Since their emergence over a decade ago, blockchain networks have evolved significantly both in terms of technology and use cases. Heralded as one of the most innovative technologies of the new century, blockchain aims to overhaul existing centralized systems across industries and eliminate their inefficiencies.
The first landmark event that signaled the start of the blockchain movement was, of course, Bitcoin. The world's first cryptocurrency runs on a first-generation blockchain based on the proof-of-work (PoW) consensus algorithm and was primarily designed to process transactions.
Ethereum arrived on the scene just a few years later, paving the way for today's burgeoning decentralized finance (DeFi) industry. The introduction of deployable smart contracts and decentralized applications (DApps) was a game-changer for the blockchain industry, enabling it to scale to new heights and encouraging developers to experiment with new use cases for the technology.
As far as smart contract platforms go, Ethereum currently dominates the space. However, issues like network congestion, high transaction fees, and the network’s difficulties with scaling have held back the platform's potential over the years, which is why third-generation blockchains like Cardano are increasingly gaining traction.
Cardano is one of the fastest-growing projects in the cryptocurrency space. The team behind its open source blockchain conducts extensive research and regularly publishes its results in peer-reviewed academic papers. Their research is focused on building a scalable, secure and efficient decentralized network by taking a systematic approach to blockchain research and development.
Taking its name from the 16th century Italian polymath Gerolamo Cardano, the platform has grown significantly over the past couple of years, with its native ADA token currently ranked the fifth-largest digital asset by market capitalization worldwide. ADA is itself named after the 19th century mathematician Ada Lovelace, who is often regarded as the world's first computer programmer.
The Cardano project began in 2015 when one of Ethereum's co-founders, Charles Hoskinson, and his former colleague Jerry Wood left the Ethereum Foundation following internal disagreements. They established a new company, Input Output (IOHK), which went on to launch the Cardano network and ADA token in 2017.
Fast forward to 2021, and the Cardano ecosystem has undergone several upgrades. Cardano uses a unique architecture that employs a dual-layer system, which is distinct from most other blockchain platforms. Its settlement layer (CSL) allows ADA token holders to send and receive transactions almost instantly at low fees, while its computational layer (CCL) serves as the foundation of the rest of Cardano's functionality.
This flexible layer is composed of many protocols and operates separately from the CSL. It supports the smooth functioning of smart contracts while simultaneously ensuring the network's security and performance.
The Cardano blockchain was written using a universally recognized and secure programming language known as Haskell. It uses the proof-of-stake (PoS) consensus mechanism but with a slight twist. Using a permissioned version of the Ouroboros family of PoS consensus protocols (Ouroboros-BFT), Cardano aims to offer a greater level of security than PoW chains at a fraction of their energy costs.
The Cardano blockchain splits time into divisible epochs (around five days), which are further divided into slots. To achieve consensus, the network randomly nominates a few nodes to validate new blocks for every slot. These selected nodes are known as slot leaders.
Slot leaders can mine their specific epoch or slot, and the higher their stake, the better their chances of being selected. If the slot leader fails to oversee the creation and confirmation of blocks, the next slot leader is elected for that epoch or its subpartition.
Currently each epoch can contain up to 432,000 slots. This enables the network to process a considerable number of transactions, all while hugely reducing network congestion, gas fees, and helping to maintain consensus on the network.
The ADA Token
ADA is the native token of the Cardano blockchain and can be used to conduct peer-to-peer transfers across the globe. 57.6% of the total 45 billion token supply was distributed to investors via an Initial Coin Offering (ICO), through which the ecosystem secured $62.2 million in funding.
As of June 2021, the ADA token has appreciated by over 1000% since the start of the year. As well as value transfer and trading, network participants can also use the token to take part in staking and the platform's governance systems. ADA stakers are also considered validators since they function as nodes that record the network's current state.
Token rewards are usually earned in two ways: either through delegating a stake to a stake pool operated by other validators (usually for small stakes) or through running a stake pool. On Cardano, staking works on a cyclical basis, which can make staking ADA highly profitable. Users are incentivized every epoch (every five days) and the platform offers a 4.5% annual interest rate on all stakes.
The Cardano protocol is still in development and its roadmap can be broken down into five phases. In contrast to most blockchain development teams, Cardano's approach is more modular. Though the phases are split into different “eras,” the Cardano team is working on all of them simultaneously: – each era can be seen to resemble a development track rather than a fixed timeline.
The network’s first phase, Byron, took its name from Lord Byron – a poet and father to Ada Lovelace. This era marked the creation of the network's primary architecture. It also witnessed the implementation of the protocol's basic functionality to ensure the smooth running of the network and its core technology.
During this era, the Daedalus wallet – IOHK's official desktop wallet for ADA – was integrated into the Cardano ecosystem, in addition to Yoroi, a light wallet from IOHK's sister firm Emurgo, which was designed for day-to-day use and offered efficient transaction execution.
The Shelley era established a higher degree of decentralization on the platform. Starting with the launch of Cardano's mainnet, Shelley saw the Cardano ecosystem shift away from the federated Byron era to more of a reliance on community-run nodes. This era also saw the introduction of delegation and incentivization schemes.
The subsequent era, Goguen, brought smart contracts to Cardano, enabling the creation of decentralized applications on the network using its smart contract development language, Plutus. During this time, Cardano also implemented a multi-currency ledger to facilitate the creation of new, natively supported tokens.
The fourth era, Basho, will involve scaling the blockchain network, adding solutions focused on enhancing its performance and stability. It will also introduce interoperable sidechains, which will significantly help Cardano to handle higher throughput levels, along with parallel accounting styles that can facilitate greater interoperability for Cardano and its applications.
Voltaire is designated as the final era of Cardano. Voltaire will establish an autonomous, decentralized network, transferring the responsibility for Cardano's future to the community. Instead of development and maintenance being undertaken by a centralized entity like the Cardano Foundation, the community will itself be tasked with upholding the network. The community will take its cue from Cardano’s treasury, voting and delegation systems in order to accelerate its evolution into a full-fledged, self-sustaining, decentralized protocol.
Participants will also be able to help the network grow by proposing improvements for stakeholders to vote on, and the protocol will distribute transaction fees to fund various development activities suggested by these improvement proposals.
Inefficiently Developing Efficiency
Several teams and initiatives are currently building the Cardano ecosystem but there are three key organizations that are at present primarily responsible for the blockchain's development and maintenance. The core blockchain protocol has been built by the Switzerland-based independent non-profit Cardano Foundation, whose main objective is to secure and promote the Cardano protocol and to monitor ADA's tokenomy.
The Cardano Foundation contracts two other organizations to help build the network's ecosystem: global blockchain solutions platform, Emurgo and blockchain research and development firm IOHK.
Emurgo is commonly referred to as Cardano's commercial and venture capital arm, whereas IOHK is Cardano's technology arm, which focuses on leveraging peer-to-peer innovations to provide financial services.
Cardano has attracted significant attention in recent times, especially with high gas fees and network congestion on Ethereum pushing DeFi applications to seek alternatives.
Cardano appears to be much stronger than Ethereum in terms of throughput. Ethereum can handle 15 transactions per second (TPS) in its current state, although its proposed upgrade with sharding is expected to improve transaction speeds up to nearly 100,000 TPS. By contrast, Cardano can already support hundreds of transactions per second, and with its layer 2 Hydra protocol in development, the network's throughput could rise to over 1 million transactions per second.
In terms of smart contract capabilities, Ethereum is relatively less tolerant of bugs and errors, ehreas Cardano's CCL offers more flexibility in case changes need to be made to deployed applications. In addition, Cardano also allows users to set customized rules for confirming transactions.
However, Ethereum is poised to complete its migration from PoW to PoS and this shift could quickly turn the tables back in its favor. The proposed Ethereum 2.0 Phase 1 launch later this year should address many of the network's significant deficits. With networks like Cardano making blockchain interoperability a reality, the industry may well gain more in the long run through collaboration, rather than competition.
Cardano is an incredibly ambitious project and, as with any grand venture, things don't always go according to plan. Over the years, the Cardano team has missed multiple deadlines on its roadmap, taking a deliberately slow route and forgoing the first-mover advantage it could have had. Nevertheless, this project – once an underdog – has emerged as one of the most promising alternatives to Ethereum and other third-generation PoS-based blockchains, which merge features from different blockchains onto a single network.
Although there's still a lot of work ahead, the Cardano team is well equipped to face these challenges. Its founder, Charles Hoskinson, consistently posts video updates to the team's development progress online, sharing details about the latest research being conducted and their plans for the future.
The industry as a whole has come a long way from the "get-rich-quick” scheme labels of the early days, building an entire generation of viable financial applications that can address multiple use cases as part of a decentralized ecosystem. Despite the various criticisms that have been leveled against it, Cardano remains one of the most popular blockchains in the industry due to its rigorous approach to research and development, robust consensus mechanism and aspirations to establish an autonomous, decentralized and self-sustaining governance model.