Module 11: Third-Generation Blockchain Cardano
Module 11 kicks off the Cardano section. The module dives into the three organizations behind Cardano, what sets Cardano apart from other blockchains, how to buy ADA & lots more.
What is Cardano?
Welcome to section 3, our focus will now shift from DeFi to Cardano.
The first generation cryptocurrency was Bitcoin. It operated on a proof of work model and stored value. The second generation was Ethereum which developed smart contracts but still experienced significant limitations.
Cardano is a third-generation blockchain and proof of stake cryptocurrency. It was founded by Charles Hoskinson (Ethereum co-founder) and Jeremy Wood back in September 2017. Charles Hoskinson believed that cryptocurrencies suffered from three main issues: scalability, interoperability, and sustainability. These issues were expected and posed significant challenges in traditional proof of work blockchains such as Ethereum.
Charles Hoskinson understood how difficult it was to address these challenges within blockchain networks and began developing Cardano and its primary cryptocurrency, ADA, in 2015 and launched the platform and ADA token in 2017.
Cardano was developed into an open-sourced and decentralized project with a layered architecture consisting of two primary elements: the Cardano Settlement Layer (CLS) and the Cardano Computational Layer (CCL), which distinguishes it from other blockchain projects. One feature that sets Cardano apart is that most present blockchain platforms only have a single layer of functionality, which frequently causes network congestion, hinders transactions, and raises fees.
The two separate layers allow the ecosystem to proactively implement changes to support faster and more secure transactions, while eliminating any user metadata that proves irrelevant to the process.
The Organizations Behind Cardano
There are three parts to Cardano:
The Cardano Foundation - The Cardano Foundation, based in Zug, Switzerland, is a blockchain and cryptocurrency organization. The primary goal of the foundation is to "standardize, preserve, and promote" the Cardano protocol.
IOHK - IOHK is a technology company dedicated to leveraging peer-to-peer innovation to deliver financial services to those who need it most. It is an engineering company that develops cryptocurrencies and blockchains for academic institutions, government agencies, and businesses.
Emurgo - Cardano's official trading and venture arm is EMURGO. EMURGO is uniquely related to IOHK and collaborates to grow the Cardano ecosystem globally and encourage Cardano adoption.
How do Ouroboros Work?
The Ouroboros consensus protocol underpins the Cardano platform. Ouroboros was the first PoS (proof of stake) protocol designed by Cardano during its foundational period. It was proven secure and the first to be founded on scientific study.
In essence, Ouroboros works by splitting time into epochs made up of slots. An epoch lasts five days, and a slot lasts one second. However, these values are customizable and can be altered after an updated proposal is submitted. Epochs work in a circular fashion, with one epoch ending and the next beginning.
A slot leader is chosen through a "lottery mechanism" for each slot. The higher the investment, the better the chances of winning the lottery in this system. The slot leaders are in charge of the following responsibilities:
Verification of transactions
When validating a transaction, a slot leader must ensure that the sender has sufficient funds to pay for the transaction and that the parameters of the transaction are met. If the transaction meets all these requirements, the slot leader will record it as part of a new block, which will then be linked to other blocks in the chain.
Putting together transaction blocks and create new blocks
Blocks are created by pools. On the Cardano network, the nodes of the staking pool operators are responsible for producing new blocks. Each pool operator must register as a block producer to become a slot leader.
A number of ADA holders must be online and maintain adequate network connectivity for Ouroboros to work. The algorithm utilizes the concept of stake pools to further reduce energy consumption. While the protocol is functioning, ADA holders can organize themselves into stake pools and designate a few people to represent the pool. Even if some of them are offline, this enables participation and ensures block generation.
The Cardano crypto platform is being developed and upgraded in five 'eras.' Cardano is currently in the Goguen era after the recent Alonzo Hard Fork, which involved the rollout of smart contracts.
The five eras of development are Byron, Shelley, Goguen, Basho, Voltaire - all of which will enhance the overall network's functionalities. While all eras will be delivered chronologically, the Cardano Foundation has confirmed that work for each era will be done in parallel, with research, prototyping, and development often happening at the same time in various development streams.
Why is Cardano Different from Other Blockchains?
Cardano's creators drew inspiration from the world of scientific journals and chose a peer-reviewed approach for their cryptocurrency.
Any changes or features proposed for development are reviewed and voted on by experts before being implemented. The network's code is written in Haskell, a computer language. Cardano's creators, IOHK, have published a number of scholarly papers outlining the platform and its technology.
As mentioned above, the Ethereum network currently uses the proof-of-work (PoW) consensus mechanism to verify transactions (although it is planning to switch to PoS by the end of 2021). One of the biggest disadvantages to PoW is that it is harmful to the environment and only allows the processing of a limited amount of transactions at once. Mining cryptocurrencies not only consumes energy, but also generates a significant amount of electronic waste as the hardware becomes obsolete.
Instead, Cardano uses PoS which utilizes less energy. To determine who develops the next block and to confirm blocks, the network uses the Ouroboros algorithm.
The Alonzo Hard Fork
The Alonzo mainnet went live in September 2021, bringing smart contracts to Cardano. During this launch, the Cardano team hosted a live stream to which discussed Alonzo in detail and Cardano's future objectives.
This upgrade meant that Cardano could now compete with other blockchains that use smart contracts, such as Ethereum. As a result, Alonzo will bring in a "new era of Cardano," according to Charles Hoskinson, the company's founder.
Smart contracts allow developers to create decentralized finance (DeFi) apps. The DeFi apps, or dApps, enable users to lend, borrow, and trade assets without the need for any third-party intermediaries.
The Biggest Advantages of Cardano
The Cardano blockchain provides its users with a lot of advantages. In comparison to its crypto rivals, here are four of Cardano’s biggest advantages:
Cardano is designed to be highly scalable, so transactions are quick. For example, it now has a transaction rate of 250 or more per second, compared to 15 for Ethereum.
Cheap Gas Fees
Cardano can also offer negligible transaction costs on its network, thanks to the PoS mechanism. On Cardano, the average transaction costs roughly 0.1 ADA or a few cents. When compared to Ethereum, which costs $15 per transaction, this is a bargain.
Because every user can become a node validator in Ouroboros, the network is becoming increasingly decentralized. For example, in Cardano, there are currently over 1500 validator pools.
By spending ADA tokens, every Cardano owner has the opportunity to make passive revenue. Purchasing ADA tokens and storing them in a wallet like Yoroi is all that is required.
How to Buy ADA
If you would like a step-by-step guide on how to set up a Cardano wallet for your ADA, have a look at our tutorial here. This section aims to give a brief overview of how to invest in ADA (although it is important to note that this certainly does not constitute financial advice).
When Cardano first launched, investing was more complicated than it is today. This is because you had to start with Bitcoin or Ethereum, then move them to specialized exchanges. However, you may now buy ADA on almost any exchange.
For the purposes of this tutorial, we will be looking at how to invest through Coinbase. However, you can open an account with another exchange that is best for your needs.
Sign up for a Coinbase account
The first step is to sign up for a Coinbase account. Your Cardano tokens will be stored on Coinbase. Coinbase supports a wide range of tokens and makes it simple to invest in cryptocurrency. As previously stated, you can buy ADA on any exchange today.
Buy Cardano ADA
You can buy ADA once there is money in your Coinbase account. Scroll down to ADA on the home screen, select Trade, and you can buy or trade your ADA.
Alternatives to Purchasing ADA
Cardano is also available on several other platforms, including Uphold. Uphold allows you to execute one-click transactions in a variety of currencies and tokens.
When investing in Cardano, as with any currency, there is a high level of risk. However, there is a chance of a significant return with a low entrance barrier because of the low price. It is also worth noting that there are currently no ETFs that track Cardano. It is important to seek professional financial advice before making any investment and also to perform your own due diligence.
Cardano vs. Ethereum vs. Bitcoin
Cryptocurrencies are receiving greater widespread acceptance. However, Bitcoin remains the most well-known cryptocurrency while other projects play a crucial role in broadening the scope of cryptocurrencies. Although developers can design decentralized applications and perform smart contracts on both blockchains, which is a better investment?
Because Cardano was developed by one of Ethereum's co-founders, it shares many similarities with its biggest crypto rival, Ethereum. Plus, picking up where Ethereum left off by developing solutions for its limitations. Cardano also serves as a platform for smart contracts, one of Ethereum's biggest advantages.
While Ethereum is in the process of moving from a PoW network to a PoS network, Cardano was built from the ground up on a PoS system which makes it greener and faster than its competitors.
Like Bitcoin, Cardano has a limit on the number of tokens that can be produced, which creates a sense of scarcity and may help Cardano's value increase over time.
Cardano is also an exciting option for investors looking for more upside, especially long-term investment horizons.
Cardano brings various new features to the smart contract platform market. More than any other platform, including Ethereum. It collaborates with academics all over the world to incorporate peer-reviewed academic research into its development. It has created a proof-of-stake system that is "provably safe" and could be suited for a public, worldwide, permission-free blockchain. It aims to overcome Bitcoin and Ethereum's apparent governance flaws by incorporating governance ideas from other blockchains.
In the next module, we will find out more about staking on Cardano.