Cardano: Everything You Need to Know Before Investing In It
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June 30th, 2022. Cardano is one of the fastest-growing cryptocurrency projects in the world and has been that way since it was created in 2015. Founded by Charles Hoskinson, one of Ethereum’s co-founders, Cardano has grown to become a leader in blockchain technology for verifying transactions and building decentralized applications (dApps).
Cardano is often called an “Ethereum Killer,” a name used for third-generation blockchains that tackle Ethereum’s scalability problems.
While other open-source cryptocurrency projects released whitepapers detailing their methods of operation to the public, Cardano took a different route. The developers released their papers to renowned scientific experts for peer review to strengthen their design.
This move gave Cardano a lot of clout and helped them grow from $0.18 in January 2021 to an all-time high of $3.09 in September, a 1,600% rise in 8 months. Cardano is also a top ten cryptocurrency by market capitalization and has remained so since its inception.
These facts about Cardano are exciting and show that the coin has a promising future, but what makes Cardano special at its core? What is the technological foundation of this blockchain, and how is it better than Ethereum?
This article will go through everything you need to know about Cardano, its origin, foundation, benefits, and disadvantages.
What is Cardano?
Cardano is a third-generation blockchain used to verify transactions and build decentralized applications. It uses the Proof-of-Stake (PoS) consensus mechanism to validate its transactions. PoS is more efficient than the Proof of Work (PoW) consensus mechanism that Bitcoin and Ethereum currently use.
For those who may not be familiar with these terms, a consensus mechanism is a method by which a blockchain validates its transactions. The blockchain is an open ledger that stores transactions, but it (the blockchain) does not have a single trusted entity that can verify the legitimacy of the transactions contained within it.
Different blockchains use different consensus mechanisms to confirm that the transactions on the ledger are accurate.
In PoW blockchains like Bitcoin and Ethereum, miners use their advanced computers to solve complex equations and compete for an opportunity to validate transactions. The miner who solves the problem can validate the transactions and add another block to the blockchain.
On the other hand, PoS blockchains require people to offer their coins as collateral. This process is called staking, and the people who stake are called validators. After staking, some validators are randomly selected to verify the transactions in the blockchain. Validators are rewarded with the coins that come with every newly mined block on the platform.
PoW is a very secure consensus mechanism but is not scalable because it is very slow and uses a lot of energy. On the other hand, PoS blockchains like Cardano reduce the amount of energy required and are much faster in validating transactions. For example, the speed of transaction validation in ETH is around 15 transactions per second (15 tps), while that of Cardano is around 250 tps.
Cardano is the largest cryptocurrency to use the PoS model and has one of the most secure and advanced consensus proof-of-stake protocols called Ouroboros.
Brief History of Cardano
When people talk about Ethereum’s founding, the name you hear is Vitalik Buterin. But, in reality, other founders were not as prominent as Buterin. One of them was Charles Hoskinson.
Before working on Ethereum with Buterin, Hoskinson worked a consulting job in Colorado. He quit in 2013 to pursue a career in cryptocurrencies after studying Bitcoin and seeing its potential as a digital form of gold. He founded the Bitcoin Foundation’s education committee and established the Cryptocurrency Research Group in 2013.
While working at the foundation, he met Vitalik Buterin. Along with several others, they founded Ethereum. He helped design the ICO and served as the CEO of the project for a while.
In 2014, Hoskinson seriously disagreed with Buterin about Ethereum’s long-term plans. He wanted a commercial governance structure for Ethereum, while Buterin wanted to keep Ethereum non-profit.
This boardroom brawl (as Hoskinson described it) led to his departure from Ethereum, and he went on to form IOHK (Input Output Hong Kong), an engineering company that builds blockchain, in 2015.
The Cardano project was founded in 2015 by IOHK, with Hoskinson at the helm of its affairs. The coin was launched on September 27, 2017.
Cardano was named after Gerolamo Cardano, an Italian mathematician from the Renaissance era. Its native token, ADA, was named after Ada Lovelace, a mathematician known for programming the first computers.
Hoskinson took a very conscious approach to Cardano’s design. He ensured that experts reviewed every step of the platform’s development from the ground up. Cardano gained an excellent reputation thanks to this approach that helped it remain a top ten cryptocurrency (by market cap) since it was founded in 2015.
What Problems Does Cardano Solve?
Cardano is a third-generation blockchain that plans to improve on the previous two generations of blockchains.
The first generation of blockchains was about Bitcoin and digital currencies. At this time, blockchain technology was solely a decentralised ledger used to transfer money without a centralized authority.
The second generation took it a bit further with the implementation of smart contracts by Ethereum.
With smart contracts, developers can build apps for different purposes on the blockchain without having to create a new blockchain for themselves. All they have to do is learn the programming language of the blockchain protocol, and they can build gaming, social, insurance, etc., apps on the blockchain.
While the second generation was revolutionary, it had some issues: scalability, interoperability, and sustainability. Let’s look at how Cardano, a third-generation blockchain, aims to solve these problems.
Before a cryptocurrency can become a global payment system, it should be able to handle large amounts of transactions at a time. Unfortunately, second-generation cryptocurrencies can’t handle enough transactions on a large scale.
For example, Ethereum can only handle 15 transactions per second at most. Comparatively, a centralized payment system like Visa can handle about 1,700 transactions per second.
Cardano solves the scalability issue by using the Ouroboros proof of stake protocol that increases the speed of transactions to 250 transactions per second. We’ll talk more about the Ouroboros protocol later in this article.
There are thousands of cryptocurrencies in circulation today, and many of them can’t communicate with each other. This is because they reside on different blockchains and have different programming languages.
For example, you can’t transfer data from the Ethereum blockchain to the Bitcoin blockchain without an intermediary.
Cardano aims to solve the interoperability problem by creating sidechains that can connect across different Layer-1 and Layer-2 blockchains.
When developers want to work on a new cryptocurrency project, they develop an ICO (Initial Coin Offering) and raise funds from there. They can use these funds to work on their project for as long as the money takes them.
This is good, but who will pay for developers to upgrade the blockchain when it is fully decentralized? Developers need incentives to continue to develop the blockchain protocol, especially since more people will continue to join in the future.
Cardano solves this problem by introducing a treasury. This treasury is a smart contract that collects small fees from transactions made on the blockchain and pays developers who wish to upgrade the protocol.
As of June 7, 2022, the Cardano treasury holds about 900 million ADA coins.
How Cardano Works
Cardano uses the Ouroboros protocol, which uses a proof of stake consensus mechanism. Ouroboros is more efficient than proof of work and other proof of stake consensus mechanisms.
Here’s how it works.
Block validators stake their tokens on the blockchain for an opportunity to validate the next block. Ouroboros divides physical time into epochs, which are fixed periods. Each epoch lasts around five days and contains many slots, which are also fixed periods. Currently, each slot is around one second long.
Each slot has a slot leader who is chosen randomly and tasked with creating new blocks, validating the blocks, and adding the newly validated block to the blockchain. Although selecting a block leader is an entirely random process, validators with higher stakes have a better chance of getting selected.
Slot leaders are the only ones who can mine blocks for that particular slot. If they fail to do this on time, they lose their right to validate the block and have to wait to be chosen again by the network.
Cardano is highly scalable using this method because it can increase the number of slots in an epoch or run multiple epochs in parallel.
Cardano Vs. Ethereum
Many people have declared Cardano a worthy replacement for Ethereum because of its improvements in infrastructure and scalability. Ethereum is currently the most prominent blockchain for running decentralized applications. Still, its struggles with speed and high gas fees have led people to think it’ll lose its place to other third-generation blockchain protocols like Cardano.
How true is this?
For now, Cardano still has a long way to go before it can stand toe to toe with Ethereum. Ethereum has the first-mover advantage over similar blockchain protocols and is still very strong in the top spot. For example, there are 73 dApps on the Cardano blockchain, while Ethereum has more than 3,000.
Also, Ethereum plans to switch to proof of stake very soon. This new upgrade is called Ethereum 2.0, and it aims to increase scalability, reduce energy costs, and lower the cost of validating transactions.
That said, it would be foolish to write off Cardano at this stage. Cardano is still undergoing some technological developments of its own. Cardano plans to be a self-sustaining system when all stages of development are complete.
You can read more about Cardano’s stages of development here.
It is hard to tell if Cardano will unseat Ethereum as the King of dApps, especially since Ethereum is still far ahead. However, if Ethereum doesn’t upgrade its system to become more scalable and interoperable, it could lose its spot to its competition in no time.
ADA, the native token of Cardano
ADA is the native token on the Cardano protocol and has different uses. For example, users can transfer ADA as a form of currency to other people, buyers can pay for goods and services, and investors can use it as a store of value.
ADA has a total supply of 45 billion coins. Currently, there are 34 billion coins in circulation. At the time of writing, one ADA is worth $0.497224. You can check the current price of ADA here.
Pros and Cons of Cardano
- Peer-reviewed technology: Cardano’s technology has been scrutinized by blockchain experts, and it continues to undergo harsh scrutiny. You can always be sure that the blockchain’s technological updates are nothing short of the best.
- Credible development team: Cardano’s founders, Charles Hoskinson and Jeremy Wood, were part of the Ethereum founding team, so they have good credibility in the blockchain space.
- Scalable protocol: Cardano is more scalable than the second-generation blockchains existing today. It allows for faster transactions between users in the protocol.
- Secure: Cardano is a secure protocol, thanks to the research and updates that have gone into its development.
- Environmentally friendly: Unlike other proof of work protocols, Cardano is environmentally friendly because it uses less computational power.
- Still in development: Cardano has a lot of promising visions for the future, but many of them are yet to be actualized. In reality, many of their solutions are theoretical, and there is still a lot of development to be done.
Cardano is a unique cryptocurrency, and its stability as a top ten cryptocurrency by market cap for years has proven that it is also an essential coin.
There is no doubt that when it reaches its full potential, it has what it takes to unseat Ethereum as the king of decentralized applications.
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About The Author
Fejiro Eforhare is a crypto writer and enthusiast who believes in blockchain’s strong potential to change every industry in the world. When he is not immersed in crypto studies, you can find him freestyle rapping with his friends or playing snooker to relax.