Basics of Cardano (ADA) | Simply Explained

Basics of Cardano (ADA) | Simply Explained

The Cardano network is an open-sourced, public blockchain with integrated smart contracts. The platform can support a host of different coins and tokens including its native crypto coin, ADA. Research is one of the things that separates Cardano from other players in this space. Their concepts are strongly based on academic and scientific theories, along with, peer-reviewed papers to gain consensus.

History of Cardano

Cardano was Founded in 2015 by Jeremy Wood and Charles Hoskinson, along with the Cardano Foundation. Charles Hoskinson is one of the co-founders of Ethereum, a long time crypto enthusiast and math genius. The Cardano network is named after Italian Mathematician and Physician, Girolamo Cardano. Girolamo Cardano is best known for giving us the First Systematic Computations of Probabilities.

The Cardano networks native coin is called ADA, which is named after Ada Lovelace. Lovelace, the daughter of Lord Byron, who is widely regarded as the world’s first computer programmer.

3 Organizations Supporting Cardano

IOHK Input Output Hong Kong is a development and research industry leader in cryptographic and distributed systems. The companies core focus is on Science and Engineering. The science team specializes on the foundations of cryptocurrencies. The engineering team uses the foundation to build functional systems.

The Cardano Foundation is a non-profit entity that ensures the protection of the protocol technology, also working to standardize and promote the technology.

Emurgo is a Japanese innovation firm that focuses resources on commercial blockchain technology.

What makes Cardano Different?

The Cardano platform is relatively new, launching in September of 2017. The Cardano project is built on peer-reviewed papers, instead of the Cardano team creating a whitepaper and building a solution. Their ideas are first analyzed and verified by industry experts throughout the world.

Cardano claims to be the 3rd Generation of cryptocurrencies. As we all know, Bitcoin was 1st, Bitcoin is a method to transfer and store value. However, the system is slow and expensive to maintain which makes it difficult to run on a large scale. The 2nd Generation started with Ethereum and gave us the first blockchain to use Smart Contracts. Scalability was definitely improved with Ethereum, however, the system is still not fast enough to become a Global Currency.

Cardano is different in the fact that the platform is divided into 2 layers. The First layer is a settlement layer that is responsible for handling cryptocurrency transactions. The Second layer is the computing layer, its main responsibility is to handle the computing of smart contracts. This idea is to separate the accounting of transactions from the reasons the transactions are performed.

The Cardano Settlement Layer (or CSL), uses the native currency ADA. ADA can be exchanged as a way to transfer funds from one party to another on the settlement layer.

Cardano also allows for dApps (Decentralized Applications) to run on their network. A dApp is an application that runs on the blockchain rather than a centralized server. Decentralized applications utilize smart contracts to perform transactions throughout the blockchain.

The Ouroboros Algorithm

Cardano uses a proprietary proof of stake consensus algorithm known as, Ouroboros to validate transactions on the network. Ouroboros was developed over many years by a team of cryptography experts. Its modular design makes it very flexible and somewhat future proof as consensus algorithms adapt over the years. According to proof of stake, the node that will validate the next block is randomly selected based on their stake in the network. The Cardano network is not dependent on mining like Bitcoin’s proof of work consensus method.

Epochs and Slot Leaders

Cardano uses the concept of Epochs (pronounced Epics) to measure time on the network. You can think of an Epoch as a block of time on a calendar. Epochs are further divided into slots which are small periods of time within an epoch. A slot generally only lasts for about 15-20 seconds. Each slot has one Slot Leader, the slot leader is the node chosen to validate transactions for a specified slot. As a slot leader, the selected node can create 1 block containing all the transactions for the slot they are chosen for. Transaction fees for an Epoch are pool together and are distributed to the slot leaders as a reward.

In order to take part in choosing who the next slot leader will be, you have to have a certain stake in the network. If you meet the minimum stake required, you are considered an Elector for the next Epoch. 

Slot leaders are selected using a distributed method of generating a random number. The Electors elect slot leaders for the next epoch during the current epoch, and it cannot be changed.

You can think of the slot leader election as a lottery; anyone from the group of stakeholders can become a slot leader. However, an important idea of PoS is that the more stake a stakeholder has, the more chances one has to be elected as a slot leader. It is also important to note that, a stakeholder can be elected as a slot leader for more than one slot during the same epoch. If a slot leader does not complete the task in time or doesn’t show up for their slot, the slot is lost and the node will have to wait until they are re-elected.

3rd Generation Cryptocurrency

As the 3rd Generation of cryptocurrency, Cardano aims to solve 3 issues of previous blockchain generations. The pain points associated with generations 1 and 2 are related to Interoperability, Scalability, and Sustainability.

I will break down each of these issues, starting with Scalability. Scalability has 3 subcategories that need to be addressed.

Speed (measured in Transactions per Second T/S): In order for a cryptocurrency to become a global payment platform, it will need to be able to handle a tremendous amount of transaction volume. By comparison, the Visa network handles 150 million transactions per day and is capable of handling 24,000+ transactions per second.

Cardano’s consensus algorithm, Ouroboros, attempts to solve scalability by using Proof of Stake. What makes Cardano scalable is that they can increase the number of slots per epoch to increase volume capacity. The system is also capable of running multiple epochs in parallel.

Network Bandwidth: Blockchains are stored in a Peer to Peer (P2P) network. Each node operating within the network receives a copy of all new transactions. As you increase to 1000’s transactions per second, each node would need a lot of bandwidth to continually download the updated the ledger. Cardano addresses this issue by dividing the network into subnetworks. To do this Cardano implements a technique called RINA (Recursive InterNetwork Architecture). Each node is part of a subnetwork within the blockchain and can communicate with other nodes in other subnetworks if needed. This technique is similar to the TCP/IP protocol, which is the protocol for connecting to the internet.

Data Storage: A great thing about blockchain technology is that the ledger records all transactions that ever happened, but how can we manage this exponentially growing data set? This issue is definitely #3 on the priority list for Cardano. They have considered different techniques such as Compression, Partitioning, and Pruning. However, with the cost of data storage still relatively low, this issue will be tackled in 2019.

The Second issue to address is interoperability. Within interoperability, there are 2 underlying issues. The first issue is that there are too many cryptocurrencies in existence right now. It’s impossible for the average person to distinguish one from another or know which to use? The second issue around interoperability has to do with the fact that banks aren’t willing to trust.

The Cardano team believes that the future will bring us multiple currencies that are used for different things. Each of these currencies will have its own protocols and sets of rules. At the time of writing this article, there are over 1,500 different cryptocurrencies, and very few of them can operate with one another. The Cardano project aims to fix this issue, their goal is to be the ‘Internet of Blockchains’. In simple terms, a blockchain that understands the protocols of many blockchains. This means the ability to transfer value no matter the currency across the Cardano chain.

Everyone had that one friend growing up that no matter what situation you were in they knew how to act. They knew how to act around parents, they knew how to act around the guys, they knew how to act around the girls, they knew how to act around teachers in school. There was not a situation they were out of place. This is the goal of Cardano, they want to be a ‘charming‘ blockchain that can hang out and play nice with all the other blockchains.

There is also the issue caused by Central Banking and Governments. Cryptocurrencies do not adhere to traditional banking regulations, which causes institutional banking to shy away from acceptance. Banks want to know information about every transaction. Who sent it? Who received it? What was it for? Cardano realizes that this information may or may not be sensitive and lets the user decide what and how much metadata to provide for any transaction.

Providing information about transactions will allow for a more symbiotic relationship between banking and crypto. It reminds me of the early days of Caller ID, at first, everyone made sure their number came up as ‘BLOCKED’. Fast forward 15 years and people realize Caller ID is a nice feature that doesn’t invade privacy. As blockchain technology advances we will start to realize that anonymity is not the best feature.

The final issue being tackled by the Cardano team is Sustainability. As previously mentioned, we are currently saturated with cryptocurrencies. To maintain the development of a new technology is very expensive. When a cryptocurrency launches they normally do an ICO or Initial Coin Offering, this usually nets the team a large amount of capital to develop their project. However, what happens if the money runs out before the technology is complete? That answer is determined on a case by case basis, but I think we can agree that development requires ongoing funding. As the money dries up, usually the development stops, and everyone that has worked to fund the project is left with nothing.

The solution Cardano offers to this problem is the creation of a Treasury. The treasury receives a very small percentage of all transactions that happen on the network. In simple terms, the treasury is a digital wallet that is not controlled by any one person. It acts similar to a smart contract, whereby funds can be released to developers that want to make technical improvements to the network.

Any developer can submit a proposal to be reviewed by the Cardano community. The proposal includes the details and scope of the change, and how much money is needed for development. The ideas are then presented to the Cardano community for a vote. After the voting period is concluded the treasury tallies the votes and money is distributed to the winners so they can begin the new development. The Treasury system is designed to keep Cardano sustainable by providing an always available stream of income for bug fixes, maintenance, and improvements.

Cardano Summary

The Cardano project is very young, but as you can tell they have a very ambitious team. With a strong backing and innovative approach to blockchain and management, maybe this will be the chain we are talking about in 10 years time. I hope you have enjoyed this deep dive into Cardano, please leave your feedback in the comments section below.

At the time of writing this article, ADA is trading at just under 7 cents. Bitcoin is at $6,500, and Bitcoin dominance is 55.7%

References:

https://dex.openledger.io/a-history-of-cardano-and-its-ada-coin/

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