What is Cardano (ADA)?

A beginner’s guide to the Cardano smart contract platform and its native cryptocurrency, ADA.

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Cardano is a smart contract platform designed to offer scalability and security for the deployment of decentralised applications (dApps). The project has the ambitious goal of delivering more advanced features than any competitor platform. Though the platform is still progressing through major developments, Cardano's native coin, ADA, at the time of writing has one of the largest market capitalisations of any cryptocurrency.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

What is Cardano?

Cardano is a decentralised blockchain for the development of smart contracts and the deployment of decentralised applications. The blockchain's proof-of-stake consensus mechanism and unique, layered architecture is designed to provide enhanced security and scalability in comparison to competitors, such as Ethereum.

One of the distinguishing factors that set Cardano apart is that it's the first blockchain project guided by academic research and scientific philosophy. The platform is being developed by a global collective of expert engineers and researchers, with related academic papers published on the website regularly.

Cardano's developers hope to create a platform that combines the need for consumer privacy and protection, while simultaneously providing regulatory oversight.

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Where is Cardano headed? See our Cardano (ADA) price prediction

Cardano use cases

When the Cardano project first started to take shape in 2015, the overarching aim was to change the way cryptocurrencies are designed and developed. According to its whitepaper, "The overall focus beyond a particular set of innovations is to provide a more balanced and sustainable ecosystem that better accounts for the needs of its users as well as other systems seeking integration."

That all sounds great in theory, but what real-world uses does the platform have?

Cardano use cases:

  • A payment protocol, providing fast and affordable transfers between users
  • To create and deploy smart contracts, which combined create decentralised applications. Smart contracts have a myriad of applications across numerous industries
  • To digitize physical real-world assets

What is ADA and what does it do?

ADA is the native cryptocurrency of the Cardano blockchain. The primary use of the coin lies within the network's proof-of-stake mechanism. This involves token holders locking away (staking) ADA coins to validate transactions and secure the blockchain.

A transaction fee must be paid in ADA when using the Cardano blockchain. This allows validators in the network to complete the transfer within Cardano's settlement layer (see below for more details). All applications that are built on the Cardano blockchain will use ADA for transactional fees.

The coin also carries monetary value and, therefore, can be used to transact between friends, pay for goods and services and deposit funds on an exchange or decentralised application.

The supply of tokens is capped at a maximum of 45 billion ADA, and at the time of writing (August 2021), just over 32 billion are in circulation.

What are Yoroi and Daedalus wallets?

The private keys to digital assets should be securely stored within a cryptocurrency wallet. But all crypto wallets are not created equally. Cardano offers two native cryptocurrency wallets for users to store ADA tokens. These are Daedalus and Yoroi. Which wallet a user chooses depends on the levels of security required.

Yoroi is a lightweight cryptocurrency wallet that comes in the form of a browser extension or mobile application. The setup is instant and connection to the Cardano blockchain is facilitated through Emurgo.

In comparison, the Daedalus wallet was developed by IOHK and is thought of by many as a more comprehensive offering. Daedalus downloads the blockchain's entire history, which allows it to validate all transactions for complete trust and autonomy. It is often referred to as a full node wallet and removes the requirement of any centrally hosted third party server.

What makes Cardano unique?

Every smart contract blockchain is inevitably compared to Ethereum. Just like Ethereum, Cardano offers a platform where developers can create dApps and deploy smart contracts.

However, it is not intended to be a carbon copy and offers several other versatile features. Cardano allows smart contracts to be executed on a different layer than where transactions take place thanks to its layered architecture. This makes it possible to quickly deploy a wide range of advanced smart contracts on the blockchain.

It's also the first cryptocurrency to be based on Haskell code, which is widely considered to be one of the most secure programming languages, providing a range of safeguard protocols.

Rather than a roadmap or whitepaper, the project was initially based on a collection of design principles, engineering best practices and other key considerations, including:

  • Separating accounting and computation into different layers
  • Small groups of academics and developers competing with peer-reviewed research
  • Building on the ability to upgrade systems once they've been deployed without destroying the network
  • Building a cryptocurrency that can work on mobile devices and provide a reasonable and secure user experience
  • Finding a "healthy middle ground for regulators to interact with commerce without compromising some core principles inherited from Bitcoin"

From these ideas and principles, Cardano was created.

The technology behind Cardano

Cardano is being built with two layers – the Cardano Settlement Layer and the Cardano Computation Layer. The two layers provide the flexibility businesses need to tailor smart contracts to their requirements.

  • Cardano Settlement Layer. The settlement layer acts as the platform's balance ledger. It uses a proof-of-stake (PoS) algorithm to generate new blocks and confirm transactions.
  • Cardano Computation Layer. The execution layer for smart contracts. The Cardano team will soon be launching a new programming language (Plutus) that will be used to build smart contracts.

As previously mentioned, instead of using a proof-of-work consensus algorithm like Bitcoin, Cardano uses a proof-of-stake algorithm called Ouroboros. Under this system, blocks are generated and transactions verified by slot leaders, or validators. Anyone who holds ADA tokens can become a slot leader, with slot leaders randomly chosen using a coin-flipping protocol.

What is Ouroboros and how does it work?

Ouroboros is the name given to the proof-of-stake protocol that secures and validates the Cardano blockchain. Marketed as an energy-efficient alternative to the proof-of-work protocol used by Bitcoin, the algorithm enables the same levels of security without the need for excessive power consumption.

Instead of computing power, a user can become a node in the network by locking away (staking) ADA tokens. Nodes are then randomly selected to perform the operation of validation. The more ADA tokens staked, the greater the chances of being selected. For those that do not wish to become a validator but still wish to participate, users may delegate their tokens to an already operational validator. All those that stake within Ouroboros are then rewarded with more ADA tokens.

Ouroboros splits time into epochs and slots. A new slot is created every second, with 432,000 slots composing an epoch. An epoch is, therefore, approximately 5 days. A new validator is randomly selected every 20 seconds to become a 'slot leader' and create a new block in the blockchain.

The Ouroboros system works based on the honest majority theory. Any major stakeholder is likely to perform validation honestly because it is in their financial interest to see the network succeed.

Mining (staking) Cardano

ADA coins cannot technically be 'mined', however, they can be earned through the process of staking. Staking requires users to deposit and lock up ADA coins for a set period of time. In doing so, those coins are then used within the proof-of-stake consensus mechanism.

As mentioned previously, the proof-of-stake mechanism, Ouroboros, is what keeps the Cardano blockchain secure. To keep it secure, validator nodes are randomly selected to validate all transactions that take place. They also look for any malicious activity. To incentivise participation, validators are rewarded with a share of all transaction fees and a percentage of the ADA reserve.

While validating requires a complex knowledge of Cardano, users can also participate by delegating ADA tokens to other validators. This process allows users to remain in control of tokens, but allow a validator to include that share with their ADA holdings. If chosen for validation, rewards are then distributed between the validator and all those supporting them.

Cardano’s team and history

The Cardano platform is the brainchild of Charles Hoskinson, a tech entrepreneur and mathematician who also co-founded Ethereum. Launched in 2015, Cardano is being developed by not one but three organisations:

  • The Cardano Foundation. Registered in Switzerland, the foundation's mission is to standardise, protect and promote the Cardano Protocol technology.
  • Input Output Hong Kong (IOHK). A tech company founded in 2015 by Hoskinson and Jeremy Wood, IOHK is responsible for most of the technology behind Cardano.
  • Emurgo. Founded in 2017 and registered in Japan, Emurgo focuses on integrating businesses into Cardano's blockchain.

Cardano held an extended ICO from September 2015 until January 2017, raising just over $62 million. It launched the first phase of its mainnet in September 2017.

Next for Cardano: the roadmap

Cardano maintains a detailed roadmap to keep users abreast of future developments. Development is split into five phases, or 'eras', which are named after poets, a computer scientist and a philosopher. Although launched in chronological order, each era is worked on in parallel. The eras are as follows:

  • Byron. The first phase and launch of the Cardano Settlement Layer mainnet in 2017.
  • Shelley. An era focused on progressing the decentralisation and autonomy of the system. Though it was scheduled for a 2018 start date, the era launched in early 2020. Updates included allowing delegations of staked assets, consensus incentives to encourage more validators, light client support, ADA added to the Ledger Nano S wallet, and launch of a Cardano debit card.
  • Goguen. The third era has been in development since Cardano's launch in 2017. The complete focus has been on the integration of smart contracts. Key milestones in this phase include finalising the Plutus Core language, marketing Plutus and a simpler Marlowe language to developers, and the creation of IELE, a virtual machine translating and executing smart contracts. This phase is set to be finalised in 2021.
  • Basho. Moving forward, the fourth phase will focus on scaling. The addition of sidechains will enhance the ability to move ADA, improve scalability and add new features without requiring major updates to the network.
  • Voltaire. Finally, the Voltaire era will complete the treasury and governance systems. Participants in the network will be able to submit Cardano Improvement Proposals.

What to watch out for

As the roadmap above reveals, Cardano is not yet fully developed. While its initial release occurred in September 2017, there are still many crucial features to be added. Smart contract deployment is imminent but scalability via sidechains is a little way off.

Cardano has received a lot of publicity recently due to the announcement that its smart contract upgrade — Alonzo — is set for release on September 12, 2021. This update is extremely important for the network and it will finally allow developers to start creating and releasing decentralised applications on the blockchain.

Until the blockchain has completed the Goguen third phase, there will still be a level of uncertainty for how successful the project can be. Investors may want to consider waiting until the Alonzo upgrade before determining if the native coin, ADA, is the right investment decision for them.

It's also worth noting that Cardano is not the only dApp/smart contract platform out there. Ethereum, NEO, NEM, and EOS all provide strong competition for Cardano and could affect levels of adoption.

Read more about where Cardano might be headed in our prediction for 2021.

The Djed stablecoin

While the launch of smart contract capabilities is just around the corner for Cardano, another element for a successful cryptocurrency ecosystem are stablecoins. They can be extremely useful for avoiding market volatility and can be used as a digital store of value when required.

Stablecoins track the price of real-world currencies such as USD. Common examples include Tether (USDT), USD Coin (USDC) and DAI. Recently, IOHK has hinted that a new stablecoin Djed will be launched for the Cardano blockchain.

The new stablecoin has been described as a crypto-backed algorithm stablecoin. This means that instead of being backed by fiat currency reserves, as is the case with some stablecoins, it will maintain its peg thanks to a reserve of 'base coins' and through a minting and burning process.

Similar to the Cardano network, the coin will be the first formally verifiable stablecoin on the market. All elements can be proven by mathematical formulae.

Djed is expected to be implemented shortly after the highly anticipated 'Alonzo' smart contract upgrade.

Cardano vs Ethereum comparison

Ethereum has become the most widely used platform for the creation of decentralised applications and the deployment of smart contracts. It remains one of Cardano's strongest competitors. While the two are similar in focus and ambition, there are some fundamental differences.

Ethereum was first launched in 2015 and has therefore had two extra years of development in comparison with Cardano. The Ethereum network pioneered the smart contract industry with a vision of creating a platform suitable for decentralising all kinds of applications. Thanks to launching smart contract capabilities quickly it has been one of the largest contributors to the cryptocurrency industry. Thousands of applications are now hosted on the network, including the popular DeFi and NFT sectors.

Cardano wanted to build on Ethereum's success but utilise a more scientific approach. From the early phases, Cardano developers have focused on peer-reviewing all updates via an academic panel. This has led to some optimisations regarding the internal architecture and operation of the blockchain. The mainnet updates for Cardano are very structured and are separated into five distinct 'eras'.

When it comes to development, Ethereum updates are performed by a dedicated developer community backed by the Ethereum Foundation. While Cardano is supported by a similar Cardano Foundation, two independent organisations - IOHK and Emurgo - have also developed important aspects of the network.

Internally, Ethereum and Cardano use two different consensus mechanisms. Cardano utilises the more energy-efficient proof-of-stake while Ethereum utilises a proof-of-work system. This means Cardano can process transactions far more effectively than Ethereum. Combined with its layered architecture 'hydra' it is theoretically possible for the blockchain to process 1 million transactions per second. A gargantuan number in comparison to Ethereum's 15 transactions per second.

However, the two are soon to be aligned, with Ethereum 2.0 launching a new proof-of-stake mainnet before the end of 2022. Once complete, both systems will rely on users staking the native cryptocurrency to validate transactions sent across the network.

Ethereum continues to be the platform of choice for many dApp developers. Once fully operational, Cardano will need to offer several improvements to draw a significant proportion of market share away from the second largest cryptocurrency project.

The bottom line

Cardano has huge potential but, like so many popular cryptocurrency projects, it still has a long way to go before the potential is realised. There are several other smart contract platforms at various stages of development, and Ethereum, the biggest and best-known of them all, continues to dominate. Whether or not Cardano can deliver on its promises remains to be seen.

There's a lot to like and admire about its science-based approach, its development team and the architecture underpinning the system. If Cardano can effectively find a balance between the needs of users and regulators, there are many who say it could have a very bright future.

As always, remember to do your own research before investing.

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Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Images: Shutterstock

Disclosure: At time of writing the author holds IOTA and XLM.

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