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What is Cardano? A Beginners Guide

José Oramas 2 September, 2021 | 7 min read

Cardano has been calling the attention of the DeFi community with its impressive market performance. ADA —the protocol’s native token— has surged over 130% last month, outpacing other coins like BNB, USDT, and XRP and positioning it as the third most valuable token in the market.

What’s behind Cardano’s impressive performance? The self-proclaimed Ethereum Killer is working on several protocol upgrades that will introduce various innovative features for users and developers in the network, sparking interest in social media searches by calling the attention of institutional investors, DeFi projects and the crypto community.

What is Cardano, the “Ethereum Killer”?

Cardano is a Proof of Stake (PoS) blockchain and smart contract platform founded by Charles Hoskinson, who’s also the co-founder of Ethereum next to Vitalik Buterin. Due to conceptual differences with Buterin, he left the project to create IOHK (Input Output) in 2015, the father company of Cardano and the Cardano Foundation.

Cardano has its own utility token, ADA, which is used as a medium of exchange and to pay for network fees. Unlike its competitors like Ethereum and Bitcoin, ADA doesn’t require miners for validating block transactions as the PoS network relies on network validators who verify transactions depending on how many coins they hold. This is the original concept of PoS networks: the more coins a validator has, the more mining power he has.

In the case of Ethereum, Proof of Work relies on miners to validate block transactions —this consumes a lot of energy and it’s environmentally hazardous due to the amount of computing power required (Bitcoin is the currency that uses the most energy —around 130 TWh (Terawatt/hour) per year—).

Founders and History

Charles Hoskinson and his team started developing Cardano in 2015 led, and it was in 2017 that it was officially launched. Their main goal was to solve some of the typical problems of the blockchain ecosystem, especially with PoW networks like Ethereum. Some of these problems are low scalability, interoperability, and sustainability —some of the hurdles that have been holding back PoW systems since they were created.

Cardano was first intended to be a research project on how to improve the crypto space and blockchain technology. Hoskinson, with a long trajectory in the cryptocurrency space, laid out a long roadmap that would catapult Cardano into one of the leading protocols in the crypto space.

Cardano Eras & Upgrades

Cardano is one of the most worked and developed protocols since its launch. According to data from Santiment, Cardano was the most developed protocol in 2019. As such, Cardano’s development roadmap is divided into six eras:

Byron Era —The Foundation

Cardano’s release came with the “Byron” phase, which allowed users to transfer ADA thanks to Ouroboros —the protocol’s PoS system created through long years of academic research. Since then, the Cardano community went from a small group of technology enthusiasts to be one of the largest in the crypto scene. The Byron era also came with the Daedalus wallet, which is IOHK’s official desktop wallet for ADA.

Shelley Era —Decentralization

Following on from the Byron era, the Shelley phase meant a significant upgrade for the protocol and its development, incentivizing network validators and ensuring the network is run by a diverse set of validators instead of a small, centralised group, which tends to happen with PoW networks.

Goguen Era —Smart Contracts

This phase represents the introduction of smart contracts to the platform, followed on by the Alonzo hard fork. Developers will be able to create dApps (decentralized applications) on top of the Cardano blockchain.

This upgrade represents the end of the Shelley era with the introduction of the Alonzo hard fork, putting forth the Goguen era. Alonzo is the long-awaited upgrade that will finally introduce smart contract programmability, allowing developers to finally deploy smart contracts for their dApps. Charles Hoskinson recently said during a live stream that the Alonzo hard fork is imminent, rapidly catapulting ADA’s price over 30% in just a week.

“We’ll be able to announce when the Alonzo hard fork is going to happen, and at that point you’ll be able to run smart contracts on Cardano."

Basho Era

The Basho phase constitutes an important improvement for the protocol as it will improve Cardano’s capability to process more transactions, allowing greater scalability by sharding the network —which means partitioning the network into separate independent chains that can communicate with each other. The Basho era improves Cardano’s underlying performance with the introduction of these side chains, allowing better support and expanding adoption for dapps that require a high transaction volume.

The official Cardano roadmap describes Basho as an era that “will see Cardano become one of the most high performance, resilient, and flexible blockchain platforms in the industry. This will provide a network infrastructure with the capability to scale in a sustainable, secure way, as well as the ability to add new functionality without compromising the reliability at the core of the network.”

Voltaire Era —Governance

As you might have guessed by now, most of Cardano’s upgrades and features are based on famous mathematicians and researchers. This time we have the Voltaire Era, which introduces governance with the introduction of a voting and treasury system for users, allowing them to have vote rights based on the amount of staked tokens and influence the future changes and developments of the Cardano network.

The treasury system will allow a fraction of all transaction fees to be allocated into liquidity pools, thus providing funds for development activities.

Cardano’s Infrastructure

Cardano’s infrastructure is a high-level architecture designed to encompass various mechanisms and protocols to keep the network going. As such, the blockchain is divided into two layers: the Settlement Layer and the Computation Layer.

The Cardano Settlement Layer (CSL) is Cardano’s balance ledger, responsible for transferring ADA between accounts and recording transactions. It uses the PoS algorithm to generate new blocks and validate transactions.

The Cardano Computation Layer (CCL) works as a data storage on how values are transferred. CCL users can create customized rules when evaluating transactions since it’s not linked to the CSL.

Ouroboros

Ouroboros is a provably PoS protocol based on peer-reviewed research, designed with innovative technology and complex mathematical mechanisms to keep the Cardano network secure.

Ouroboros distributes network control across stake pools. The network is held by honest participants who, through an incentive mechanism, are rewarded with their initiative. This can be achieved by either operating a stake pool or delegating a stake in ADA to a stake pool.

Provably Secure: Provable Secure Encryption refers to any type or level of computer security that can be proved. Ouroboros has a provably secure system with features mathematically verifiable security against attacks such as 51% attack.

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ADA Token

ADA is Cardano’s utility token named after the 19th-century mathematician Ada Lovelace. The IOHK team hosted five separate rounds of public sales to attract investors between September 2015 and January 2017. The token was capped at a maximum of 45 billion ADA, and IOHK distributed 20% of the supply to the development team, to EMURGO —a global blockchain technology company—, and to the Cardano Foundation to support future developments. 80% of the supply was split among investors and project founders in an Initial Coin Offering that raised $62.2 million.

Buying ADA

ADA can be bought on almost any exchange like Kraken, Binance, or Coinbase, to name a few. Buying it is simple —just look for the ADA ticker on the exchange you use and deposit money choosing the available options. If you already have funds on your account, choose the option that allows you to exchange USDT, for instance, for ADA.

Staking ADA

Staking ADA allows users to have a portion of the company and, once the Voltaire era stepps in, it will allow them to have voting rights depending on the amount they have staked. By staking ADA, users win staking rewards —besides, with voting rights, users can have a voice deciding what protocol upgrades or changes will be implemented and propose some of their own.

The staking mechanism operates on a cyclical basis —users are rewarded every five days.

Who are Cardano’s Main Competitors?

Cardano has strong competition, while it doesn’t have any comparison to Ethereum’s market share, for example, it has managed to give a good fight to win a slice of it. We can name a few competitors like Ethereum, which is undoubtedly the leader of the DeFi space, Solana, the high-performance blockchain, or the Binance Smart Chain, Binance’s decentralised protocol.

Ethereum

Ethereum is Cardano’s main competitor since Hoskinson left the project in 2015. Since then, Cardano’s research methods and studies have focused on creating a protocol that eliminates some of the limitations of Ethereum and blockchain technology in general.

We can fairly say Cardano has been rapidly improving its infrastructure, yet Ethereum isn’t falling behind as the network will soon transition into a PoS blockchain, adding new features to enhance scalability, lower gas fees, and higher throughput, which could give Cardano a serious competition in the market.

Solana

Solana is a high-performance blockchain built using a new consensus mechanism: Proof of History (PoH) which uses a cryptographic clock to give a timestamp to transactions and thus proving its authenticity.

Binance Smart Chain

Launched in 2019, Binance Smart Chain (BSC) is Binance’s decentralised protocol built to provide a high-performance infrastructure for decentralised trading, building dApps, and allow interoperability with other networks.

Final Thoughts

Cardano’s infrastructure has allowed the protocol to be more scalable than some of the leaders in the cryptocurrency industry even in its early days. In a test conducted in 2017, Cardano managed to process 257 transactions per second. The result outshines Bitcoin and Ethereum, it is still not comparable to payment giants like Visa or Mastercard. An essential part of Cardano is its protocol development and while its scalability is not yet up to par, Cardano is expected to process thousands of transactions per second in the near future.

Currently, Cardano is working on the Alonzo hard fork, the long-awaited protocol upgrade that will finally introduce smart contracts programmability. The mainnet launch is on track, and this has raised hype from investors and the crypto community.

“With Friday’s revelation that the mainnet launch is on track, crypto investors and enthusiasts in general, were hyped on the optimism that a supposedly superior blockchain infrastructure with the possibility to support the next generation of smart contracts is on the horizon.” —Told Konstantin Anissimov, executive director at CEX.IO for Business Insider.

Cardano has called the attention of the media as well, and Hoskinson, who’s not short on words about Ethereum, has said Buterin’s company is falling behind. Yet, we’ll see how that rolls out in the next months as Ethereum’s London hard fork was successfully implemented and activated on August 4, which skyrocketed ETH price to levels above $3,000.

Author's avatar
José Oramas
Fintech and finance writer, with keen interest in blockchain and crypto.

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