-a node selected to add the next block to the shared ledger.
Staking pool-a node that accepts to stake on behalf of stakeholders
Stakeholders-someone with ADA coins in wallets that take part in staking.
Epoch-a period between snapshots of the status of stakeholders and in particular their balances used to select a slot leader. It is about 5 days long
Slot-a moment when one stakeholder adds the next block to the Cardano ledger.
ROS– the short form of return on stake, the amount of revenue you get by having your ADA coins participate in the consensus process.
The Cardano is an attempt to make blockchain technology more suitable for solving existing and emerging problems in different aspects of the economy.
Whether it achieves its set goals, it is something we can just wait to see. Meanwhile, we can get involved in whatever way we feel is appropriate.