Blockchain and cryptocurrency started with bitcoin (BTC), which took the world by storm in 2009 when it was introduced by the mysterious and pseudonymous Satoshi Nakamoto. Due to Bitcoin’s singular design and being first, the cryptocurrency has become enormously popular as an alternative store of value.
Then came Ethereum in 2015. One of the key new features offered by Ethereum is its smart contracts capability, which could fast-track digital payments and execution of agreements automatically when certain conditions are met. Ethereum has become a towering network and become a hotbed for decentralized finance (DeFi) and non-fungible tokens.
Cardano is now one of the most prominent blockchain platforms that came after Bitcoin and Ethereum. But that wasn’t always the case.
Only about a year ago, Cardano’s native cryptocurrency ADA had fallen to its all-time low of under US$0.02. But a lot has happened in the past year. ADA has soared by nearly 7,400% since. Cardano’s ADA coin is now the third biggest cryptocurrency in the world by market capitalization, after bitcoin and Ethereum’s ETH, as of publication time.
Let’s now take a closer look at the Cardano project, what it’s all about, and what the future holds for this so-called third-generation blockchain.
This guide contains:
- What is Cardano, and what makes it different from others?
- Blockchain before Cardano
- Cardano’s beginnings
- Cardano’s philosophy
- Cardano’s architecture: CSL and CCL
- Understanding key concepts
- Ouroboros mining protocol
- Proof of stake
- Mary hard fork
- Teams behind Cardano
- What does the future hold for the Cardano project?
1. What is Cardano, and what makes it different from other blockchain platforms?
Cardano is a public, open-source blockchain for building and running smart contracts and other decentralized protocols. The project was built from the ground-up by a team led by Charles Hoskinson, a co-founder of Ethereum. In contrast to many blockchains, Cardano did not kick off with a white paper. But it was the first blockchain to be peer-reviewed and developed by academic experts in the field.
2. Blockchain technology before Cardano
Hoskinson and others have been quite vocal on the shortcomings of the Bitcoin and Ethereum blockchains.
Bitcoin was created to eliminate a central authority in verifying transactions. Due to its simple design, it was very secure. But the Bitcoin blockchain was not modifiable and has few uses outside payments. Bitcoin is now referred to as a first-generation blockchain
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Ethereum is commonly called a second-generation blockchain. Ethereum was created in 2015 as a platform for deploying smart contracts and decentralized apps. This enabled users to exchange money, property, shares, or anything of value in a clear, conflict-free way and still eschewed the need for a central authority. But Ethereum has run into such problems as high gas fees and scalability.
Cardano is part of the so-called third generation in blockchain technology, which includes platforms like Polkadot and Cosmos. Aside from scalability, third-generation platforms like Cardano also seek to address interoperability and sustainability issues that plagued the earlier generations.
3. Cardano’s beginnings
Hoskinson started Cardano with his former Ethereum colleague Jerry Wood in 2014 after leaving Ethereum, following a difference in opinion with the team running the Ethereum Foundation over governance and the role of venture capital.
Cardano is supported by the same-named foundation that aids the research and development of the protocol and its community. The Cardano project’s development is spearheaded by the for-profit company Input Output Hong Kong (IOHK). Hoskinson also heads IOHK. The project signed up leading academics in several universities worldwide to review their work before announcing Cardano to the world.
In 2017, Cardano launched its native cryptocurrency ADA, named in homage to 19th-century mathematician Ada Lovelace, a child of English poet Lord Byron. Lovelace is credited as being one of the world’s first computer programmers by being the first to publish her idea of a machine algorithm for a computer-like “analytical engine.” The Cardano project itself is named after Italian polymath Gerolamo Cardano.
4. Cardano’s philosophy
Cardano has been different from other blockchain projects from the start. In lieu of publishing a white paper, Cardano adopted a collection of unique design principles, engineering best practices, and created avenues for continued exploration to achieve its goals. This decision has seen the Ethereum challenger gaining global prominence in a few short years. The project remains entirely open source and unpatented.
5. Cardano’s blockchain architecture: CSL and CCL
The Cardano blockchain is stratified into two layers, the Cardano Settlement Layer (CSL) and the Cardano Computational Layer (CCL), which separates Cardano from the regular smart contract platform. Ethereum runs a single-layer architecture, which has seen it experience network congestion, slow transaction speed and high gas fees.
Cardano seeks to address these issues through the CSL and CCL.
Its CSL layer facilitates peer-to-peer transactions such as tokens transfer between users. The CSL is Cardano’s balance ledger. Using a proof-of-stake consensus algorithm (Ouroboros protocol) to generate new blocks and confirm transactions, Cardano wants to improve Bitcoin’s proof-of-work protocol.
The CCL layer is where Cardano truly distinguishes itself. The CCL powers the computational needs of the blockchain, enabling the execution of smart contracts.
This layer is operated separately from the settlement layer to afford flexibility if the need for changes arises. It’s off-chain protocol allows it to offer greater data storage flexibility and an access model that lets users create customized rules when validating transactions.
6. Understanding Key Concepts
Ouroboros is Cardano’s consensus algorithm. It’s a proof-of-stake model with a twist. A proof-of-stake allows nodes with the highest number of stakes (or coins) to create transaction blocks. The Ouroboros algorithm works in a very different way.
What the Cardano team did with the Ouroboros is to divide physical time into epochs made of slots, which are just fixed periods. These so-called epochs operate in an annular fashion whereby when one epoch ends; another comes online. This helps to reduce network congestion and save on gas fees.
The epochs are divided further, with each having a slot leader chosen by other nodes. These slot leaders will see the creation and confirmation of transaction blocks to be added to the blockchain. If the selected slot leader cannot create a transaction block in an epoch, the next slot leader will have a go at it.
The transaction blocks submitted by the slot leaders will further be reviewed by input endorsers, who are the second group of stakeholders running the Ouroboros protocol. These input endorsers are also elected based on the amount of ADA tokens they have staked in the network.
The Ouroboros mining process removes the need for an energy-consuming proof-of-work protocol, which has been a source of controversy and negative publicity surrounding the Bitcoin and Ethereum networks.
Proof of stake is said to be the consensus mechanism that will replace the proof-of-work protocol brought by Bitcoin. A proof-of-work protocol allows crypto miners to invest computing power to see who will be chosen to mine a transaction block. The successful miner is rewarded with the native coin of the network.
Proof of stake, a protocol that Ethereum is working towards adopting with its Ethereum 2.0 development, will see nodes chosen based on the amount of coins they have staked. The slot leaders are chosen at random and required to create and confirm transactions blocks in the network.
Cardano’s aim is to make this selection as random and as secure as possible with its Ouroboros protocol. With the platform’s recent “Mary” upgrade, developer can finally create tokens on the Cardano blockchain just like its cryptocurrency ADA. Users will be able to store their digital assets on its Daedalus wallet or its super-lite Yoroi wallet, which lets users monitor digital assets they have interests in.
Hard forks are important changes to the source code of a blockchain protocol that bring about significant changes as they cause the previous protocol to become inoperable.
Cardan’s recent Mary hard fork upgrade launched the network into its new phase. The upgrade, which is named after “Frankenstein” author Mary Shelley, is meant to transition the Cardano blockchain from the era of decentralization (named Shelley) to a new, multi-asset era that Cardano calls the Goguen phase. Goguen, which is named after computer scientist Joseph Goguen, will see Cardano becoming a protocol that will allow developers and enterprises create custom tokens on the network.
The hard fork combinatory that went live on March 2 and has resulted in Cardano gaining wider acceptance for the DeFi community. Now, crypto enthusiasts looking for more scalability for their DeFi, non-fungible tokens (NFTs) or stablecoins projects can move to Cardano.
Mary represents a key part of IOHK’s growth strategy. The upgrade promises to eliminate high gas fees, ensure a much more scalable and secure network, and bolster Cardano’s standing as a potential “Ethereum killer.”
After Goguen, next up in Cardano’s roadmap for its future development is the Basho era, which will aim to improve interoperability and scalability. The final era will be Voltaire, which will introduce a voting and treasury system for governance.
7. Teams behind Cardano
Input Output Hong Kong is a for-profit company that supports Cardano. Signing a multi-year contract with blockchain company Emurgo, the company aims to promote better financial inclusion, and Hoskinson has spoken widely about Cardano’s uses cases in Africa and ambitions for helping lift the world’s poor.
The Cardano Foundation is an independent Swiss-based non-profit that aims to “standardise, protect and promote” Cardano’s technology through building partnerships with other companies as well as aiming to help shape legislation that affect the blockchain and cryptocurrency industry.
8. What does the fuure hold for the Cardano project?
High fees have been a limiting factor for the DeFi space. As the appeal for these projects increases with record values locked up, Ethereum’s gas fees have made them an expensive endeavor. Cardano is aiming to fix this and more with its Mary upgrade.
Cardano developers can now create custom tokens or import projects from other blockchains into the Cardano network. This could be beneficial for new and interesting projects such in the DeFi and NFT ecosystem.
Will Cardano’s Mary upgrade finally position the one-time underdog as a serious challenger to Ethereum? While Cardano is innovating, other blockchain platforms — including Ethereum — are in a race to work out issues like scalability and sustainability as well.
But in the world of technology, it’s not necessarily the best technology that wins, but the one with the better business strategy. Time will tell whether Cardano’s Africa and Fortune 500 strategy will prevail.